Ita/88/2009 Of M/S.nitta Gelatine India Ltd v. Asst. Commissioner Of Incometax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE SMT. JUSTICE P.V.ASHA FRIDAY, THE 26TH DAY OF AUGUST 2016/4TH BHADRA, 1938 ITA.No. 88 of 2009 ( ) ----------------------- ITA.NO. 195/COCH/07 AND 368/COCH/07 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN -------------- APPELLANT/APPELLANT: ---------------------------------------- M/S. NITTA GELATINE INDIA LIMITED, (FORMERLY M/S. KERALA CHEMICALS & PROTEINS LTD), PANAMAPILLY NAGAR, KOCHI-36., PAN NO. AABCK 1582H BY ADVS.SRI.JOSEPH KODIANTHARA SRI.TERRY V.JAMES RESPONDENT/RESPONDENT : ---------------------------------------------- ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), ERNAKULAM. BY SRI.P.K.R. MENON, SENIOR ADVOCATE ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26-08-2016,ALONG WITH I.T.A.NO.245 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: sts APPENDIX PETITIONER'S ANNEXURES: ANNEX ACOPY OF THE LETTER OF OFFER ANNEX BCOPY OF THE ORDER DATED 27/2/2006 OF THE ASSESSING OFFICER. ANNEX CCOPY OF THE ORDER DATED 15/1/2007 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS).COMMISSIONER OF INCOME TAX (APPEALS). ANNEX DCOPY OF THE APPEAL MEMORANDUM FILED BY THE APPELLANT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCHBEFORE THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH ANNEX ECOPY OF THE COMMON ORDER DATED 23/11/2007 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NOS.108 (COCH)/2005, 326(COCH)/206 AND ITA NO.477/05.TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NOS.108 (COCH)/2005, 326(COCH)/206 AND ITA NO.477/05. ANNEX FCERTIFIED COPY OF ORDER DATED 28/11/2008 RECEIVED BY THE APPELLANT ON 22/12/2008 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH.APPELLANT ON 22/12/2008 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. RESPONDENT'S ANNEXURES:NIL /TRUE COPY/ P.A.TO JUDGE ANTONY DOMINIC&P.V.ASHA, JJ. ------------------------------------------------ I.T.A. Nos.245 & 88 of 2009------------------------------------------------- Dated this the 26[th] day of August, 2016 J U D G M E N T ANTONY DOMINIC, J. These appeals are filed by the assessee challengingthe orders passed by the Income Tax Appellate Tribunal inI.T.A. Nos.477 of 2005 and 195 of 2007, pertaining toassessment years 1999-2000 and 2003-2004. 2.The assessee is a Public Limited Company. Interms of the provisions contained in Section 81 of theCompanies Act, in July 1998, the assessee announced arights issue of shares and accordingly shares were offeredto its existing share holders. Many of them accepted theshares offered and the shares which were not accepted bythe existing shareholders were subscribed by the promotersof the Company themselves. In terms of the provisionscontained in Section 35D(2)(c)(iv) of the Income Tax Act,the assessee claimed amortization of the preliminaryexpenses incurred for the rights issue. On the ground that only shares issued for public subscription qualified for thebenefit of Section 35D(2)(c)(iv) of the Income Tax Act andthat in a rights issue, shares are issued only to a sectionof the public, the Assessing Officer disallowed the claim.This order was confirmed by the First Appellate Authorityand the Tribunal. 3.It is in this background these appeals are filed and the questions of law framed for the consideration ofthis Court are the following: only shares issued for public subscription qualified for thebenefit of Section 35D(2)(c)(iv) of the Income Tax Act andthat in a rights issue, shares are issued only to a sectionof the public, the Assessing Officer disallowed the claim.This order was confirmed by the First Appellate Authorityand the Tribunal. 3.It is in this background these appeals are filed and the questions of law framed for the consideration ofthis Court are the following: “1. Whether on the facts and in the circumstances ofthe case the Appellate Tribunal was right in holdingthat the expenditure incurred by the Appellant inconnection with the issue of Right Shares to thepublic is not covered under Section 35D(2) (c ) (iv)of the Income Tax Act?the case the Appellate Tribunal was right in holdingthat the expenditure incurred by the Appellant inconnection with the issue of Right Shares to thepublic is not covered under Section 35D(2) (c ) (iv)of the Income Tax Act? 2. Whether there were any materials on record for theAppellate Tribunal to hold that the issue was not forpublic subscription especially after having acceptedthat share holders of the Appellant form part of thepublic?Appellate Tribunal to hold that the issue was not forpublic subscription especially after having acceptedthat share holders of the Appellant form part of thepublic? 3. Whether on the facts and in the circumstances ofthe case, having regard to the provisions of theCompanies Act and other enactments the AppellateTribunal was justified in its conclusion that theexpenditure incurred in connection with the rightsissue cannot be amortized and allowed as adeduction under Section 35D?”the case, having regard to the provisions of theCompanies Act and other enactments the AppellateTribunal was justified in its conclusion that theexpenditure incurred in connection with the rightsissue cannot be amortized and allowed as adeduction under Section 35D?” I.T.A.Nos.245 & 88 of 2009 3 4.We heard the learned Senior Counsel for theassessee and the learned Senior Counsel appearing forthe Revenue. 5.The primary question that is to be answered inthese appeals is whether the preliminary expensesincurred by the assessee in connection with the rightsissue of shares qualified for the benefit of Section 35D(2)(c)(iv) of the Income Tax Act . 6.Relevant part of Section 35D(2)(c)(iv), reads asfollows: “35D.Amortisation of certain preliminary expenses:- (1) Where an assessee, being an Indiancompany or a person (other than a company) who isresident in India, incurs, after the 31[st] day of March, 1970,any expenditure specified in sub-section (2),- (i)before the commencement of his business, or(ii)...................................................................... the assessee shall, in accordance with and subject to theprovisions of this section, be allowed a deduction of anamount equal to one-tenth of such expenditure for each ofthe ten successive previous years beginning with theprevious year in which the business commences or, as thecase may be, the previous year in which the extension ofthe undertaking is completed or the new unit commencesproduction or operation: ............................................................................... (2) The expenditure referred to in sub-section (1)shall be the expenditure specified in any one or more of the I.T.A.Nos.245 & 88 of 2009 following clauses, namely:— (a)expenditure in connection with- (i)..................................... (ii)..................................... (iii).................................... (iv)..................................... (b)............................................... (c) where the assessee is a company, also expenditure— (i)..................................................... (ii)................................................... (iii)................................................. ............................................................................... (2) The expenditure referred to in sub-section (1)shall be the expenditure specified in any one or more of the I.T.A.Nos.245 & 88 of 2009 following clauses, namely:— (a)expenditure in connection with- (i)..................................... (ii)..................................... (iii).................................... (iv)..................................... (b)............................................... (c) where the assessee is a company, also expenditure— (i)..................................................... (ii)................................................... (iii)................................................. (iv) in connection with the issue, for publicsubscription, of shares in or debentures of thecompany, being underwriting commission,brokerage and charges for drafting, typing,printing and advertisement of the prospectus” 7.From a reading of this provision, it can be seen that where the assessee is an Indian Company, theexpenditure incurred by it in connection with the issue ofits shares for public subscription, being underwritingcommission, brokerage and charges for drafting, typing,printing and advertisement of prospectus, qualify foramortization as provided in the Section. Companiesincorporated in India are permitted to issue shares to itsexisting shareholders and such issue of shares isgoverned by Section 81 of the Companies Act. This Section provides that such shares shall be offered to thepersons who, at the date of the offer, are holders ofequity shares of the company, in proportion to the capitalpaid up on those shares at that date. It is also providedthat after the expiry of the time specified for acceptingthe offer thus made by the company, if the offer isdeclined, the Board of Directors may dispose of the sharesin such a manner as they think most beneficial to thecompany. 8.In compliance with Section 81 of the CompaniesAct, the assessee Company offered shares to its existingshareholders. Many shareholders accepted the offer andsuch of those shares which were declined to be accepted,were subscribed by the promoters of the Companythemselves. It is because of the fact that the subscriptionof the shares thus issued by the Company was confined toits existing shareholders, the authorities have declined thebenefit of amortization, stating that the subscribers of theshares were only a section of the public and not thepublic itself. 9.According to us, this interpretation adopted cannot be sustained. The term 'public' is not defined in theIncome Tax Act. In such a situation and when the term isto be understood in the context of a rights issue underSection 81 of the Companies Act, to understand the scopeof the term 'public' employed in Section 35D(2)(c)(iv) ofthe Income Tax Act it is permissible to refer to therelevant provision of the Companies Act. 10.Section 67(1) of the Companies Act, reads thus: “67. Construction of references to offeringshares or debentures to the public, etc.—(1) Anyreference in this Act or in the articles of a company tooffering shares or debentures to the public shall, subjectto any provision to the contrary contained in this Act andsubject also to the provisions of sub-sections (3) and (4),be construed as including a reference to offering them toany section of the public, whether selected as membersor debenture- holders of the company concerned or asclients of the person issuing the prospectus or in anyother manner.” 11.A reading of this provision shows that anyreference in the Companies Act or in the Articles of aCompany offering shares to the public shall, subject to the 10.Section 67(1) of the Companies Act, reads thus: “67. Construction of references to offeringshares or debentures to the public, etc.—(1) Anyreference in this Act or in the articles of a company tooffering shares or debentures to the public shall, subjectto any provision to the contrary contained in this Act andsubject also to the provisions of sub-sections (3) and (4),be construed as including a reference to offering them toany section of the public, whether selected as membersor debenture- holders of the company concerned or asclients of the person issuing the prospectus or in anyother manner.” 11.A reading of this provision shows that anyreference in the Companies Act or in the Articles of aCompany offering shares to the public shall, subject to the provisions of the Companies Act, be construed asincluding a reference to offering the shares to any sectionof the public also. In other words, insofar as theCompanies Act is concerned, the section of the publicholding shares in a company would be treated as public,for the purposes mentioned in Section 67. It is also clearfrom Section 67, that the purposes of the Section wouldinclude rights issue of shares under Section 81 of theCompanies Act also. Therefore, when the scope andpurport of Section 35D(2)(c)(iv) of the Income Tax Act isexamined, this Court is entitled to refer to the provisionsof Section 67 of the Companies Act and if so done, theinevitable conclusion is that the term for “publicsubscription” employed in Section 35D(2)(c)(iv) of theIncome Tax Act would include subscription by a section ofthe public, i.e., the existing shareholders in a Company aswell. Any interpretation to the contrary would lead to asituation where the benefit of amortization would beavailable to public issue of shares and the same benefitwould be denied when shares are issued by Companies onrights basis. 12.This conclusion that we have reached is alsosupported by the interpretation given to the term “generalpublic utility” in the Apex Court judgment inCommissioner of Income Tax, Madras v. AndhraChamber of Commerce, Madras(AIR 1965 SC 1281)where it has been held that the term general public utilitydoes not mean that the benefit should be available to thewhole world, and the benefit can be continued to a sectionof the public as well. This principle has been laid down inparagraph 15 of the judgment, the relevant part of whichreads as follows: “The expression "object of general public utility"however is not restricted to objects beneficial to thewhole mankind. An object beneficial to a section ofthe public is an object of general public utility. Toserve a charitable purpose, it is not necessary thatthe object should be to benefit the whole of mankindor even all persons living in a particular country orProvince. It is sufficient if the intention to benefit asection of the public as distinguished from specifiedindividuals. Observations to the contrary made byBaumont, C. J., in Commissioner of Income taxBombay v. Grain Merchants' Association of Bombay,1938 (6) ITR 427 : AIR 1939 Bom 45 that "an objectof general public utility means an object of publicutility which is available to the general public as distinct from any section of the public" and thatobjects of an association "to benefit works of publicutility confined to a section of the public, i.e. thoseinterested in commerce" are not objects of generalpublic utility, do not correctly interpret the expression"objects of general public utility". The section of thecommunity sought to be benefited must undoubtedlybe sufficiently defined and identifiable by somecommon quality of a public or impersonal nature :where there is no common quality uniting thepotential beneficiaries into a class, it may not beregarded as valid.” distinct from any section of the public" and thatobjects of an association "to benefit works of publicutility confined to a section of the public, i.e. thoseinterested in commerce" are not objects of generalpublic utility, do not correctly interpret the expression"objects of general public utility". The section of thecommunity sought to be benefited must undoubtedlybe sufficiently defined and identifiable by somecommon quality of a public or impersonal nature :where there is no common quality uniting thepotential beneficiaries into a class, it may not beregarded as valid.” 13.Sum and substance of the above discussionsthat the findings of the Assessing Officer confirmed by theFirst Appellate Authority and the Tribunal is unsustainable.Therefore, answering the questions of law in favourof the assessee and against the revenue, these appealsare disposed of. Sd/- ANTONY DOMINIC, JUDGE. Sd/- P.V.ASHA, JUDGE.