Income-tax Treatment of Expenditure Incurred in Connection with Issue of Shares

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Treatment of share issue expenses can be explained under two categories-

1. Issue expenses expended at the time of inception of company,
2. Subsequent Issue Expenses.

1. Issue expenses expended at the time of inception of company:

As per Section 35D(2)(c)(iii) or (iv) of the Income Tax Act, before the commencement of his business, Any expenditure incurred by the company by way of fees for registering the company or in connection with the issue of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years.

2. Subsequent Issue Expenses:

After the commencement of business, Section 35D covers the expenditure incurred in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit.

Under broad view, the share issue expenses can be grouped under the expenditure incurred in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit.

However Supreme Court has different view on the same. The Supreme Court in the case ofPunjab State Industrial Development Corporation Limited v. CIT [1997] 225 ITR 792 andBrooke Bond India Limited v. CIT [1997], has held that the expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company and its capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. Therefore, it was held that the expenditure incurred with reference to issue of shares is not allowable deduction. In view of the aforesaid judgment of the Supreme Court, the order of the Tribunal holding it otherwise is unsustainable in law and, therefore, the question referred for our opinion is answered in the negative and against the assessee and in favour of the revenue.