Public Issue Expenses and its tax treatment

In my opinion it will be deductible under the residuary section i.e. 37(1) and it also satisfies all the conditions of that section.because this expense occured only because of the business, if it hadnt been there than there wouldnt have been any need to incur such expenses.

And one cannot treat it as capital expenses,had the IPO been succesful than only u can call it as capital expense and then deduction would have been allowed in 35D. Due to this expense no long term future benefit will br derived.

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In my opinion the company may debit such expenses to Profit & Loss Account. But it will not an allowable expenses. Sec 14 A is the charging section. It clearly states that any expenses can be allowed only when there is a corresponding income. In fact in normal course it was a deffered revenue expenditure and only 1/10th of the same can be debited in P & L a/c. But as the issue plan has failed it may be disallowed in view of section 14A.

In my opinion the company may debit such expenses to Profit & Loss Account. But it will not an allowable expenses. Sec 14 A is the charging section. It clearly states that any expenses can be allowed only when there is a corresponding income. In fact in normal course it was a deffered revenue expenditure and only 1/10th of the same can be debited in P & L a/c. But as the issue plan has failed it may be disallowed in view of section 14A.

Only revenue expenditure can be deducted under Section 37. Expenditure for raising additional capital by public issue is a capital expebditure [Vazir sultan 174 ITR 689 (AP)], Brook Bond [225 ITR 798 (SC), and hence not deductible under S 37. It should be treated as a capital expenditure.

Thanks Rajesh Kumar,
 

From your reply it is clear that the expenditure is a capital expenditure. Can we write off the ame u/s 35D ?

Mr Rajesh

Please also suggest how it will be refelected in Balance Sheet specially when the IPO has been scrapped.

Mr Kumar, I have a doubt that such being a failed IPO the expenses incurred in its regard wont realise the co. any future benefit than how can we call it as capital expenditure?

If the IPO had been succesfult than I totally agree that it would have been a capital expenditure. Is there any other criteria for treating it as capital Expenditure?

TIA

Chitrank, I dont know accounting principles, so kindly bear with me if I am not very right in my treatements of accounts.

An expenditure is a valid expenditure, even if it fails in achieving its objective. Say, you spend something for marketing your product, the expenditure is a valid expenditure even if you failed in your effort. Thus an expenditure has to be treated on the basis of intention at the time of expenditure- its success or otherwise is irrelevant. Applying the principles in this particular case, it is a capital expenditure, irrespective of the fact whether IPO failed or succeeded.

Let me explain othet concept- profit shown in your balance sheet and profit for the purposes of Income Tax are two different things. For your balance sheet profit, you can treat this expenditure as per the principles of accounting principles, i.e. you can take is as a one time capital loss or amortise it in 5 years or 10yrs- i dont know. That is accounting problem.

I am concerned whether this expenditure will be allowed as depreciation over a period of time in calculating profit of business as per the calculation of income made under Section 29 of the IT Act. There is no direct provision. 35D, prima facie is not applicable. Let us keep this question open, think for a few days, may be we can find some way of claiming depreciation......

Mr. Deepak , I cant understand how u are applying Sec 14A? As per IT ACT Sec 14A applies for the "Expenditure incurred in relation to income not includible in total income". Whereas if this IPO had been successful the income from the funds emloyed would have been includible in the total income.

Expenditure is treated as capital expenditure if

1. It is not a revenue expenditure
2. It has an enduring benefit (long lasting) which is not confined to one particular year of operation.
3. It is not deferred revenue expenditure.

Share Issue expenses are of capital nature and can be claimed as deduction only under Section 35D subject to applicability. Even if the share issue was made to raise working capital the expenses shall be regarded as of capital nature - BSL LTD (2003) 267 ITR 754 (CAL).

Expenditure has to be treated on the basis of intention at the time of making expenditure- its success or otherwise is irrelevant. Applying the principles in this particular case, the share issue expenses shall continue to be Share issue expenses i.e. of a capital nature, irrespective of the fact whether IPO failed or succeeded.

The land mark decision of Supreme Court in Empire Jute Co. Ltd. V/s CIT 124 ITR 1 has propounded that the test of the benefit of enduring nature may fail in certain cases and the expenditure giving rise to such benefit would still be deductible if the benefit is in the Revenue field.

As per the earlier quoted decision the raising of funds for working capital has also been held of a capital nature. Acquisition of assets in itself is a capital expenditure and that there is lack of enduring benefit on cancellation of the IPO sum up to the effect that the expense would not be deductible u/s 37(1) as the expense is of capital nature, not a deferred revenue expenditure either and also lacking enduring benefit which is not in the revenue field.

Please confirm if my understanding of the matter is tenable

It should be debited to Profit and loss and will be allowed in IT Act.. It has been judicially held in various cases in order to capitalise there should be an increase in capital employed by the company.

Dear Vinay,

Can you provide the case laws?

hi sujit,

i have given the answer taking into consideration decison given by suprememe court in GIC. In the said case the company had incurred expenses relating to issue of bonus shares. The court stated that in case of bonus issue there is no increase in capital employed by the company. Hence the criteria put forward by the court was Increment in Capital employed and not nature of expense. Therefore in case where issue falls out, there will be no increment in capital employed and hence chargeable to profits.