The specific provision for amortization under Section 35D of the Income Tax Act, 1961, precludes the allowance of depreciation on the capitalized expenditure incurred on the issue of shares.

G.S. Kulkarni, J.

1. By this Income Tax Reference under Section 256(1) of the Income Tax Act,1961 (for short “the Act”), the Income Tax Appellate Tribunal (Tribunal) has referred the following questions of law for decision of this Court:-

“(I) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not granting depreciation on a part of issue of shares capitalised to Plant & Machinery and factory equipment Rs.29,668/-?

(II) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not granting depreciation of Rs.1,97,636/- on the cost of issue of shares capitalised to plant and machinery and factory equipment Rs.29,668/- and Rs.9,79,438/- towards capital work-in-progress?”

2. Facts in brief are :-

The Assessment Years in question are 1980-81 and 1981-82 respectively. In the Assessment Year 1980-81, the assessee had issued 6,25,000 equity shares of Rs.10/- each. Accordingly, a sum of Rs.62.50 lakhs was adjusted by issue of shares and the balance application money was refunded to the subscribers. The increase in the share capital was for setting up an unit for the manufacture of computer and OEM peripheral manufacturing project. For the issue of shares, the assessee had incurred expenses of Rs.14,21,276/- under different heads like financial consultancy, managerial fees, legal fees, underwriting commission, advertisement, issue house expenses, printing charges etc. Out of total expenditure of Rs.14,21,276/-, the assessee capitalised a sum of Rs.29,668/- on plant & machinery and factory equipment and Rs.9,79,438/- on the work-in-progress. The balance sum of Rs.4,12,170/- was treated as preliminary expenses and on these expenses had claimed relief under Section 35D of the Act in the following Assessment Year i.e. 1981-82. On the capitalised amount of Rs.29,668/-, the assessee claimed depreciation of Rs.4,203/- in the said Assessment Year. The applicant justified the claim for depreciation on the ground that these amounts which were capitalised, represented expenditure incurred in raising finance for the acquisition of and/or for brining into existence capital assets and thus formed part of the cost of fixed assets. In support of its claim for depreciation under Section 32 of the Act, the applicant principally relied upon the decision of the Supreme Court in the case of “ChellapalliSugars Ltd. Vs. CIT, (98 ITR 167)”. The Assessing Officer in the assessment order dated 1 March 1984 held that the expenditure of Rs.14,21,276/- was in the nature of expenses listed under Section 35D of the Act and thus were required to be treated in accordance with Section 35D of the Act and not in the manner as done by the assessee in claiming depreciation under Section 32 of the Act and disallowed the Assessee's claim for depreciation on the capitalised sum of Rs.29,668/- for an amount of Rs.4,203/-. Similarly, for the Assessment year 1981-82 by an Assessment order dated 25 March 1984, applying the same yardstick the Assessing Officer rejected the claim of the assessee for depreciation on the sum of Rs.9,79,438/-, amounting to Rs.1,97,636/-. Thus for the Assessment Year 1980-81 and Assessment Year 1981-82 the Assessing Officer disallowed the Assessee's claim for depreciation on the capitalised amount of Rs.4,176/- and Rs.1,97,636/- respectively.

3. The assessee approached the Commissioner of Income Tax (Appeals) (for short 'CIT (A)') against the order dated 1 March 1984 and 25 March 1984 passed by the Assessing Officer disallowing its claim for depreciation for Assessment Years 1980-81 and 1981-82 respectively. CIT(A) by a common order dated 31 January 1985 rejected the ground as raised in this behalf by the assessee while holding that this claim of the assessee seeking depreciation on the basis of judgment of the Supreme Court in the case of “Chellapalli Sugars Ltd” (supra) was misconceived as the said decision of the Supreme Court cannot be applied in the facts of th