Cost incurred in acquisition of shares of Co. can’t be treated as a cost of project for Sec. 35D deduction: HC

Case Details: Subex Ltd. v. CIT - [2021] 132 taxmann.com 96 (Karnataka)

Judiciary and Counsel Details

• • Mrs. S. Sujatha and Ravi V. Hosmani, JJ.
  • K.K. Chythanya, Adv. for the Appellant.
  • Jeevan J. Neeralgi, T.N.C. Sridhar and K.V. Aravind, Advs. for the Respondent.

Facts of the Case

Section 35D(3) provides for the qualifying amount which shall be eligible for deduction as preliminary expenditure. Such qualifying amount is lower of actual preliminary expenditure incurred on specified items or 5% of the cost of the project, in case of non-corporate assessee. However, in the case of an Indian company, the qualifying amount shall be lower of actual preliminary expenditure incurred on specified items or 5% of cost of project (or 5% of capital employed, at the option of the assessee).

Further, the Explanation (a)(ii) to section 35D provides that cost of project means the actual cost of fixed assets being land buildings, leaseholds, plant, machinery, furniture, fittings, railway sidings, and expenditure on development of lands and buildings.
The issue before the Karnataka High Court was:
‘Whether the Tribunal was right in law in holding that the cost of acquisition of companies cannot be treated as asset for allowing deduction under section 35D of the Income-tax Act?’

Assessee claimed that it has acquired two companies and acquisition of 100% subsidiary shares of such two companies has to be construed as cost of project. Referring to section 35D, assessee contended that cost of project could be acquired by two methods. Firstly, by acquiring the assets individually and secondly, acquiring 100% subsidiary shares.
On contrary, the Assessing Officer (AO) submitted that the shareholder is not the owner of the fixed asset. The phrase ‘being’ has to be interpreted as exhaustive, i.e., which are in the nature of fixed assets, namely land, building, leaseholds, plant, machinery, etc. which are shown in the books of assessee on the last day of the previous year. In the given case, assessee hadn’t acquired any fixed assets.

High Court Held

The Karnataka High Court has concurred with the ruling of the Hon’ble Madras High Court in the case of Ashok Leyland Ltd. [2012] 23 taxmann.com 50 (Madras). The Madras High Court has considered the meaning of the phrase ‘being’ and declared that the expenditure that qualified for consideration under section 35D is restricted by reason of use of phrase ‘being’.

The Karnataka High Court held that the word ‘being’ gets colour from the associated words. The preceding word ‘fixed assets’ indicated as land, building, leaseholds, plant machinery relates to the nature of assets mentioned therein, and the same is exhaustive.
Accordingly, acquisition of companies by acquiring 100% subsidiary shares would not be constructed as the acquisition of the fixed assets that were acquired or developed in connection with the extension of industrial undertaking or setting up of new industrial unit of assessee.