Share Issue Expenses :
The Supreme Court in the case of Brooke Bond India Ltd. Vs. Commissioner of Income-tax, 224 ITR 798, has held that expenditure incurred on issue of shares is a capital expenditure for the purpose of taxation.
However, the expenditure incurred by a banking company on account of stamp duty and registration fees for the issue of bonus shares is allowable as revenue expenditure as held by the Supreme Court in CIT v. General Insurance Corporation (2006) 286 ITR 232.
Preliminary expenses are allowed as deduction under section 35D over a period of 5 successive years starting from the year of commencement of business, i.e., one-fifth of the expenditure is allowed as deduction in each year. Such preliminary expenses include the following:
(a) Expenditure in connection with:
(i) Preparation of feasibility report;
(ii) Preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee: Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;
(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;
(c) Where the assessee is a company, also expenditure:
(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;
(ii) On printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 2013;
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
(d) Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.
Where the aggregate amount of the expenditure referred to above exceeds an amount calculated at five per cent:
(a) of the cost of the project; or
(b) where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, The excess shall be ignored for the purpose of computing the deduction allowable for the preliminary expanses.
Such preliminary expenses incurred before commencement of business is allowed as deduction to companies in both the manufacturing and service sector. However, so far, such expenses incurred after commencement of business for extension of an industrial undertaking or for setting up a new industrial unit were allowed only for the companies in the manufacturing sector. This benefit has now been extended to the companies in the service sector as well. Consequently, the banking sector would also be benefited. This amendment has been effected by the Finance Act, 2008.