Medreich Ltd.,, Bangalore v. DCIT, Bangalore

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE DR. O.K NARAYANAN VICE PRESIDENT AND SMT. P MADHAVI DEVI JUDICIAL MEMBER ITA NO. 1023/BANG/2010 (ASST. YEAR 2006-07) M/S MEDREICH LTD. NO.12/8 SARASWATHI AMMAL STREET MARUTHI SEVA NAGAR BANGALORE-560 033. . APPELLANT VS. THE DY. COMMISSIONER OF INCOME-TAX LTU BANGALORE. . RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA CHARTE RED ACCOUNTANT RESPONDENT BY : SHRI G.V GOPALA RAO COMMISSIONER OF INCOME-TAX O R D E R PER DR. O.K NARAYANAN VICE PRESIDENT THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF THE CIT(A) LTU AT BANGALORE DATED 17.5.2010. THE APPE AL ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143A OF THE INCOME-TAX 1961. ITA NO.1023/B/10 2 2. THE ASSESSEE IS A DOMESTIC COMPANY ENGAGED IN TH E BUSINESS OF SALES OF PHARMACEUTICAL FORMULATIONS. IN ITS COMPU TATION OF INCOME THE ASSESSEE COMPANY HAS CLAIMED A DEDUCTION OF RS. 1 56 87 500/- U/S 37 (1) AS REVENUE EXPENDITURE. THIS EXPENSES REP RESENTED THE SUM OF RS.1 56 87 500/- PAID BY THE ASSESSEE TO M/S YES BA NK AGAINST RENDERING OF STRATEGIC AND FINANCIAL ADVISORY SERVI CES. THE SERVICES WERE RENDERED ON THE BASIS OF MUTUAL AGREEMENT AND THE PAYMENT WAS MADE ACCORDINGLY. THE ASSESSING OFFICER TREATED TH E PAYMENT AS CAPITAL EXPENDITURE AND DISALLOWED THE CLAIM MADE B Y THE ASSESSEE COMPANY. 3. THE ASSESSEE COMPANY HAS ALSO MADE ALTERNATIVE C LAIM FOR DEDUCTION U/S 35D IN RESPECT OF RS.3 93 78 491/-. THIS AMOUNT REPRESENTED PAYMENTS MADE BY THE ASSESSEE COMPANY T OWARDS STAMP DUTY FILLING FEE AND REGISTRATION FEE INCURRED IN RESPECT OF RAISING THE CAPITAL BLOCK OF THE ASSESSEE COMPANY. ANOTHER AM OUNT OF RS.1 40 00 000/- RELATED TO DOCUMENTATION AND TERM SHEET FEES AGAIN IN RESPECT OF RAISING CAPITAL BLOCK OF THE ASSESSEE C OMPANY. THE ABOVE TWO AMOUNTS HAVE BEEN DEBITED BY THE ASSESSEE COMPA NY TO ITS SHARE PREMIUM ACCOUNT AND BROUGHT DOWN IN THE INCOME-TAX COMPUTATION AS EXPENSES ELIGIBLE FOR AMORTIZATION U/S 35D. THE BA LANCE AMOUNT OF ITA NO.1023/B/10 3 RS.1 86 500/- RELATED TO PROFESSIONAL FEE PAID BY T HE ASSESSEE. THE ASSESSEE CLAIMED THE BENEFIT OF SEC. 35D ON THE GRO UND THAT THE ABOVE EXPENDITURE WERE INCURRED FOR RAISING MONEY TO EXPA ND THE BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE. BUT ASSESSI NG AUTHORITY REJECTED THE CLAIM ON THE GROUND THAT ENTIRE EXPENDITURE WER E INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE AN D NOT IN CONNECTION WITH THE EXPANSION OF UNDERTAKING OR FO R THE MATTER OF SETTING UP OF A NEW UNIT. 4. THESE TWO ISSUES WERE TAKEN BEFORE THE CIT(A). THE CIT(A) FIRST CONSIDERED THE QUESTION OF DEDUCTION OF RS.1 56 87 500/-. HE FOUND THAT THE PAYMENT WAS MADE BY THE ASSESSEE COM PANY AS STRATEGIC AND FINANCIAL ADVISORY FEE TO M/S YES BAN K IN CONNECTION WITH THE ISSUE OF SHARES TO INCREASE THE SHARE CAPI TAL OF THE ASSESSEE COMPANY. THE ASSESSEE HAD RAISED ANOTHER CONTENTI ON BEFORE THE CIT(A) THAT EVEN THOUGH THE EXPENDITURE WERE INCURR ED FOR ISSUING SHARES THE ISSUE PROCEEDS WERE MEANT FOR WORKING C APITAL REQUIREMENTS AND IN THAT CONTEXT THE EXPENSES SHOUL D BE TREATED AS REVENUE IN NATURE. THIS CONTENTION WAS ALSO REJECT ED BY THE CIT(A). HE HAS AGREED WITH THE VIEW TAKEN BY THE ASSESSING AUTHORITY. IN RESPECT OF THE ALTERNATE CONTENTION U/S 35D THE CI T(A) AGREED WITH ITA NO.1023/B/10 4 THE ASSESSING AUTHORITY AND FOUND THAT THE EXPENDIT URES WERE INCURRED FOR RAISING CAPITAL. HE HELD THAT THE EXPENSES CL AIMED BY THE ASSESSEE DO NOT COME UNDER ANY OF THE CATEGORIES OF EXPENSES PRESCRIBED AS ELIGIBLE FOR AMORTIZATION U/S 35D(2). THE ALTERNATE GROUND WAS ALSO REJECTED. 5. THE ASSESSEE COMPANY IS AGGRIEVED AND THEREFORE THE SECOND APPEAL BEFORE US. 6. THE DETAILED GROUNDS RAISED BY THE ASSESSEE ARE EXTRACTED BELOW: .1. THE LEARNED DCIT LTU BANGALORE HAS ERRED IN PASSING THE ASSESSMENT ORDER IN THE MANNER PASSED BY HIM AND THE LEARNED CIT(A) LTU BANGALORE HAS ERRED IN SUSTAINING THE ADDITIONS MADE BY THE LEARNED AO. THE ORDERS PASSED BY THE LOWER INCOME-TAX AUTHORITIES TO THE EXTENT PREJUDICIAL TO THE APPELLANT ARE BAD IN LAW AND LIABLE TO BE QUASHED. .2. THE LEARNED DCIT LTU BANGALORE HAS ERRED IN DISALLOWING STRATEGIC AND FINANCIAL ITA NO.1023/B/10 5 ADVISORY FEES PAID TO YES BANK AMOUNTING TO RS.1 56 87 500/- AND THE LEARNED CIT(A) LTU BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED AO. THE LOWER INCOME-TAX AUTHORITIES HAVE ERRED IN (A) STATING THAT THE IMPUGNED EXPENDITURE IS CAPITAL IN NATURE; (B) RELYING ON CERTAIN DECISIONS WHICH ARE DISTINGUISHABLE ON BOTH FACTS AND LAW; (C) NOT APPRECIATING THAT THE IMPUGNED EXPENDITURE WAS NOT WHOLLY INCURRED IN CONNECTION WITH THE ISSUE OF SHARES. .2.3. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE PAYMENT MADE TO YES BANK AMOUNTING TO RS.1 56 87 500/- SHOULD BE FULLY ALLOWED IN COMPUTING THE INCOME FOR THE YEAR UNDER CONSIDERATION. .3.1. WITHOUT PREJUDICE THE LOWER INCOME-TAX AUTHORITIES HAVE ERRED IN DENYING DEDUCTION U/S 35D IN RESPECT OF THE PAYMENT MADE TO YES BANK AND OTHER EXPENDITURE TOTALLY AMOUNTING TO RS.3 93 78 491/-. ITA NO.1023/B/10 6 .3.2. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE STRATEGIC AND FINANCIAL ADVISORY FEES PAID TO YES BANK AND OTHER EXPENDITURE TOTALLY AMOUNTING TO RS.3 93 78 491/- QUALIFIES FOR DEDUCTION U/S 35D AND THE SAME IS TO BE ALLOWED. .4.1. THE LEARNED DCIT LTU BANGALORE HAS ERRED IN LEVYING INTEREST U/S 234B AND THE LEARNED CIT(A) LTU BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE INTEREST U/S 234B IS NOT LEVIABLE. THE APPELLANT DENIES ITS LIABILITY TO PAY INTEREST U/S 234B. .5.1. IN VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADDUCED AT THE TIME OF HEARING THE APPELLANT PRAYS THAT THE ORDERS OF THE LOWER INCOME-TAX AUTHORITATIES TO THE EXTENT PREJUDICIAL TO THE APPELLANT BE QUASHED OR IN THE ALTERNATIVE (I) STRATEGIC AND FINANCIAL ADVISORY FEES PAID TO YES BANK AMOUNTING TO RS.1 56 87 500/- BE FULLY ALLOWED AS DEDUCTION; OR IN THE ALTERNATIVE AND WITHOUT PREJUDICE ITA NO.1023/B/10 7 (II) DEDUCTION U/S 35D BE ALLOWED IN RESPECT OF EXPENDITURE TOTALLY AMOUNTING TO RS.3 93 78 491/-; (III) INTEREST LEVIED U/S 234B BE DELETED. 7. AS CONCLUDED BY THE ASSESSEE IN ITS GROUND OF AP PEAL WE ARE TO EXAMINE THE TWO CONTENTIONS OF THE ASSESSEE COMPANY RELATED TO 1. PAYMENT OF RS.1 56 87 500/- PAID TO M/S YES BA NK 2. AMORTIZATION OF EXPENDITURE U/S 35D OF EXPENDITU RE AMOUNTING TO RS.3 93 78 491/-. 8. THE GROUND RELATING TO LEVY OF INTEREST U/S 234B BEING INCIDENTAL OR CONSEQUENTIAL DOES NOT CALL FOR ANY SPECIFIC ADJUDICATION. 9. WE HEARD SHRI PADAMCHAND KHINCHA THE LEARNED CH ARTERED ACCOUNTANT APPEARING FOR THE ASSESSEE COMPANY. 10. ON THE FIRST ISSUE OF THE CLAIM OF EXPENDITURE OF RS.1 56 87 500/- THE LEANED CHARTERED ACCOUNTANT A RGUED IN THE FOLLOWING MANNER : ITA NO.1023/B/10 8 I. EVEN IF THE EXPENDITURE WAS INCURRED IN CONNECTION WITH ISSUE OF SHARES TO RAISE THE CAPITA L THE CAPITAL WAS RAISED FOR THE PURPOSE OF AUGMENTING TH E WORKING CAPITAL NEEDS OF THE ASSESSEE COMPANY. IT IS A SETTLED LAW THAT EXPENSES INCURRED FOR PROCURING WO RKING CAPITAL ARE REVENUE IN NATURE. THE CASE LAWS RELIE D ON BY THE LOWER AUTHORITIES DO NOT DEAL WITH THIS PARTICU LAR ISSUE. THE DECISIONS ONLY DEAL WITH THE EXPENSES INCURRED IN CONNECTION WITH THE ISSUE OF SHARES FO R RAISING THE CAPITAL WITHOUT LOOKING INTO THE PURPOS E FOR WHICH THE CAPITAL WAS RAISED. II) THAT THE THIRD MEMBER DECISION OF THE ITAT CHENNAI BENCH IN THE CASE OF LAXMI AUTO COMPANIES LTD. VS. DCIT 303 (AT) 45 IS A DIRECT DECISION IN SUPPORT OF THE CASE OF THE ASSESSEE. IN THE SAID DECISION THE TRIBUNAL HAS HELD THAT THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD. 229 ITR 798 CAN BE APPLIED ONLY AFTER EXAMINING THE OBJECT OF THE CAPITAL ISSUE AND THAT DECISION IS NO T ITA NO.1023/B/10 9 APPLICABLE IF ENHANCEMENT OF CAPITAL IS MADE FOR GE ARING UP OF FUNDS FOR WORKING CAPITAL III) HE HAS ALSO RELIED ON THE ORDER OF THE ITAT BANGALORE B BENCH DATED 3.5.2005 PASSED IN THE CA SE OF M/S TATA ELXSI LTD. IN ITA NO.610 & 1112/BANG/2002 AND ON COMMENTARY OF COMPANIES ACT BY SHRI A RAMAIYA AND ALSO THE NOTIFICATION OF THE DEPARTMENT OF ECONOMIC AFFAIRS GOVERNMENT OF INDIA IN THE MINIST RY OF FINANCE DATED 4 TH JUN 2010 TO BUTTRESS HIS ARGUMENT THAT IN THE PRESENT CASE THE SHARES WERE ISSUED T O THE PUBLIC AND THE PUBLIC MEANT THE PERSONS OTHER THAN PROMOTERS AND THE PROMOTERS GROUP SUBSIDIARY AND ASSOCIATES OF THE COMPANY. HE EXPLAINED THAT WHETH ER THE SHARES WERE ISSUED TO THE PUBLIC WAS A QUESTION RAISED BY THE LOWER AUTHORITIES AND WITHIN THE MEANING OF TERM PUBLIC EXPLAINED BY THE ABOVE AUTHORITIES THE SH ARES WERE OFFERED TO THE PUBLIC AND ON THAT GROUND ALSO THERE WAS NO REASON TO REJECT THE CLAIM OF DEDUCTION MADE BY THE ASSESSEE. ITA NO.1023/B/10 10 11. SHRI G.V GOPALA RAO THE LEARNED COMMISSIONER O F INCOME-TAX APPEARING FOR THE REVENUE ON THE OTHER HAND CONTEND ED THAT NONE OF THE DECISIONS RELIED ON BY THE ASSESSEE COMPANY ARE DIRECTLY ON THE DISPUTE RAISED IN THE PRESENT CASE AS THE FACTS AN D CIRCUMSTANCES ARE ENTIRELY DIFFERENT. HE CONTENDED THAT IN THE PRESE NT CASE THE PAYMENT OF RS.1 56 87 500/- WAS MADE BY THE ASSESSEE COMPAN Y TO M/S YES BANK FOR RENDERING OF SERVICES IN CONNECTION WITH I SSUE OF SHARES. THESE PAYMENTS IN FACT RELATED TO VARIOUS CORPORATE AND FINANCIAL SERVICES RENDERED BY M/S YES BANK TO HELP THE ASSES SEE TO MAKE THE SHARE ISSUE A SUCCESS AND RAISE ITS CAPITAL. RAIS ING OF CAPITAL BLOCK IN THE CASE A COMPANY IS ESSENTIALLY AN ACTIVITY OF EN DURING BENEFIT AND THEREFORE THE EXPENSES INCURRED IN CONNECTION WITH RAISING OF CAPITAL BLOCK IS ALSO A CAPITAL EXPENDITURE AND THIS POSITI ON HAS BEEN CONFIRMED BY A NUMBER OF JUDICIAL PRONOUNCEMENTS. 12. WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED TH E PLETHORA OF CASE LAWS RELIED ON BY THE ASSESSEE COMPANY AND ALS O THE DETAILED WRITTEN SUBMISSION FILED BY THE LEARNED CHARTERED A CCOUNTANT APPEARING FOR THE ASSESSEE COMPANY. 13. THERE IS NO DOUBT REGARDING THE FACT THAT THE P AYMENT OF RS.1 56 87 500/- WAS MADE BY THE ASSESSEE COMPANY T O M/S YES ITA NO.1023/B/10 11 BANK FOR SERVICES RENDERED IN CONNECTION WITH ISSUE OF SHARES TO INCREASE THE CAPITAL BASE OF THE ASSESSEE COMPANY. THE HONBLE SUPREME COURT HAS HELD IN THE CASE OF BROOKE BOND I NDIA LTD. VS. CIT 229 ITR 798 AND OTHER CASES THAT THE EXPENDITU RE INCURRED IN CONNECTION WITH THE ISSUE OF SHARES IS CAPITAL IN N ATURE. THE LEARNED CHARTERED ACCOUNTANT HAS RELIED ON THE THIRD MEMBER DECISION OF THE ITAT CHENNAI BENCH RENDERED IN THE CASE OF LAXMI AU TO COMPANY LTD. VS. DCIT 303 ITR (AT) 45 TO MAKE A FURTHER ARGUMENT THAT IT WAS NECESSARY TO EXAMINE THE OBJECT OF THE CAPITAL ENHANCEMENT MADE BY A COMPANY AND THEN ONLY IT WOULD BE POSSIBLE TO HOLD WHETHER THE EXPENDITURE WERE CAPITAL OR REVENUE IN NATURE. HE HAS INVITED OUR ATTENTION TO THE DISCUSSION AVAILABLE IN THE SAID T HIRD MEMBER ORDER THAT THE CASE OF THE BROOKE BOND INDIA (SUPRA) CAN BE APPLIED ONLY AFTER EXAMINING THE OBJECT OF THE CAPITAL ENHANCEME NT. IT WAS ALSO HELD THEREIN THAT THE DECISION OF BROOKE BOND INDIA LTD. (SUPRA) IS NOT APPLICABLE IF ENHANCEMENT OF CAPITAL WAS MADE FOR GEARING UP THE FUNDS FOR WORKING CAPITAL. 14. WE HAVE GONE THROUGH THE SAID THIRD MEMBER DECI SION OF THE ITAT CHENNAI BENCH HEAVILY RELIED ON BY THE LEARNE D CHARTERED ACCOUNTANT APPEARING FOR THE ASSESSEE COMPANY. THE SAID DECISION ITA NO.1023/B/10 12 RENDERED BY THE HONBLE THIRD MEMBER IN THE CASE OF LAXMI AUTO COMPANY LTD. (SUPRA) ARISES OUT OF AN INTIMATION M ADE U/S 143(1)(A) WHERE PRIMA-FACIE ADJUSTMENT WAS MADE BY THE ASSESS ING AUTHORITY. THE ADJUSTMENT RELATED TO DISALLOWANCES OF EXPENDIT URE INCURRED IN CONNECTION WITH THE ENHANCEMENT OF SHARE CAPITAL. THEREFORE THE QUESTION CONSIDERED IN THAT CASE WAS WHETHER THE AD JUSTMENT MADE BY THE ASSESSING AUTHORITY WAS PRIMA FACIE OR NOT. IN THAT CONTEXT THE TRIBUNAL HAD TO EXAMINE IN WHICH CONTEXT THE EXPENS ES WERE INCURRED. IT IS IN THAT SCENARIO OF THE EXAMINING THE SCOPE O F PRIMA FACIE ADJUSTMENT PROVIDED IN SEC. 143(1)(A) THE THIRD M EMBER HAS HELD THAT IT IS NECESSARY TO EXAMINE THE OBJECT OF THE I NCREASE IN SHARE CAPITAL BEFORE APPLYING THE JUDGMENT OF THE HONB LE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA (SUPRA). WE DO N OT SAY THAT THE OBSERVATION OF THE HONBLE THIRD MEMBER ARE OBITERDICTA; BUT THEY ARE NOT IN THE COURSE OF TRACK IN WHICH THE FACTS OF THE PRESENT CASE ARE MOVING. THEREFORE WE ARE NOT IN A POSITION TO FOLLOW THE SAID OBSERVATION OF THE THIRD MEMBER DECISION AS FAR AS THE PRESENT CASE IS CONCERNED. 15. NOW COMING TO THE ISSUE OF EXPENDITURE AS ALRE ADY REPEATED THE PAYMENT WERE MADE FOR SERVICES RENDERED IN CONN ECTION WITH THE ITA NO.1023/B/10 13 ISSUE OF SHARES TO RAISE THE CAPITAL BLOCK OF THE A SSESSEE COMPANY. THE FUNDS RAISED BY A COMPANY THROUGH ISSUE OF SHARES A UTOMATICALLY INCREASES THE CAPITAL VOLUME OF THAT COMPANY. THE FUNDS RAISED BY INCREASING THE CAPITAL IN THAT MANNER MAY BE USED B Y THE ASSESSEE COMPANY FOR VARIOUS PURPOSES. THE CAPITAL FUNDS MA Y BE USED TO SET UP THE BUSINESS; TO PURCHASE CAPITAL ASSETS; OR TO PAY OFF LIABILITIES; OR TO AUGMENT ITS WORKING CAPITAL ETC. ONCE SHARES A RE ISSUED FOR CASH THE ASSESSEE COMPANY GETS THE FUNDS IN ITS HANDS AN D ONCE THE FUNDS HAVE COME INTO THE HANDS OF THE ASSESSEE COMPANY T HE PROCESS OF ISSUE OF SHARE CAPITAL IS COMPLETE. THEREFORE THE SCOPE OF EXPENDITURE INCURRED FOR RAISING THE SHARE CAPITAL BY ISSUING S HARES MUST ALSO STOP AT THAT POINT. THE SCOPE SHOULD NOT BE ENLARGED FUR THER. IT IS THE WISDOM OF THE COMPANY TO DECIDE IN WHICH MANNER THE FUNDS AVAILABLE WITH IT COLLECTED BY WAY OF ISSUE OF SHA RES SHOULD BE APPLIED. IF THE FUNDS ARE UTILIZED FOR WORKING CAP ITAL REQUIREMENTS IT IS ONLY AN APPROPRIATION OF FUNDS AVAILABLE IN THE HANDS OF THE COMPANY. RAISING THE CAPITAL AND UTILIZING THE FU NDS ARE DIFFERENT. APPLICATION OF FUNDS DOES NOT DECIDE THE CHARACTER OF THE MONEY COLLECTED AGAINST THE ISSUE OF SHARES. MONEY COLLE CTED AGAINST THE ISSUE OF SHARES ALWAYS REMAINS AS CAPITAL. THEREFO RE THE ARGUMENT OF THE LEARNED CHARTERED ACCOUNTANT THAT THE EXPENDITU RE INCURRED FOR ITA NO.1023/B/10 14 ISSUE OF SHARES TO AND RAISE SHARE CAPITAL FOR WORK ING CAPITAL REQUIREMENTS NEED TO BE ALLOWED AS REVENUE EXPENDIT URE CANNOT BE ACCEPTED. 16. WE FIND THAT THE LOWER AUTHORITIES HAVE RIGHTLY HELD THAT THE PAYMENT MADE BY THE ASSESSEE TO M/S YES BANK FOR SE RVICES RENDERED AMOUNTING TO RS.1 56 87 500/- WAS IN THE NATURE OF A CAPITAL EXPENDITURE AND COULD NOT BE ALLOWED AS DEDUCTION I N COMPUTING THE INCOME OF THE ASSESSEE COMPANY. THIS ISSUE IS DECI DED AGAINST THE ASSESSEE. 17. THE ALTERNATE GROUND RAISED BY THE ASSESSEE COM PANY IS THAT THE ASSESSEE MAY BE GIVEN THE BENEFIT OF AMORTIZATION U /S 35D FOR THE EXPENDITURE TOTALING TO RS.3 93 78 491/-. 18. AS RIGHTLY POINTED OUT BY THE CIT(A) ALL THESE EXPENDITURES HAVE BEEN INCURRED BY THE ASSESSEE COMPANY IN CONNE CTION WITH RAISING OF THE CAPITAL BASE OF THE ASSESSEE COMPANY . 19. SECTION 35D PROVIDES THAT SPECIFIED EXPENDITURE SHALL BE ENTITLED FOR AMORTIZATION ONLY IF THE EXPENDITURE W ERE INCURRED BEFORE ITA NO.1023/B/10 15 THE COMMENCEMENT OF THE BUSINESS OR AFTER THE COMME NCEMENT IN CONNECTION WITH THE EXTENSION OF THE BUSINESS OR IN CONNECTION WITH SETTING UP OF A NEW UNIT. 20. THE ARGUMENT OF THE ASSESSEE COMPANY IS THAT TH E EXPENSES WERE INCURRED IN RAISING THE CAPITAL MONEY FOR THE EXPANSION OF THE EXISTING BUSINESS CARRIED ON BY THE ASSESSEE COMPAN Y AND THEREFORE IT AMOUNTED TO THE EXTENSION OF THE EXISTING BUSINESS AND AS SUCH THE ASSESSEE IS ENTITLED FOR BENEFIT AVAILABLE U/S 35D. 21. WE CONSIDERED THIS ISSUE VERY CAREFULLY. THERE IS NO DOUBT THAT EXPENSES WERE NOT INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS. THEREFORE THE FIRST CONDITION IS NOT COMPLIED WITH . THE SECOND CONDITION IS THAT THE EXPENSES INCURRED AFTER COMME NCEMENT OF THE BUSINESS SHOULD BE INCURRED IN CONNECTION WITH EXT ENSION OF THE UNDERTAKING OR IN CONNECTION WITH SETTING UP OF A N EW UNIT. THERE IS NO CASE OF SETTING UP OF A NEW UNIT. THE QUESTION IS WHETHER THERE WAS AN EXTENSION OF THE EXISTING UNDERTAKING? A GREAT E MPHASIS HAS TO BE GIVEN ON THE EXPRESSION UNDERTAKING. BUSINESS EX PANSION AND MARKET EXPANSION OF AN EXISTING BUSINESS WILL NOT A MOUNT TO EXTENSION OF THE UNDERTAKING. THE EXPRESSION UNDERTAKING DENOTES A VISIBLE ITA NO.1023/B/10 16 EXPENDITURE ON THE PHYSICAL FACILITIES FOR MANUFACT URE AND PRODUCTION. AN UNDERTAKING IS ALWAYS HAVING AN AREA OF PHYSICA L STRUCTURE WHICH PRODUCES GOODS AND SERVICES BY UTILIZING THE NECESS ARY FACTORS OF PRODUCTION. ENHANCEMENT OF THE GEOGRAPHICAL AREA O F MARKETING DOES NOT AMOUNT TO EXPANSION OR EXTENSION OF THE UNDERTA KING. THE EXPRESSION USED IN THE STATUTE IS EXTENSION OF UND ERTAKING. IT CLEARLY MANIFESTS THAT AN APPARENT EXTENSION OR EXPANSION M UST TAKE PLACE IN THE PHYSICAL UNDERTAKING. THERE IS NO SUCH CASE A S FAR AS THE PRESENT CASE IS CONCERNED. THE EXPANSION IN THE PRESENT CA SE IS IN THE BUSINESS PROSPECTS OF THE EXISTING UNDERTAKING. 22. THEREFORE WE FIND THAT THE EXPENDITURE INCURRE D BY THE ASSESSEE COMPANY IN CONNECTION WITH THE ISSUE OF SHARES DO N OT QUALIFY TO BE AMORTISED U/S 35D. THIS ISSUE IS ALSO DECIDED AGAI NST THE ASSESSEE. 23. IN RESULT THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON TUESDAY THE 22ND DAY OF FEBRUARY 2011 AT BANGALORE. SD/- SD/- (P MADHAVI DEVI) (DR. O.K NARAYANAN) JUDICIAL MEMBER VICE PRESIDENT ITA NO.1023/B/10 17 -