INCOME TAX ACT, 1961

Section 35D

Business deduction under section 35D - Issue of shares of QIBs - Whether issue of shares to QIBs account to issue of shares to public -

Assessee, company raised a sum by issue of share capital through a Qualified Institution Placement ('QIP') in which it placed its share capital with Qualified Institutional Buyers ('QIB'). In connection with QIP, assessee incurred expenses on account of payments to Lead Managers of the Issue and payments to Legal consultants and Auditors for the finalization of placement document for the QIP. It claimed 1/5th of these expenses under section 35D for the captioned year. The question involved in this appeal as to whether QIB can be regarded as 'public' and whether the offer made to them can be regarded as 'offer made to public' for the purpose of section 35D.Held: Assessee being a listed company bound by 'Listing Agreement', which provides for the disclosure requirements for the share holding pattern of a listed company. There are only two categories of shareholders 'promoter/promoter group' and 'public'. As can be seen from the list of QIBs to whom shares are issued, the shares are not issued to any of the aforesaid categories. Thus QIBs, not being promoters, promoter group, subsidiaries and associates of the company would qualify as 'public'. As specified in clause 40A(ii) of the listing agreement, public shareholding can be increased by any of the modes specified therein to comply with rules 19(2) and 19A of Securities Contracts (Regulation) Rules, 1957. Regulation 91B defines IPP as a further public offer made only to QIBs. These regulations provide that when a company has a public shareholding lower than the requirements specified, then company may issue IPP to QIBs and raise the public shareholding to required levels. Tribunal in the case of Deccan Chronicle Holdings Ltd. ((2015) 60 Taxmann.com 240 (Hyderabad-Trib.) : 2015 TaxPub(DT) 2055 (Hyd-Trib) held that assessee was eligible for deduction under section 35D.

Provisions explained:CIT v. Andhra Chamber of Commerce AIR 1965 SC 1281 : 1965 TaxPub(DT) 190 (SC), Nitta Gelatine India Limited (Formerly M/s. Kerala Chemicals and Proteins Ltd) v. Asstt. CIT (2016) 243 Taxman 245 (Ker) : 2016 TaxPub(DT) 4438 (Ker-HC) Followed:Dy. CIT, Circle 16 (2) Hyderabad v. Deccan Chronicle Holdings Ltd. (2015) 60 Taxmann.com 240 (Hyderabad-Trib.) : 2015 TaxPub(DT) 2055 (Hyd-Trib), CIT v. J.K. Synthetics Limited (2009) 309 ITR 371 (Del) : 2009 TaxPub(DT) 1196 (Del-HC) and CIT v. Shree Synthetics Limited (1986) 162 ITR 819 (MP) : 1986 TaxPub(DT) 1053 (MP-HC).