ITAT Bangalore Allows Section 35D and Rejects Disallowance Without Disturbing Earlier Assessments

The Income Tax Appellate Tribunal (ITAT) Bangalore held that where amortisation of preliminary expenses under Section 35D has been accepted in earlier years, the Revenue cannot deny the deduction in a later year without first disturbing the original allowance.

The assessee Navi General Insurance Limited is in the business of general insurance and filed its return for assessment year 2021-22 declaring a loss. During scrutiny proceedings, the AO disallowed the deduction of Rs.1.73 crore claimed under Section 35D towards amortisation of preliminary expenses. The Department also disallowed ESOP expenditure amounting to Rs.68.95 lakh and share issue expenses of Rs.18.57 lakh.

The National Faceless Appeal Centre (NFAC) affirmed the additions, following which the assessee approached the ITAT.

The Tribunal observed that the assessee had incurred preliminary expenses amounting to Rs.8.68 crore and had been claiming one-fifth thereof under Section 35D over successive years. The Revenue had sought to deny the deduction only in the fifth year. The court, after referring to the decision of the Karnataka High Court in Subex Ltd v. CIT, held that once the claim had been accepted in the initial years, the Department could not disallow the same in the subsequent year without disturbing the earlier assessments. Accordingly, the disallowance of Rs.1.73 crore under Section 35D was deleted.

With regard to ESOP expenditure, the Tribunal noted that since the expenditure related to the assessee’s own employees and had been incurred wholly and exclusively for the purposes of business, the Bench held that such reimbursement could not be regarded as a notional expense. However, in respect of share issue expenses amounting to Rs.18.57 lakh, the Tribunal sustained the disallowance.

Accordingly, the appeal of the assessee was partly allowed.