Under the Income Tax Act, 1961, revenue expenses are generally allowable as deductions in computing business income unless there is an explicit provision in the law that disallows them. Conversely, capital expenditures, which are incurred to acquire assets or bring enduring benefits to the business, are typically not deductible unless expressly permitted under the Act. Public issue expenses, which companies incur when raising capital through the issuance of shares or debentures, fall into the category of capital expenditures because they are undertaken to secure long-term funding and result in a lasting advantage to the company’s financial structure.
Recognizing the significant financial outlay involved in such activities and the need to provide partial tax relief, the legislature introduced Section 35D. This provision enables certain preliminary expenses, including public issue expenses, to be amortized over five successive years. Under Section 35D(2)(c)(iv), the law specifically allows for the amortization of public issue expenses incurred in connection with the preparation, printing, and advertisement of a prospectus, as well as other expenses related to the public issue process. The amortization mechanism ensures that the burden of these large, one-time costs is spread evenly over multiple assessment years, thereby aligning the deduction more closely with the long-term benefits derived from the capital raised.
However, the practical application of Section 35D has given rise to interpretational challenges. One of the main issues concerns the scope of what constitutes “public issue expenses” for deduction. While the statute lists certain categories of eligible expenses, it is silent or unclear about many ancillary costs that companies often incur during the process. For example, questions arise about whether expenses for merchant banker fees, underwriters’ commissions, legal consultancy, stock exchange listing fees, or registrar’s charges fall within the ambit of allowable deductions under this section.
Judicial precedents have further highlighted these uncertainties. Courts and tribunals have taken differing views depending on the specific facts and documentation presented by taxpayers. In some cases, the judiciary has adopted a narrow interpretation, limiting the deduction strictly to the items explicitly mentioned in Section 35D(2). In others, a broader interpretation has been applied, allowing related and necessary costs that are integral to the public issue process. The lack of uniformity has compelled many companies to seek professional advice and maintain meticulous documentation to substantiate their claims.
From a policy perspective, the provision offers a valuable tax planning tool for companies looking to optimize their cash flows during capital-raising exercises. Nonetheless, the ambiguity surrounding eligible expenses suggests a need for legislative or administrative clarification. A more detailed enumeration of qualifying costs, or updated CBDT guidelines, could reduce litigation and provide greater certainty to taxpayers.
In the meantime, companies are well-advised to ensure that public issue expenses are directly linked to the capital-raising activity and are supported by clear evidence of their necessity and relevance. Doing so increases the likelihood of the claim being accepted by tax authorities and withstands possible scrutiny in assessments or appeals.
Scope of Section 35D(2)
Sub-section (2) of Section 35D of the Income Tax Act, 1961, enumerates the various categories of preliminary expenses that qualify for amortisation. This section intends to provide relief to taxpayers who incur substantial one-time costs during the establishment or expansion of a business, or in connection with raising capital. Clause (c)(iv) of this sub-section holds particular significance for companies that issue shares or debentures to the public.
According to Clause (c)(iv), expenditure incurred “in connection with the issue, for public subscription, of shares in or debentures of the company” is eligible for amortisation. The provision explicitly mentions costs such as underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus. These expenses are integral to the process of inviting the public to invest in the company, and without them, the public issue process cannot be effectively executed.
The inclusion of this clause in the statute reflects a policy decision by the legislature to treat such capital expenses differently from other capital outlays. Public issue expenses do not result in the acquisition of a tangible asset but instead create an enduring source of finance for the business. They are necessary for mobilising public funds, which, in turn, are deployed in the company’s long-term projects and expansion plans. By allowing amortisation over five years, the law seeks to align the recognition of these costs with the multi-year benefits they yield.
In practice, this provision serves as a significant tax relief mechanism for companies. Without it, the entire cost of a public issue would have to be borne in a single financial year, potentially creating a heavy strain on profitability. Amortisation smooths this impact, distributing the deduction evenly across five assessment years and providing better matching between costs and benefits.
However, the provision also requires careful compliance. Only those expenses directly connected to the public issue and falling within the categories listed in Section 35D(2)(c)(iv) qualify for deduction. For example, underwriting commission and brokerage are admissible, but questions may arise about the eligibility of ancillary costs such as registrar’s fees, listing fees, or legal advisory charges. This has led to interpretational disputes and varying judicial opinions.
Moreover, companies must ensure that the expenditure has been actually incurred and duly supported by invoices, agreements, and proof of payment. The onus lies on the assessee to demonstrate the nexus between the expense and the public issue activity. Any ambiguity or weak documentation could invite disallowance during assessment.
Renumbering in the New Income Tax Bill 2025
The New Income Tax Bill, 2025, has introduced several structural changes to the numbering and organisation of provisions within the Act to improve readability and logical sequencing. One such change is the renumbering of the earlier Section 35D to the new Section 44. Within this restructured framework, the clause that previously existed as Section 35D(2)(c)(iv) is now designated as Section 44(2)(c)(iii). It is important to note that this modification is purely a renumbering exercise, undertaken as part of the broader harmonisation of the Act, and does not entail any substantive change to the scope, eligibility, or conditions governing the amortisation of public issue expenses.
The new numbering has been implemented to align related provisions more closely and eliminate historical inconsistencies in section placement. For practitioners and taxpayers, the shift to Section 44 requires adjustments in citation and compliance documentation, but the underlying rights and obligations remain unaffected. Companies that have been claiming amortisation for public issue expenses under the earlier section can continue to do so under the new section without any additional procedural hurdles, provided they meet the same qualifying criteria.
Section 44(2)(c)(iii) continues to cover expenditure incurred “in connection with the issue, for public subscription, of shares in or debentures of the company,” including underwriting commission, brokerage, and charges for drafting, typing, printing, and advertising the prospectus. This reflects the legislature’s consistent recognition that such expenses, while capital in nature, are a necessary cost of raising long-term funds and should not be disallowed outright for tax purposes. Instead, by permitting amortisation over five years, the law provides a balanced mechanism to match the cost of capital raising with the period over which the benefit of such funds accrues to the business.
The continued presence of this provision in the 2025 Bill underscores a stable policy approach. In an environment where companies—particularly in capital-intensive sectors—rely on public issues for expansion funding, the amortisation relief acts as an incentive to tap into equity and debt markets. It reduces the short-term tax impact and smooths the burden of large one-off expenses. This approach also aligns with global practices where certain capital-raising costs are allowed to be spread over multiple periods.
However, taxpayers must remain vigilant in ensuring that only eligible expenses are claimed and that they maintain clear records to substantiate the direct connection between the expenditure and the public issue. Renumbering does not imply relaxation in scrutiny, as this is a longstanding area of dispute in tax assessments; companies should be meticulous in their compliance.
Importance of Amortisation of Public Issue Expenses
The amortisation of public issue expenses is a critical tax relief mechanism that recognises the unique nature of costs associated with raising capital from the public. When a company opts to issue shares or debentures to investors, it typically incurs a variety of substantial expenses, including underwriting fees, brokerage charges, printing and advertising costs for the prospectus, legal drafting fees, and other associated administrative outlays. These costs, though incurred upfront, yield benefits that extend well beyond the year in which they are paid, since the capital raised is generally deployed for long-term projects, expansion, or debt restructuring.
If such expenses were to be treated purely as capital in nature and disallowed as a deduction in their entirety in the year of occurrence, the immediate financial burden on companies could be significant. This would not only distort the company’s profit and loss account for that year but could also discourage businesses—especially newly incorporated or growth-stage companies—from accessing public markets due to the prohibitive upfront tax implications.
By permitting amortisation, tax law offers a balanced solution. Under the applicable provision (now Section 44(2)(c)(iii) of the Income Tax Act, 2025, previously Section 35D(2)(c)(iv)), eligible expenses can be written off in equal instalments over five years. This spreading of the cost mirrors the continuing benefit that the raised capital provides over time, aligning taxation more closely with economic reality. It also ensures consistency between accounting treatment and tax computation, reducing mismatches that could otherwise arise.
From a policy standpoint, this relief serves multiple objectives. It encourages companies to utilise public capital markets as a viable funding avenue, fosters economic growth by facilitating infrastructure and capacity expansion, and promotes investor participation in capital raising activities. Furthermore, it reflects the principle that taxation should be fair, equitable, and economically justifiable—avoiding punitive treatment of necessary and legitimate business expenditure.
However, companies must exercise caution in claiming amortisation. Only expenses directly related to the public issue are eligible; any unrelated promotional, internal administrative, or general marketing costs cannot be included. Documentation, such as contracts with underwriters, invoices from printers, advertising bills, and copies of the issued prospectus, must be retained for audit purposes. Tax authorities often scrutinise these claims to ensure that there is no inflation or misclassification of expenses.
Judicial Interpretations on Public Issue Expenses
Over the years, courts and tribunals have examined the scope and application of Section 35D, particularly regarding what qualifies as public issue expenses eligible for amortisation. Judicial pronouncements have clarified the types of expenses that can be amortised and emphasized that only those expenses directly connected with the public issue process qualify under this provision.
The courts have distinguished between preliminary expenses incurred exclusively for the public issue and other capital expenses that do not fall within the ambit of Section 35D. For instance, expenses related to share transfer, registration, or general corporate expenses have been held not to qualify as public issue expenses.
Ambiguities and Controversies
Despite judicial clarifications, ambiguity remains around certain expenses claimed as public issue costs. Some companies have attempted to include expenses like promoters’ fees, legal fees not specifically linked to the prospectus, and other incidental costs under Section 35D. Such claims have often been contested by tax authorities.
The uncertainty stems from the lack of a precise definition of public issue expenses in the statute. This has led to disputes, with companies and tax authorities interpreting the scope differently, resulting in litigation and appeals.
Accounting Treatment of Public Issue Expenses
The amortisation of public issue expenses is a critical tax relief mechanism that recognises the unique nature of costs associated with raising capital from the public. When a company opts to issue shares or debentures to investors, it typically incurs a variety of substantial expenses, including underwriting fees, brokerage charges, printing and advertising costs for the prospectus, legal drafting fees, and other associated administrative outlays. These costs, though incurred upfront, yield benefits that extend well beyond the year in which they are paid, since the capital raised is generally deployed for long-term projects, expansion, or debt restructuring.
If such expenses were to be treated purely as capital in nature and disallowed as a deduction in their entirety in the year of occurrence, the immediate financial burden on companies could be significant. This would not only distort the company’s profit and loss account for that year but could also discourage businesses—especially newly incorporated or growth-stage companies—from accessing public markets due to the prohibitive upfront tax implications.
By permitting amortisation, tax law offers a balanced solution. Under the applicable provision (now Section 44(2)(c)(iii) of the Income Tax Act, 2025, previously Section 35D(2)(c)(iv)), eligible expenses can be written off in equal instalments over five years. This spreading of the cost mirrors the continuing benefit that the raised capital provides over time, aligning taxation more closely with economic reality. It also ensures consistency between accounting treatment and tax computation, reducing mismatches that could otherwise arise.
From a policy standpoint, this relief serves multiple objectives. It encourages companies to utilise public capital markets as a viable funding avenue, fosters economic growth by facilitating infrastructure and capacity expansion, and promotes investor participation in capital raising activities. Furthermore, it reflects the principle that taxation should be fair, equitable, and economically justifiable—avoiding punitive treatment of necessary and legitimate business expenditure.
However, companies must exercise caution in claiming amortisation. Only expenses directly related to the public issue are eligible; any unrelated promotional, internal administrative, or general marketing costs cannot be included. Documentation, such as contracts with underwriters, invoices from printers, advertising bills, and copies of the issued prospectus, must be retained for audit purposes. Tax authorities often scrutinise these claims to ensure that there is no inflation or misclassification of expenses.
Impact of Amortisation on Financial Statements
The amortisation of public issue expenses has a dual impact on a company’s financial statements, affecting both the profit and loss account and the balance sheet in a structured and predictable manner. At the time these expenses are incurred—whether they involve underwriting fees, brokerage commissions, advertising for the prospectus, or professional charges for legal and drafting work—they are not charged entirely to the profit and loss statement. Instead, they are initially recorded as a non-current asset, often classified as “Deferred Revenue Expenditure” or a similar heading under the asset side of the balance sheet.
This classification acknowledges that the benefit of the expenditure is not confined to the year in which the cost was incurred, but extends over several subsequent years as the funds raised through the public issue are utilised for business expansion, long-term investments, or debt reduction. From an accounting perspective, this treatment ensures that the expense is matched with the revenues or benefits generated from the capital raised, thereby aligning with the matching principle of accounting.
Each year, a portion of this deferred expenditure—calculated on a straight-line basis over the prescribed five-year period—is charged to the profit and loss account. This periodic amortisation achieves two important results: it reduces taxable income proportionately each year, and it prevents a significant one-time reduction in reported profitability in the year of the public issue. By avoiding an abrupt drop in net profit, the company presents a more stable earnings profile to its stakeholders, which can be crucial for maintaining investor confidence and favourable credit ratings.
From a tax perspective, this gradual recognition also smooths out the associated tax liability. Without amortisation, the company would face either complete disallowance (if treated as purely capital in nature) or an unusually high deduction in a single year, both of which can distort cash flow planning. By spreading the deduction evenly, the company can manage its cash flows more predictably, ensuring that tax obligations remain manageable across the amortisation period.
However, proper compliance and documentation are essential to sustain this tax benefit. Companies must maintain detailed records of all public issue-related expenditures, including contracts with intermediaries, invoices, bank payment records, and statutory filings related to the issue. Inadequate documentation may lead to partial or full disallowance upon assessment.
Practical Challenges in Claiming Amortisation
Companies often face practical difficulties while claiming amortisation of public issue expenses under Section 35D. One challenge is the accurate identification and segregation of qualifying expenses from non-qualifying ones. Since public issue expenses can include various components, it is essential to clearly distinguish those that are eligible for amortisation.
Another challenge arises from the need to maintain detailed documentation supporting the nature and amount of expenses. Without proper evidence, tax authorities may disallow the amortisation claim, leading to disputes and potential penalties.
Compliance Requirements and Documentation
To successfully claim amortisation, companies must adhere to compliance requirements prescribed by tax authorities. This includes maintaining invoices, contracts, appointment letters of underwriters or brokers, advertisement proofs, and other related documents that justify the public issue expenses.
Proper accounting treatment is also necessary, with expenses recorded separately in the books and amortised over the stipulated five-year period. Any deviation or incorrect classification can attract scrutiny during assessments.
Implications of Non-Compliance
Failure to comply with the conditions for claiming amortisation can result in the denial of the deduction. Tax authorities may disallow the amortisation claim if expenses are not properly categorized, or if supporting documentation is insufficient or missing.
Such disallowance can lead to increased tax liability, interest, and penalties, negatively impacting the company’s financial position and reputation. Therefore, companies need to ensure strict adherence to the procedural and documentary requirements.
Impact of Renumbering on Compliance
The renumbering of Section 35D as Section 44 in the New Income Tax Bill 2025 does not change the substantive provisions or compliance requirements related to the amortisation of public issue expenses. Companies must remain updated on legislative changes and continue to follow existing guidelines to avoid compliance risks.
This continuity reinforces the importance of consistent tax planning and documentation practices, ensuring companies can benefit from amortisation without facing legal hurdles.
Strategic Considerations for Companies
Companies planning public issues should factor in the amortisation provisions under Section 35D while budgeting their expenses. Understanding that public issue expenses can be amortised over five years helps in better financial planning and tax management.
Incorporating this knowledge during the capital-raising process can influence decisions regarding the timing and nature of expenses incurred, ensuring optimal tax benefits without compromising the issue’s success.
Tax Planning and Advisory Role
Tax advisors play a crucial role in guiding companies on the correct application of Section 35D. They help in identifying qualifying expenses, ensuring proper documentation, and structuring the amortisation schedule to maximize tax benefits.
Advisors also assist in staying abreast of legislative changes, such as the renumbering of the section, and judicial rulings that impact the interpretation and application of the provision.
Future Outlook and Legislative Developments
While the renumbering of Section 35D to Section 44 in the New Income Tax Bill 2025 is largely a case of legislative housekeeping, it serves as a timely reminder that tax provisions, even when formally unchanged, remain subject to evolving administrative interpretations, judicial precedents, and policy adjustments. Lawmakers may retain the current structure but still introduce subtle modifications through subordinate legislation, explanatory circulars, or changes in the Income-tax Rules. Such amendments could influence not only the procedural aspects of claiming amortisation but also the eligibility of certain cost categories.
For instance, debates have persisted over whether certain marketing, investor relations, or corporate governance costs linked to a public issue qualify as deductible under this section. The central criterion has always been whether the expenditure is “in connection with” the issue of shares or debentures. However, differing views from assessing officers, appellate authorities, and tribunals have occasionally created uncertainty for taxpayers. The risk is that what one year’s assessment accepts as eligible might be disallowed in another assessment cycle if the interpretive environment shifts.
Moreover, policy trends indicate a growing emphasis on transparency in capital market activities and the accurate representation of fundraising costs. Any regulatory tightening from the Securities and Exchange Board of India (SEBI) or amendments in the Companies Act could indirectly influence the nature and documentation of public issue expenses. A stricter regulatory regime might necessitate more detailed disclosures in prospectuses, thereby adding compliance costs that companies would naturally want to amortise.
Tax professionals should, therefore, adopt a forward-looking approach. This involves not only ensuring present-day compliance but also anticipating the potential reclassification of certain expenses based on shifts in legal interpretation. Maintaining detailed, contemporaneous records for each cost item—along with board approvals, contracts, and third-party invoices—will remain essential for defending the deduction in case of scrutiny.
Additionally, companies could benefit from integrating tax planning with broader corporate finance strategies. For example, timing the public issue in a way that maximises the cash flow benefit of amortisation deductions can improve capital efficiency. Coordination between the finance, legal, and tax teams during the pre-issue stage can also ensure that the structure of the offering and the nature of related expenses are aligned with statutory eligibility requirements.
Conclusion
The amortisation of public issue expenses under Section 35D has long been recognised as an important tax relief mechanism, enabling companies to spread the deduction for significant capital-raising costs over five years. This provision applies to qualifying expenditure incurred in connection with the public subscription of shares or debentures, including underwriting commission, brokerage, printing of prospectuses, advertisement costs, and legal or professional fees directly linked to the issue. By allowing the write-off over multiple years, the law aligns tax deductions with the enduring benefit such expenditure confers on the business, thereby reducing the immediate financial strain in the year of issue.
However, the interpretation and application of Section 35D have not been without challenges. Ambiguities have arisen over the years in defining “eligible expenditure” and determining the cut-off between capital and revenue items. Certain judicial decisions have emphasised that only those expenses directly related to the raising of share or debenture capital qualify, while ancillary or indirect costs may be disallowed. This underscores the importance for companies to link each claimed expense to the public issue process through proper contracts, invoices, and contemporaneous records.
In practical terms, the requirement for certification by a statutory auditor is a critical safeguard. The auditor’s report, often submitted along with the income tax return, serves as independent confirmation that the expenditure claimed meets the statutory conditions. Failure to obtain and submit this certification can jeopardise the deduction. Furthermore, tax officers often scrutinise such claims during assessment proceedings, making it imperative for companies to maintain comprehensive documentation from the planning stage of the issue itself.
The renumbering of this provision in the New Income Tax Bill 2025 from Section 35D to Section 44 represents a purely formal change, with no substantive alteration to the scope, conditions, or duration of the deduction. This ensures continuity in the treatment of such expenses and reassures companies that their long-term tax planning based on this benefit remains valid. Nevertheless, companies must stay updated on legislative developments and administrative circulars to ensure that they continue to meet compliance obligations without interruption.
Proactive tax planning can also enhance the utility of the amortisation benefit. By integrating projected deductions into cash flow forecasts, companies can manage working capital more effectively and anticipate the medium-term impact on profitability. Additionally, understanding the interaction between this amortisation and other tax incentives such as deductions under sections related to infrastructure or R&D can help optimise the overall tax position.