By CA Surekha S Ahuja
The tax treatment of IPO expenditure has long remained a friction point between statutory rigidity and evolving capital market practices. While India’s IPO ecosystem today involves merchant bankers, legal advisors, regulatory due diligence, digital platforms, and investor communication architecture, the Income-tax Act, 1961 still operates within a framework drafted for a far simpler environment.
This mismatch inevitably results in avoidable disallowances, prolonged litigation, and penalty exposure—particularly under the under-reporting and misreporting provisions of Section 270A.
This analysis offers a professionally structured, litigation-oriented guide that explains the statutory framework, examines judicial developments, and provides companies with a practical compliance roadmap to navigate IPO-related tax positions with confidence.
The Legal Architecture: Where the Law Draws Its Lines
Section 37(1): A Wide Provision with a Narrow Gate
Section 37(1) serves as the Act’s residual deduction clause. However, two embedded principles significantly limit its use in the context of IPO expenditure:
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Expenses incurred for raising share capital create an enduring benefit, and
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Expenditure with enduring capital advantage cannot qualify as “wholly and exclusively for the purpose of business” in the revenue sense.
The Supreme Court’s landmark ruling in Brooke Bond India Ltd. confirmed that public issue expenses are capital in nature, irrespective of the commercial need for raising funds.
This view has been repeatedly upheld and forms the foundation of current tax treatment.
Section 35D: The Only Statutory Route for Relief—But a Narrow One
Section 35D offers amortisation of “preliminary expenses” over five years. Its scope includes:
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preparation of prospectus,
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underwriting commission,
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filing fees,
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and certain enumerated public issue costs.
However, the section adopts an exhaustive, tightly drafted list, which does not reflect modern IPO requirements. Consequently, several commercially essential costs—such as merchant banking fees, legal opinions, IFRS/Ind-AS conversion support, BRLM advisory, ESG disclosures, and specialised regulatory documentation—do not fall within its ambit.
This statutory rigidity continues to be the principal reason behind disallowances.
Judicial Landscape: Competing Interpretative Models
The Strict Model: Textual and Conservative
Following Brooke Bond, rulings such as Inditrade Capital Ltd. reinforce a strict interpretation of Section 35D:
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Only expenses expressly listed qualify for amortisation.
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All other IPO-related costs remain capital and disallowed.
This approach prioritises the statute’s text over business realities and is currently the more dominant judicial view.
The Liberal Model: Commercial Reality Considered
In decisions like Shree Synthetics and Mahindra Ugine & Steel, courts adopted a broader interpretation of the phrase “in connection with,” recognising that contemporary IPOs require a multi-layered advisory and compliance structure.
This allowed certain advisory and regulatory expenses to qualify.
However, such rulings are jurisdiction-specific and not uniformly followed.
The Hybrid Model: Deployment-Based Logic
The PC Jewellers (ITAT Delhi) decision introduced a practical hybrid approach:
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IPO costs proportionate to working capital deployment were treated as revenue.
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Costs linked to acquisition of capital assets retained capital character.
Though not universally binding, this reasoning is increasingly cited where utilisation of IPO proceeds is transparently documented.
The Contemporary Problem: A Statute Behind Its Time
Today’s IPO processes involve:
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SEBI due diligence and internal control mapping,
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Merchant banking and BRLM advisory,
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Extensive legal drafting and opinion support,
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Investor relations, branding, and ESG communications,
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Digital registrar interactions and roadshow strategies.
Yet, the tax law recognises only a fraction of these expenditures.
As a result:
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routine IPO costs continue to face disallowances,
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assessments rely heavily on “capital nature” or “not covered under Section 35D,”
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penalty exposure under Section 270A has increased.
The gap between commercial practice and statutory language is widening with each assessment year.
Position Emerging from Case Law
A consolidated assessment of judicial authority indicates that:
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IPO expenses are capital and not deductible under Section 37(1).
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Amortisation under Section 35D is strictly confined to items expressly listed.
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Advisory, legal, merchant banking, and compliance costs are generally not eligible, unless a favourable High Court precedent exists.
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Costs incurred during an IPO period but unrelated to capital raising may qualify as revenue expenditure under Section 37(1).
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Working capital deployment arguments may offer partial relief in specific cases but are not universally accepted.
Overall, the prevailing legal interpretation remains conservative.
A Litigation-Proof Framework: Practical Steps for Companies
Careful Categorisation of All IPO Expenditures
Companies should classify costs into:
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expenses specifically covered by Section 35D,
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IPO-related costs not eligible under Section 35D,
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regular business expenses incurred parallel to the IPO,
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expenditure linked to working capital utilisation.
A transparent internal classification matrix demonstrates reasonableness and intent.
Robust Documentation and Evidentiary Support
Companies must maintain:
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merchant banker and BRLM engagement letters,
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legal advisory mandates and due diligence reports,
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SEBI filing fees and regulatory charges,
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DRHP, RHP and related drafts,
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invoices with clear service descriptions,
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utilisation of proceeds schedules and board notes.
Strong documentation is central to succeeding in assessments and appellate proceedings.
Adopt a Consistent and Conservative Tax Position
A defensible approach includes:
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not claiming IPO costs under Section 37(1),
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amortising only those items clearly falling within Section 35D,
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using deployment-based reasoning only where fully documented,
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reconciling the tax treatment with accounting disclosures.
This significantly reduces misreporting risk under Section 270A.
Transparent Tax Audit and Financial Reporting
Form 3CD disclosures should explicitly reflect:
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nature of IPO expenses,
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the basis for amortisation,
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items not claimed due to statutory restriction.
Alignment with notes to accounts adds credibility.
Board-Level Consideration and Internal Notes
Board or audit committee notes explaining the rationale for cost classification strengthen the company’s defence and demonstrate corporate governance diligence.
Seek Professional Opinions for High-Value Issues
For material IPOs, a formal tax or legal opinion acts as a powerful shield during penalty proceedings or appellate review.
It evidences that the company acted on expert guidance and not on aggressive or negligent tax positions.
Conclusion
The tax treatment of IPO expenses is governed by a statutory framework that has not evolved with the complexities of modern capital markets. Judicial viewpoints range from strict textual interpretations to limited commercially sensitive approaches, yet the predominant view remains conservative.
Until legislative reforms modernise Section 35D to reflect contemporary IPO environments, companies must rely on disciplined classification, rigorous documentation, transparent reporting, and professionally supported reasoning to minimise disputes and avoid litigation.
