By CA Surekha Ahuja
A startup raises ₹5 crore through a private placement and incurs legal, valuation, company-secretarial, ROC and placement-agent fees. Can these costs be deducted from taxable profits? Can they be written off over five years? Can the GST paid on these services be claimed as input tax credit?
The answer depends on the transaction, the nature of each expense and the specific statutory provision. Costs directly attributable to issuing fresh equity are generally capital expenditure and are not deductible under Section 34 of the Income-tax Act, 2025. Section 44 permits amortisation only of specified expenditure satisfying its conditions. GST input tax credit requires a separate analysis under Sections 16 and 17 of the CGST Act, 2017.
The distinction matters because a genuine business expense is not necessarily a tax-deductible expense.
1. Start with the transaction
| Expenditure | General treatment |
|---|---|
| Private placement, seed funding or VC round | Direct equity-issue costs are capital; no general deduction under Section 34 |
| IPO or FPO | Specified public-issue expenses may qualify for amortisation under Section 44 |
| QIP | Eligibility requires separate examination of the statutory conditions and judicial precedents |
| Increase in authorised capital for a fresh issue | Capital expenditure |
| Bonus issue | Revenue treatment supported by Supreme Court authority |
| Bank loan or other borrowing | Borrowing costs are generally revenue expenditure, subject to applicable provisions |
| Routine annual secretarial and compliance services | Generally deductible as revenue expenditure, where incurred for business purposes |
Where an invoice covers both share-issue work and routine compliance, obtain a proper service-wise breakup. The invoice heading alone does not determine the tax treatment.
2. Why private-placement expenses are not deductible
The Supreme Court has settled the central principle: expenditure incurred to issue fresh shares and increase a company’s capital is capital expenditure, even if the funds are required for business operations.
In Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC), the Court held that expenditure incurred in connection with a fresh share issue was capital in nature.
The distinction is reinforced by two other decisions:
Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC): ROC fees for increasing authorised share capital are capital expenditure.
India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC): expenditure incurred to raise a loan is distinguishable from expenditure incurred to issue fresh equity.
A startup cannot claim a deduction merely because the money raised is used for salaries, marketing, product development or working capital. The purpose for which the funds are ultimately used does not, by itself, change the capital character of the share-issue expenditure.
Practical treatment: Direct costs of a private equity round should generally be excluded from the Section 34 deduction. If charged to the profit and loss account, they should ordinarily be added back in the tax computation.
3. When does Section 44 allow five-year amortisation?
Section 44 of the Income-tax Act, 2025, corresponding broadly to Section 35D of the 1961 Act, is a limited statutory relief. It does not permit every capital expense incurred in raising funds to be written off over five years.
For companies, the relevant categories include specified incorporation expenses and certain costs of an issue of shares or debentures for public subscription.
The public-issue category covers specified expenditure such as:
Underwriting commission.
Brokerage.
Charges for drafting, typing and printing the prospectus.
Prospectus advertising expenses.
The claim remains subject to the applicable conditions, including the nature of the expense, the relevant commencement or expansion requirements, the statutory ceiling and the prescribed period of deduction.
The five-year treatment is therefore not available merely because an expense relates to an IPO.
What about QIP expenses?
A QIP requires a separate legal assessment.
In Yes Bank Ltd. v. DCIT (2020) 183 ITD 721 (Mumbai ITAT), the Tribunal allowed a claim under the former Section 35D on the facts before it, considering the public character of the QIP.
The decision is relevant but should not be treated as a blanket entitlement. The statutory conditions and the nature of each expense must be examined before claiming amortisation.
Is Form 5 required?
Form 5 under the Income-tax Rules, 2025, relates to the statement prescribed for qualifying preliminary expenditure under Section 44(2)(a). It is not a universal filing requirement for every Section 44 claim.
The applicable filing requirement and deadline should be verified for the relevant tax year.
4. Accounting treatment is separate from tax deductibility
For companies following Ind AS, qualifying incremental costs directly attributable to an equity transaction are generally deducted from equity under Ind AS 32, net of the related tax benefit where applicable. Costs of an abandoned equity transaction are recognised as an expense.
For companies following the applicable Accounting Standards, the treatment must be determined under the relevant framework. Section 52(2)(c) of the Companies Act, 2013 permits securities premium to be applied towards writing off specified expenses of an issue of shares or debentures.
The accounting entry does not decide the tax deduction. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), the Supreme Court confirmed that accounting treatment does not determine tax liability.
Accordingly:
A capital expense debited to the profit and loss account does not become deductible merely because it has been written off.
An expense adjusted against securities premium must still be examined independently under the Income-tax Act.
A capital cost cannot be converted into a depreciable asset merely by recording it as one.
5. GST: can input tax credit be claimed?
The issue of shares is not itself a supply of goods or services under the CGST Act. However, the professional services purchased for a share issue may attract GST.
The GST treatment of the service and the eligibility to claim input tax credit are separate questions.
| Expense | GST point |
|---|---|
| CA, CS, valuation and investment-banking fees | Generally taxable at the applicable rate |
| Legal services | Examine the applicable reverse-charge provisions and exemptions |
| ROC fees | Verify whether the particular fee falls within the relevant exemption |
| Stamp duty | A statutory levy, not consideration for a taxable professional service |
| Foreign legal or advisory services | Examine import-of-services conditions and IGST reverse charge |
The ITC issue
Sections 16 and 17 of the CGST Act govern input tax credit and its restrictions.
In Gujarat Narmada Valley Fertilizers & Chemicals Ltd., the Gujarat AAAR, by order dated 22 September 2025 in Appeal No. GUJ/GAAAR/APPEAL/2025/17, denied ITC on expenses connected with a share buyback and addressed reversal of common credit.
That decision concerned a buyback, not a fresh issue. The distinction is relevant, but it does not by itself establish that ITC on fresh share-issue expenses is admissible.
Before claiming material credit, the company should document the service received, its business use, compliance with Section 16, the effect of Section 17 and any applicable common-credit reversal.
Practical approach: Do not assume that ITC is automatically available because the service supports the business. Equally, do not treat a ruling on a buyback as automatically deciding every fresh-issue case. The position should be assessed and documented on its facts.
6. What the CFO should do before closing the funding round
Maintain one expense schedule that identifies:
The transaction and the purpose of each service.
The invoice amount, GST particulars and vendor.
The distinction between equity-issue costs, borrowing costs and routine business expenses.
The accounting treatment and the corresponding tax adjustment.
The statutory basis for any Section 44 claim, including the applicable ceiling and filing requirements.
The GST and ITC position, including reverse charge, exemptions and common-credit reversal.
This exercise should be completed before finalising the financial statements, income-tax computation and GST returns.
A funding round can bring cash into the business without creating a corresponding tax deduction for the cost of raising it.
For a private placement, the starting point is clear: direct costs of issuing fresh equity are generally capital expenditure. Section 44 offers limited relief for specified expenditure, not a general five-year write-off for fundraising costs. GST credit must be assessed independently.
Classify the transaction first, establish the tax treatment second, and document the GST position separately. That is the practical way to avoid an unsupported deduction, an incorrect accounting adjustment or a disputed input tax credit claim.
