Companies seem eager to tap into the public funding in the currently growing Indian capital markets by way of an Initial Public Offering (IPO). While IPO can be an effective way of fund raising, it comes with hefty expenses and compliance requirements, thus treatment of such expenses in tax computation plays a vital role in accessibility of this option.

In today's Expert Column, Mr. Tejas P Shah (Partner, Deloitte India) and Mr. Harsh Shah (Director) explores the scope of tax treatment of IPO-related expenses, in view of Section 35D and Section 37 of the Income-tax Act, 1961. The author delves on the interpretation of term ‘being’ as envisaged in Section 35 and apprises, while the ‘illustrative’ reading of the term offers a more logical and pragmatic approach for claiming IPO-related expenses, it must be applied judiciously in view of a ‘restrictive’ reading with careful attention to legislative intent and factual context including documentation and reasoning. The author highlights that, claim of IPO expenses under Section 37 is caught in the controversy of whether it qualifies as capital or Revenue expenditure

In view of the Author "The interplay between Sections 35D and 37, and the evolving judicial interpretations around what qualifies as deductible, calls for a thoughtful and proactive approach. The line between capital and revenue expenditure remains fluid – hinging on purpose, structure, and substantiation."

IPO Expenses and Tax Deductibility: Rethinking the Norms in 2025

I. A Deep Dive into What’s Deductible and What’s Not

India’s capital markets are buzzing. Companies across sectors are preparing to tap into public funds, and IPO activity remains strong. Even as the trend keeps building, a critical yet less glamorous issue keeps ticking behind the scenes: the tax treatment of IPO-related expenses.

Whether it is merchant banker fees, legal costs, registrar expenses, or roadshow budgets, these costs can run into millions. And yet, the way they are treated under the Income Tax Act, 1961 is anything but settled. At the heart of the matter lies a bigger question: are we interpreting tax law in a way that acknowledges commercial reality or are we too often trapped by outdated textualism?

II. Section 35D:  Decoding “Being” – Illustrative or Restrictive?

Section 35D of the Income Tax Act, 1961 deals with the amortisation of certain expenses incurred on public subscription of shares or debentures, over a period of five years subject to certain conditions.  The provision lists specific expenses which are covered within its ambit:

‘being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus’ 

Given the wording of the provision, there has been significant judicial debate on whether deduction can be claimed only for expenses that are explicitly listed above or even for expenses which are not. The dispute lies in interpretation of the term ‘being’, as used in Section 35D. 

There are two possible interpretations based on principles enunciated by the Indian courts:

‘Being’ is illustrative – The Madhya Pradesh High Court in Shree Synthetics Ltd[1] adopted a liberal view, holding that the term “being” used in the provision is illustrative, thereby permitting a broader range of IPO related expenses to qualify for deduction.  This interpretation was followed in subsequent rulings[2]. 

In these cases, expenses in the nature of fees to registrar, fees to manager, stamp duty, capital portion of share issue expenses, etc. have been allowed as deductible despite not being listed specifically.

‘Being’ is restrictive – In another set of rulings by Madras High Court[3], it has been held that the word ‘being’ implies that only specified expenses are allowed for tax deduction. The Court specifically disregarded the above-mentioned decision of the Madhya Pradesh High Court. It also referred to Section 35D(2)(d), which provides that any other qualifying expenses must be notified by the Central Board of Direct Taxes.

This interpretation was affirmed recently by the Kerala High Court[4], where it disallowed expenses such as advertising, travelling, postage, and market research.  

The evolving jurisprudence around Section 35D reflects a growing recognition of the need to interpret tax provisions in a manner that accommodates commercial realities. While the ‘illustrative’ reading offers a more logical and pragmatic approach for claiming IPO-related expenses, it must be applied judiciously in view of a ‘restrictive’ reading adopted by the Madras High Court, with careful attention to legislative intent and factual context including documentation and reasoning.

Section 37:  The Residual Route and the Capital vs. Revenue Puzzle

Where IPO-related expenses do not qualify under Section 35D, attention naturally shifts to Section 37 which is the catch-all provision for business expense deductions.

Section 37 allows a deduction for any expenditure incurred wholly and exclusively for the purpose of business or profession, provided it is not capital or personal in nature, and not covered under other provisions.  While the other tests are expected to be satisfied, a question may arise whether IPO-related expenses may qualify as ‘capital’ expense.  There are two possible interpretations based on principles enunciated by the Indian courts:

1. IPO expenses are ‘capital’ in nature – The Indian Supreme Court, in various cases[5], has held that expenses incurred for increasing share capital are ‘capital’ in nature, regardless of incidental business benefits.  It was emphasized that the direct link to capital expansion overrides any ancillary advantage to the business.

2. IPO expenses are ‘revenue’ in nature – The Indian Supreme Court in an earlier ruling[6] of Brooke Bond held:

• The expenses incurred in connection with the issue of shares to increase the share capital with the object of enhancement of capital to have more working funds were to be treated as revenue expenditure.
• However, in this case, the statement sent by the Tribunal did not indicate the finding that the expansion of capital was to meet the need for more working funds. Therefore, Supreme Court treated the expenses as ‘capital’ in nature.

This principle has been reinforced in various subsequent rulings[7], wherein it has been held that where the end‑use of funds was demonstrably linked to day-to-day business operations or working capital requirements, then the IPO expenses are deductible.

The Delhi Tribunal’s more recent ruling in PC Jewellers Ltd.[8] is particularly instructive, as it permitted a proportionate deduction of IPO expenses based on the portion of proceeds earmarked for working capital, provided the taxpayer could substantiate the utilization. It may be pertinent to note that in this case the Tribunal took into consideration the ruling of the Supreme Court in Brooke Bond while concluding positively.

While the Supreme Court appears to have taken a view to regard IPO expenses as ‘capital’ in nature, however, a more recent line of judicial reasoning supports the view that where share issue proceeds are used for working capital or operational needs, the related expenses may be treated as ‘revenue’ in nature and thus deductible under Section 37.  This appears to be a more logical and rational approach. However, this position is not free from doubt, and therefore any expense claim made by the companies should be backed by clear documentation demonstrating the end-use of funds, and care must be taken to exclude expenses that are specifically treated as capital.

III. Aborted IPOs:  Can You Claim a Deduction?

Not all public issue plans reach the finish line. In cases of aborted IPOs, companies often incur substantial preliminary expenses before ultimately withdrawing the offer. This raises important questions about the tax treatment of such expenses and whether any deduction can be claimed under the Income-tax Act, 1961.

The judicial position regarding deductibility of expenses on aborted IPO is not settled having regard to the rulings of Supreme Court (discussed above) and other rulings[9], contending that the share issue proceeds would have increased the capital base of the company and thus IPO expenses are ‘capital’ in nature.

However, a liberal interpretation has been adopted in a number of cases where the Courts have recognized the nature of expenditure incurred in connection with aborted capital-raising activities.

In Nimbus Communications Ltd. v. ACIT[10], the Bombay High Court held that expenses incurred for a proposed issue of shares, which was ultimately aborted, did not result in the creation of any asset of enduring nature and hence qualified as ‘revenue’ expenditure.

In General Insurance Corporation v. CIT[11], the Supreme Court allowed the deduction of expenses incurred in connection with the issuance of bonus shares, treating them as revenue in nature.

This view was followed by the Mumbai Tribunal in Go Airlines (India) Ltd. v. DCIT[12], where the Tribunal held that legal and professional fees incurred in relation to a proposed IPO that was subsequently aborted were allowable under Section 37, as no enduring benefit had accrued to the taxpayer. 

These decisions emphasize the principle that where no capital asset is brought into existence, the expenditure cannot be treated as ‘capital’ in nature. 

While there is judicial support for treating aborted IPO-related expenses as revenue in nature, particularly where no enduring asset is created and the expenditure fails to meet the criteria under Section 35D, this position must be approached with nuance. If the expenditure is intrinsically linked to the expansion of the capital base, as held by Supreme Court, it may still retain its capital character regardless of the outcome. 

Therefore, while a favorable view may be taken in appropriate cases, it must be supported by a clear factual matrix and careful legal reasoning, ensuring that the nature and purpose of the expenditure are thoroughly examined before claiming deduction under Section 37.

V. Final Thoughts – Charting a Cautious Path Forward

The journey for an IPO is rarely linear. It’s a high-stakes, high-effort undertaking that spans legal diligence, investor marketing, regulatory approvals, and intense coordination across functions. In the middle of all this, questions around the tax treatment of IPO-related expenses can feel peripheral – until they aren’t.

Because when these expenses run into millions, the deductibility (or disallowance) can materially impact profitability and shareholder value.  And yet, companies often find themselves navigating a maze of conflicting judicial views, dated statutory language, and inconsistent interpretations.

The interplay between Sections 35D and 37, and the evolving judicial interpretations around what qualifies as deductible, calls for a thoughtful and proactive approach.  The line between capital and revenue expenditure remains fluid – hinging on purpose, structure, and substantiation. Companies must maintain meticulous documentation, align expense structures with their business objectives, and consider both regulatory guidance and divergent judicial precedents before making deduction claims.