English Electric Co. of India Ltd. vs Commissioner of Income Tax

K.A. Thanikkachalam, J.—In pursuance of the directions given by this court in T.C.P. No. 416 of 1979, u/s 256(2) of the Income Tax Act,

1961, the Tribunal referred the following question for our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 38,387 incurred by the

assessee-company in connection with the issue of right shares to existing shareholders was capital in nature and not admissible as a deduction in

computing the total income ?

The assessee is a public limited company engaged in the manufacturing and sale of electronic instruments, relays, fusegears, etc. During the

relevant previous year for the assessment year 1967-68, the assessee issued equity shares to existing shareholders as rights shares. In connection

with that the assessee spent Rs. 28,000 as fees paid to the share registrars and a further amount of Rs. 10,387 was paid to solicitors, Jardine

Henderson Ltd., in connection with the raising of further capital for the company. The assessee claimed before the Income Tax Officer that such

expenditure was only administrative expenses and hence revenue in nature. The Income Tax Officer, as well as the Appellate Assistant

Commissioner, on appeal, treated such expenditure as capital in nature and hence the assessee filed an appeal before the Tribunal.

The assessee contended before the Tribunal that the company has to spend these amounts in connection with the raising of the further capital for

the company and they were in the nature of administrative expenses and hence only revenue in nature. The assessee relied upon the decision of the

Bombay High Court reported in Commissioner of Income Tax, Bombay City-I Vs. Tata Iron and Steel Co. Ltd., . The Department relied upon

the decision of the Allahabad High Court in the case of Upper Doab Sugar Mills Ltd. Vs. Commissioner of Income Tax (Central), in order to

support its contention that what was claimed by the assessee is not revenue expenditure. However, the Tribunal on the facts treated the

expenditure claimed as capital in nature.

We have heard learned counsel for the assessee who contended that the expenses involved as fees paid to the share registrars and the fees paid

to the solicitors would amount to revenue expenditure. In order to support this contention, reliance was placed upon the following decisions :

(1) Commissioner of Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., ;

(2) Warner Hindustan Limited Vs. Commissioner of Income Tax, ; and

(3) Commissioner of Income Tax Vs. Aurofood Pvt. Ltd., .

On the other hand, learned standing counsel for the Department, in support of his contention that the expenditure claimed is capital in nature,

relied upon several decisions mentioned in page 673 under the caption ""expenditure incurred in increasing the share capital, raising loans or issuing

debentures"" in the text book ""The Law and Practice of Income Tax"" by Kanga and Palkhiwala (Eighth edition, Vol. I) and the decision reported in

Commissioner of Income Tax Vs. Motor Industries Co. Ltd., . We have heard learned counsel for the assessee as well as for the Department.

In Commissioner of Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., , this court while considering whether the assessee''s claim for fees

paid for raising capital of the company to the Registrar of Companies is revenue expenditure, held that the amount was wholly and exclusively laid

out for the purpose of the business. Therefore, it is revenue in nature and deductible as such. This decision was rendered by following the decision

of the Supreme Court in the case of India Cements Ltd. Vs. Commissioner of Income Tax, Madras, .

In the decision in the case of Commissioner of Income Tax Vs. Aurofood Pvt. Ltd., , this court following the decision in Commissioner of

Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., mentioned above, held that the expenditure incurred by a company for amending its

memorandum and articles of association and also for complying with the other formalities under the Companies Act has to be regarded as having

been incurred in the fulfilment of the statutory formalities incidental to the carrying on of the business of the assessee as a company. Therefore, it is

deductible as revenue expenditure.

In Warner Hindustan Limited Vs. Commissioner of Income Tax, , the assessee claimed deductions in respect of a sum of Rs. 18,000 paid by it

by way of legal and consultation fees in connection with the issue of bonus shares. The Andhra Pradesh High Court, following the decision of the

Supreme Court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , held that Rs. 18,000 paid by way of legal and consultation fees in

connection with the issue of bonus shares is revenue in nature and, therefore, allowed the deduction since it is revenue expenditure.

This court also in the case of Lucas T.V.S. Ltd. Vs. Commissioner of Income Tax, (T.C. Nos. 1137-1139 of 1982, dated January 12, 1996),

held that the fees paid to the Registrar of Companies for registration could be treated as revenue expenditure.

However, learned standing counsel for the Department, relying upon the decision reported in Commissioner of Income Tax Vs. Motor

Industries Co. Ltd., and other decisions as seen from the commentary by Kanga and Palkhivala (Eighth edition, Vol. I) mentioned above,

submitted that the expenditure claimed by the assessee cannot be allowed as revenue expenditure. In view of the stand taken by this court in the

earlier decisions and also for the reasons stated by the Andhra Pradesh High Court in the case of Warner Hindustan Limited Vs. Commissioner of

Income Tax, , we hold that the assessee is entitled to deduction as revenue expenditure with regard to the fees paid to the share registrars and the

fees paid to the solicitors, in connections with the raising of further capital for the company. In that view of the matter, we answer the question

referred to us in the negative and in favour of the assessee. No costs.