1991 (7) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of expenses incurred in connection with the issue of shares for complying with the Foreign Exchange Regulation Act, 1973.
2. Deductibility of disputed sales tax demand.
3. Admissibility of surtax liability as a deduction in computing the total income.

Summary:

Issue 1: Allowability of Expenses for Share Issue
The assessee-company issued fresh share capital to comply with the Foreign Exchange Regulation Act, 1973, incurring an expenditure of Rs. 19,36,797. The Tribunal held this expenditure to be capital in nature, following the Kerala High Court decision in CIT v. Commonwealth Trust Ltd. [1987] 167 ITR 365. The court emphasized that the expenditure aimed to change the capital structure of the company, thus qualifying as capital expenditure. Despite the assessee's argument that the expenditure was meant to comply with statutory requirements and not to augment financial resources, the court held that any expenditure altering the capital structure is capital in nature. The court referenced Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 and Union Carbide India Ltd. v. CIT [1987] 165 ITR 678 to support its decision. The first question was answered in the affirmative, favoring the Revenue.

Issue 2: Deductibility of Disputed Sales Tax Demand
The assessee faced a sales tax demand of Rs. 5,75,203 for various financial years. The Tribunal held that the liability should be allowed as a deduction only if it was not disputed by the assessee. The court, however, clarified that the liability to sales tax arises in the year of sale or transfer and should be claimed as a deductible expenditure in that year. The court remanded the matter to the Tribunal to ascertain why the provision for this liability was not made in the relevant year and to redecide the issue in accordance with the law. The second question was remanded to the Tribunal for further enquiry.

Issue 3: Admissibility of Surtax Liability
The third question regarding the admissibility of surtax liability as a deduction was directly covered by the decision in Molins of India Ltd. v. CIT [1983] 144 ITR 317. Following this precedent, the court answered the third question in the affirmative, favoring the Revenue.

Conclusion:
The court ruled in favor of the Revenue on the first and third issues, while the second issue was remanded to the Tribunal for further investigation. There was no order as to costs.