1989 (11) TMI 24 - HC - Income Tax

Agricultural Development Allowance Business Expenditure Depreciation Reserve For Bad Debt Weighted Deduction

Issues Involved:
1. Deduction of expenditure incurred for raising additional capital by issuing bonus shares.
2. Deduction of surtax payable under the Companies (Profits) Surtax Act, 1964.
3. Reimbursement of salaries and other expenses under section 40A(5).
4. Weighted deduction under section 35C for reserve for bad debts and depreciation.

Issue-wise Detailed Analysis:

1. Deduction of Expenditure for Raising Additional Capital by Issuing Bonus Shares:
The assessee, a public limited company, incurred an expenditure of Rs. 77,300 for raising additional capital through the issuance of bonus shares and claimed it as a revenue expenditure. The Income-tax Officer disallowed the deduction, deeming it capital expenditure. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld this view. The Tribunal followed its earlier decision for the assessment year 1976-77, where similar expenditure was considered capital in nature. The court examined whether the expenditure is covered by previous judgments in Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 or Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224. The court concluded that the expenditure for issuing bonus shares results in an increase in the company's capital base, thus qualifying as capital expenditure. The judgment in Warner Hindustan Ltd. was deemed inapplicable, and the ruling in Vazir Sultan Tobacco Co. Ltd. was followed, leading to the conclusion that the expenditure is of a capital nature.

2. Deduction of Surtax Payable:
The assessee sought to deduct surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure under section 37 or alternatively under section 28 of the Income-tax Act. The court referenced its earlier judgments in Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 169 ITR 35 and Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689, concluding that the surtax is not deductible as business expenditure. The question was answered in the negative, against the assessee and in favor of the Revenue.

3. Reimbursement of Salaries and Other Expenses under Section 40A(5):
The Department questioned whether the Appellate Tribunal was correct in excluding reimbursement of salaries, repairs to buildings, depreciation on buildings and furniture, and payment of water charges from the computation under section 40A(5). The court referred to its judgment in R. C. No. 190 of 1982 dated November 11, 1987, which covered these issues. Following this precedent, the court ruled in favor of the Revenue and against the assessee.

4. Weighted Deduction under Section 35C:
The Department also questioned the Tribunal's decision to allow weighted deduction under section 35C on amounts representing reserve for bad debts and depreciation. The court again referred to its previous ruling in R. C. No. 190 of 1982, deciding in favor of the Revenue and against the assessee.

Conclusion:
The court concluded that the expenditure of Rs. 77,300 incurred for issuing bonus shares is capital expenditure and not deductible. The surtax payable under the Companies (Profits) Surtax Act, 1964, is not deductible as business expenditure. The reimbursement of salaries and other expenses, as well as the weighted deduction under section 35C, were ruled in favor of the Revenue. The reference was answered accordingly, with a certificate granted under section 261 of the Income-tax Act for the second question to appeal to the Supreme Court, but not for the first question.

← Previous Next →