1988 (4) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of expenditure incurred for raising additional capital by issuing ordinary shares.
2. Deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure u/s 37 or u/s 28 of the Income-tax Act.

Summary:

Issue 1: Deduction of Expenditure for Raising Additional Capital
The assessee, Vazir Sultan Tobacco Co. Ltd., claimed a deduction of Rs. 20,82,994 incurred for raising additional capital by issuing ordinary shares. This expenditure included underwriting commission charges, brokerage, printing charges for prospectus, application forms, servicing charges paid to banks, and other miscellaneous expenses. The Income-tax Officer rejected this claim, and both appellate authorities confirmed the rejection. The court held that the expenditure was incurred in connection with raising additional capital and was thus capital expenditure, not revenue expenditure, citing precedents such as Tata Iron and Steel Co. Ltd., India Cements Ltd. v. CIT, and Brooke Bond India Ltd. v. CIT. The court emphasized that expenditure aimed at affecting the capital structure, even if it results in incidental advantages, is capital in nature. The court rejected the assessee's reliance on Schedule VI of the Companies Act, 1956, and various case laws, including CIT v. Kisenchand Chellaram (India) Pvt. Ltd., India Cements Ltd. v. CIT, and Empire Jute Co. Ltd. v. CIT, stating that these did not apply to the facts of the case. The court concluded that the expenditure was for adding to the capital structure and acquiring an asset of enduring nature, thus capital in nature.

Issue 2: Deduction of Surtax Payable
The assessee conceded that the question of surtax deduction must be answered in the negative, against the assessee and in favor of the Revenue, based on the court's previous decision in Vazir Sultan Tobacco Co. Ltd. v. CIT.

Additional Argument:
The assessee's counsel argued for the deduction of Rs. 1,19,119 paid towards interest on term-deposit and on allotment of shares. However, the court noted that this aspect was not argued before the Tribunal and thus did not arise from the Tribunal's order. The Tribunal may consider this aspect while passing orders u/s 260 of the Act.

Conclusion:
The court answered both questions in the negative, in favor of the Revenue and against the assessee. No order as to costs was made. A certificate u/s 261 was granted for the second question but declined for the first question.