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Whether the expenditure of Rs. 12,620 incurred by the assessee-company for making alterations in its articles of association is deductible as revenue expenditure under section 37(1) of the Income-tax Act, 1961. Analysis: The case involved a question regarding the deductibility of legal fees amounting to Rs. 12,620 incurred by an assessee-company for making alterations in its articles of association to comply with changes in the law relating to companies. The assessee, a private company, sought to bring its articles in conformity with the provisions applicable to public companies following an amendment in the Companies Act. The Income Tax Officer treated the expenditure as capital investment, disallowing the deduction. However, the Tribunal, in the second appeal by the assessee, allowed the claim by treating it as revenue expenditure. The revenue challenged this decision, leading to the present dispute. The High Court referred to a similar case decided by the Allahabad High Court, emphasizing that the expenditure was incurred wholly and exclusively for the purpose of the business to ensure the company's continued compliance with the law. The court rejected the distinction between capital and revenue expenditure drawn by the standing counsel, highlighting that the amendment was necessary for the company to operate in its business field. The court held that if the expenditure was intrinsically connected with the running of the company and essential for its operation, it should be considered revenue expenditure. In this case, since the expenditure was crucial for the company to function within the legal framework, the court agreed with the Tribunal's decision and allowed the deduction under section 37(1) of the Income-tax Act. In conclusion, the High Court ruled in favor of the assessee, stating that the expenditure of Rs. 12,620 was deductible as a revenue expenditure under section 37(1) of the Income-tax Act. The judgment was a significant clarification on the treatment of expenses incurred for legal compliance purposes, emphasizing the connection between such expenses and the operational requirements of a business.
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