1987 (1) TMI 143 - AT - Income Tax

Summary

Issues:
1. Treatment of expenses incurred in connection with the issue of bonus shares - revenue or capital expenditure?
2. Deductibility of subscription payment to Chamber of Commerce - revenue or capital expenditure?

Analysis:

Issue 1: Treatment of expenses incurred in connection with the issue of bonus shares
The primary issue in this case was whether the expenses incurred in connection with the issue of bonus shares should be treated as revenue or capital expenditure. The Assessing Officer (ITO) added back a portion of the expenses related to bonus shares, considering it as capital expenditure. However, the Commissioner of Income Tax (Appeals) (CIT(A)) deleted the addition, relying on precedents such as the Supreme Court decision in India Cements Ltd. vs. CIT and the Madras High Court decision in CIT vs. Kishenchand Chellaram (India) P. Ltd. The departmental representative argued that the expenditure aimed to strengthen the capital structure, making it of a capital nature. In contrast, the assessee's counsel contended that the expenditure did not impact the capital structure, citing the Empire Jute Co. Ltd. vs. CIT case. The Tribunal agreed with the assessee, distinguishing the case from previous High Court decisions and upholding the CIT(A)'s order.

Issue 2: Deductibility of subscription payment to Chamber of Commerce
Regarding the payment of subscription to a Chamber of Commerce, the ITO treated it as a capital expenditure, emphasizing that the assessee did not own the building constructed with the contribution. However, the CIT(A) deemed it a revenue expenditure, stating that the building would be utilized for services benefiting the assessee. The departmental representative argued against this, citing the Supreme Court decision in T.H. Sugar Factory and Oil Mills (P) Ltd. vs. CIT and the case of Travancore Cochin Chemicals Ltd. vs. CIT. The assessee's counsel maintained that the contribution was a legitimate revenue expenditure, supported by commercial expediency and business necessity. The Tribunal concluded that the contribution was akin to a donation, lacking a direct nexus with the assessee's business, and therefore, not a legitimate business expenditure. Consequently, the Tribunal reversed the CIT(A)'s decision and upheld the ITO's order on this issue.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the assessee on the treatment of expenses related to bonus shares but in favor of the department on the deductibility of the subscription payment to the Chamber of Commerce.