1983 (5) TMI 55 - AT - Income Tax

Issues Involved:

1. Whether the Commissioner's order under section 263 of the Income-tax Act, 1961, was erroneous and prejudicial to the interests of the revenue.
2. Whether the legal expenditure of Rs. 81,571 related to the merger of Dena Bank Ltd. was of a capital nature.
3. Whether the ITO had duly considered the details of all the legal expenses incurred, and if the Commissioner's order was without jurisdiction, bad in law, and against the facts of the case.

Issue-wise Detailed Analysis:

1. Whether the Commissioner's order under section 263 of the Income-tax Act, 1961, was erroneous and prejudicial to the interests of the revenue:

The Commissioner analyzed the bills related to the legal expenses incurred for the merger of Dena Bank Ltd. with the assessee-company. The Commissioner found that the legal expenses were incurred for obtaining legal advice and opinions, drafting the amalgamation scheme, and getting it approved by the High Courts. The Commissioner concluded that these expenses were linked to the restructuring of the company's capital base, resulting in long-term benefits and a permanent enhancement of the company's capital. Consequently, the Commissioner held that the ITO's order was erroneous and prejudicial to the interests of the revenue, as the legal expenses should have been classified as capital expenditure and not allowed as revenue expenditure.

2. Whether the legal expenditure of Rs. 81,571 related to the merger of Dena Bank Ltd. was of a capital nature:

The legal expenditure was incurred for obtaining legal advice, drafting the amalgamation scheme, and getting it approved by the High Courts. The Commissioner concluded that the merger resulted in a permanent enhancement of the company's capital base and long-term benefits. The Commissioner noted that the restructuring of the capital base enabled the company to secure large funds for setting up a new Board Mills at Bhopal. The Commissioner cited the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT, where it was held that expenditure resulting in an advantage in the capital field is disallowable as revenue expenditure. Thus, the Commissioner held that the legal expenditure of Rs. 81,571 was of a capital nature and not allowable as revenue expenditure.

3. Whether the ITO had duly considered the details of all the legal expenses incurred, and if the Commissioner's order was without jurisdiction, bad in law, and against the facts of the case:

The ITO disallowed Rs. 74,609 out of the total legal expenses claimed, which included fees for drafting an agreement with LIC and valuation of land. The ITO did not properly examine the details of the legal expenses related to the merger. The Commissioner found that the ITO's disallowance was not consistent with his own findings in another part of the assessment order, where he disallowed interest on bonds and debentures issued to Dena Bank Ltd. shareholders as capital expenditure. The Commissioner held that the ITO's order was erroneous and prejudicial to the interests of the revenue, as the legal expenses related to the merger should have been classified as capital expenditure. Therefore, the Commissioner's order was upheld, and the assessee's appeal was dismissed.

Conclusion:

The Tribunal upheld the Commissioner's order under section 263 of the Income-tax Act, 1961, concluding that the legal expenses incurred for the merger of Dena Bank Ltd. were of a capital nature and not allowable as revenue expenditure. The ITO's order was deemed erroneous and prejudicial to the interests of the revenue, as the legal expenses should have been classified as capital expenditure. Consequently, the assessee's appeal was dismissed.

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