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TMI Blog1991 (7) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... missible deduction in computing the total income of the assessee ? " This reference relates to the income-tax assessment of the assessee-company for the calendar year 1979 corresponding to the assessment year 1980-81. The facts relating to the first question are that the assessee-company, in order to comply with the provisions of the Foreign Exchange Regulation Act, 1973, issued fresh share capital during the relevant previous year with the object of reducing the level of non-resident interest in the equity capital of the company from 60 per cent. to less than 40 per cent. The assessee-company incurred an aggregate expenditure of Rs. 19,36,797 in connection with the issue of shares as aforesaid. The Tribunal held that the share issue expenditure was capital in nature following the decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1987] 167 ITR 365. In that case, the Kerala High Court held that, where the expenditure was incurred for the purpose of changing the capital structure of the assessee-company to suit the requirements of the Foreign Exchange Regulation Act by obtaining shares held by foreigners and transferring them to Indian citizens, the structure, ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed deposits with banks. Thus, the object of the issue of the share capital was not to augment the financial resources of the company by issuing further capital. The object of the company was to reduce the non-resident interest in the equity capital in order to comply with the directions of the Reserve Bank of India so that the company may carry on the business after complying with section 29 of the Foreign Exchange Regulation Act. The expenditure was incurred, therefore, to facilitate the carrying on of the business and the aim and object of the expenditure was not to increase the share capital for the purposes of obtaining financial resources. It is no doubt true that, if an expenditure has been made not for the purposes of bringing into existence an asset or advantage for the enduring benefit of the business but for running the business or working it with a view to producing profit, it is a revenue expenditure and the aim and object of the expenditure would determine the character of the expenditure, whether it is a capital or a revenue expenditure. Whether a particular expenditure is revenue expenditure incurred for the purposes of the business must be determined on a consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Carbide India Ltd. v. CIT [1987] 165 ITR 678, a Division Bench of this court, following the decision in Brooke Bond India Ltd. [1983] 140 ITR 272 (Cal), held that the fees paid to the Registrar of Companies in connection with the increase of the authorised capital of a company is capital expenditure. Dr. Pal, however, has contended that the Bombay High Court in CIT v. Glaxo Laboratories (India) Ltd. [1990] 181 ITR 59, distinguished the decision in Brooke Bond India Ltd. [1983] 140 ITR 272 (Cal). In the case before the Bombay High Court, the question was whether the share issue expenses were allowable as revenue expenditure. In that case, the assessee, a manufacturer of pharmaceuticals, had entered into an agreement of technical collaboration with its parent company in the United Kingdom which was due to expire in the beginning of 1967. The assessee applied to the Government of India for permission to enter into a fresh technical collaboration agreement so that it could continue to obtain the benefit of research being carried out by the parent company and also day-to-day advice in respect of the manufacture of existing and new products. It was common ground that the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of the expenditure was to strengthen the capital structure and, only as an incidental result, more funds had flowed to the assessee making more working funds available to it. The High Court held that that could not change the essential object and purpose of incurring the expenditure and the resultant fact, that is to say, the fundamental change in the income-earning machinery and structure. It held that, therefore, the Tribunal had been right in disallowing the expenditure. In its exhaustive judgment, the High Court said that if the main object, purpose and nature of the transaction was to affect the income-earning machinery or structure as such and not only to make the inflow of more funds available, then the expenditure would be on the capital side. It was true that the alteration in the capital structure by raising the share capital would make more funds available, but that was not decisive. The essential object and purpose for incurring the expenditure and the resultant fact was the fundamental change in the income-earning machinery or structure. It was the resultant advantage obtained by incurring the expenditure, along with the purpose and object of incurring the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral authorities referred to in the said judgment and not on the basis of the admission of the assessee. In this case, admittedly, there has been further issue of share capital inasmuch as 7,46,606 shares of Rs. 10 each were issued afresh at a premium of Rs. 9 per share to the Indian public. Avery Ltd., the foreign company, also offered for sale 1,55,000 shares of Rs. 10 each held by it at a premium of Rs. 9 per share on right basis to the existing shareholders. By that process, not only the non-resident company was converted into a resident company but the structure and character of the company changed as held by the Kerala High Court in Commonwealth Trust Ltd. [1987] 167 ITR 365. When we were about to deliver the judgment, our attention was drawn to a decision of a Division Bench of this court in the case of CIT v. Machine Tools (India) Ltd. [1991] 190 ITR 220. In that case, the assessee, a FERA company, decided to increase its subscribed share capital to ensure that 60 per cent. of the increased subscribed capital would be in the hands of Indian nationals in view of the amendment made to the Foreign Exchange Regulation Act. The assessee created two trusts in October, 1973, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------------------------------------------------------------------------------------------- Rs. 1973-74 21,963 28-9-1978 1974-75 1,63,009 20-3-1979 1975-76 3,82,231 24-8-1979 ------------------- 5,75,203 ------------------------------------------------------------------------------------------------------------------------------------------------ The assessee's accounting year ended on December 31, 1979. The assessee did not make any provision in its books of account in respect of the aforesaid liability. The Commissioner of Income-tax (Appeals) directed the Income-tax Officer to verify the facts relating to sales tax liability and allow deduction in respect thereof only if it was found that demands were raised for the first time during the previous year in question and were also accepted and paid by the assessee-company during the same previous year. The Tribunal, however, held that if the assessee had not objected to the demand of sales tax during the previous year in question, the same should be allowed as a deduction. In case, however, the assessee has disputed the assessment order so passed, the liability shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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