1989 (9) TMI 56 - HC - Income Tax

Summary

Issues involved:
The judgment involves the issue of whether the share issue expenses incurred by the assessee were of revenue nature and allowable under section 37(1) of the Income-tax Act, 1961.

Summary:
The High Court of BOMBAY heard a reference made by the Revenue under section 256(1) of the Income-tax Act, 1961 regarding the claim of share issue expenses by the assessee for the assessment year 1970-71. The assessee, a pharmaceutical manufacturer, incurred expenses of Rs. 9,32,946 for issuing fresh equity capital to comply with the Government's requirement of diluting shareholding. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claims, but the Income-tax Appellate Tribunal found a direct nexus between the expenditure and income earning, considering it as revenue expenditure.

Mr. Jetley for the Revenue argued that capital expenditure cannot be allowed as a deduction under section 37, emphasizing that the expenditure was incurred in raising capital. On the other hand, Mr. Dastur for the assessee contended that the purpose of the expenditure was to maintain the technical collaboration arrangement, not solely for obtaining additional funds. The Tribunal's conclusion that the expenditure was revenue in nature, despite being related to fresh capital issuance, was based on the businessman's viewpoint and business necessity.

The Court referred to various legal precedents emphasizing that the object and purpose of expenditure, from a businessman's perspective, determine its nature. It cited cases like Anglo-Persian Oil Co. Ltd. v. Dale and Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT to highlight the importance of the expenditure's aim in relation to business operations. The Court also discussed cases such as CIT v. Kirkend Coal Co. and Brooke Bond India Ltd. v. CIT to illustrate the distinction between revenue and capital expenditure based on the fundamental change in income-earning machinery.

Considering the peculiar facts of the case, the Court upheld the Tribunal's decision that the share issue expenses were revenue expenditure, allowing the deduction claimed by the assessee. The judgment was in favor of the assessee, with no order as to costs.