TMI Blog1982 (7) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Its contention was that the ITO should have first calculated the value of the perquisites in terms of the relevant Rules and if such value was in excess of 1/5th of the salary of that employee, then only that excess should be disallowed. The Tribunal took the view that for the purposes of s. 40(c)(iii), actual expenditure incurred was the only expenditure which could be taken into consideration and there was no warrant for the view to limit the expenditure to the extent of the value of the perquisite in the hands of the employees. Another question which arose in the course of the assessment for the assessment year 1964-65, was whether the expenditure amounting to Rs. 31,899 and legal expenses totalling Rs. 10,350 in connection with the issue of bonus shares was admissible as a revenue expenditure. The ITO and the AAC took the view that both items were in the nature of capital expenditure. The Tribunal took the view that both the items of expenditure were incurred in the course of the carrying on of the business of the assessee, because instead of declaring dividends, the assessee thought fit to issue bonus shares and since the expenditure incurred in connection with the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 31,899 incurred by the assessee during the year in connection with the issue of bonus shares and splitting of shares was an allowable revenue expenditure and not in the nature of capital expenditure. Question No. 5 : " Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 10,350 incurred by the assessee for the assessment year 1964-65, as legal expenses in connection with the issue of bonus shares was an allowable revenue expenditure and not in the nature of capital expenditure ? Question No. 6 : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,250 estimated by the Tribunal to be the expenditure incurred by the assessee by way of fees in connection with the issue of bonus shares out of the total fees of Rs. 52,500 was an allowable revenue expenditure and not in the nature of capital expenditure ? Before we take up the several questions for consideration, it is necessary to refer to the relevant provisions of s. 40(c)(iii) of the Act which, at the material time, read as follows: Section 40 " Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not ". The words " such expenditure " clearly refer back to " any expenditure incurred after 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite ". In order to see whether the provisions of s. 40(c)(iii) are attracted or not, all that the tax authority is to do is to find out whether there is any expenditure which resulted directly or indirectly in the provision of any benefit or amenity or perquisite and whether that expenditure exceeds one-fifth of the amount of salary payable to the employee concerned for any period of his employment after the 29th day of February, 1964. If the expenditure exceeds one-fifth of the amount of salary payable, that excess has to be disallowed by way of deduction by the tax authorities. It appears that the foundation of the arguments advanced before us by Mr. Munim lies in a decision of the Calcutta High Court in CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35. It is no doubt true that, on the facts of that case, the Calcutta High Court took the view that the value of the perquisite of the free car provided by the assessee-company to its employees should be worked out at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees is to be taken in the hands of the employees for the purpose of assessment of the employees under the head "Income from salaries " at Rs. 150 per month, the same value should be taken in the hands of the assessee-company which is the employer for the purpose of working out the ceiling under s. 40(c)(iii) ". The decision of the Calcutta High Court cannot be read as an authority that in all cases, for the purpose of s. 40(c)(iii), the value of the perquisite in the hands of the employees computed, in accordance with relevant rules, must be ascertained. It is not possible, therefore, to accept the argument of the learned counsel for the assessee that the value of the benefit or amenity or perquisite in the hands of the employees has to be taken into account for the purposes of s. 40(c)(iii). Accordingly, question No. has to be answered in the affirmative and against the assessee. The answer to the second question turns on the construction of the second proviso to s. 40(c)(iii) of the Act. The learned counsel for the asses. see has relied upon a decision of the Madras High Court in Addl. ClT v. Brakes India Ltd. [1979] 118 ITR 820. In that case, the Division Bench of the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taken by the Madras High Court in the case of Brakes India Ltd. [1979] 118 ITR 820, cited above. The salary payable in that case was to a foreign technician and, admittedly, his salary could not be brought to tax under the I.T. Act. Under s. 10(6)(iii), the ITO had allowed the expenditure of perquisite only to the extent of one-fifth of the amount of salary payable to him, holding that the second proviso was not applicable, on the ground that the income chargeable under the head " Salaries " was more than Rs. 7,500. The argument on behalf of the assessee in that case was that the salary paid to the foreign technician was exempt from tax and his income chargeable under the head " Salaries " was nil and the second proviso was, therefore, attracted. The argument on behalf of the Revenue in that case was that in order to attract the second proviso, there should be some income chargeable under the head " Salaries ", at least one rupee to say that this is less than Rs. 7,500 but where there is no income chargeable under the head " Salaries " the proviso would not be attracted. Considering these arguments, the Division Bench has observed as follows (p. 824): " Having given our anxious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out or expended wholly and exclusively for the purposes of the assessee's business. What is, however, important is that the Supreme Court in that case has highlighted the difference between the obtaining of capital by issue of shares and obtaining of loan by debentures. The Supreme Court has referred to the earlier decision of this court in In re Tata Iron and Steel Co. Ltd. [1921] 1 ITC 125. In that case, the Tata Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to the underwriters on an issue of Rs. 7 lakhs preference shares of Rs. 100 each and the company claimed to deduct this amount as expenses under s. 9(2)(ix) of the Indian I.T. Act, 1918. Macleod C.J. in that case had taken the view that if the cost of raising the original capital cannot be deducted from profit after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way, and that expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floatation of the company or thereafter. Accordingly, he held that Rs. 28 lakhs could not be treated as expenditure (not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company in connection with the issue of bonus shares. In question No. 4, the allowability of Rs. 31,899 as expenditure is in issue. Different sums are in issue in other questions. Now,we have tried to find Out from the orders of the tax authorities and the Tribunal as to the nature of this expenditure, but all that we find is that the AAC has described the expenditure as being in connection with bonus shares and splitting of shares, which according to him, was an activity undertaken for capitalization of profits, resulting in an advantage of an enduring nature. The Tribunal has merely described this amount as expenditure incurred in connection with the issue of bonus shares and splitting of shares. The Tribunal has, no doubt, allowed this item as an allowable expenditure and the common argument advanced by the learned counsel for the Revenue in respect of all the three items in issue in the three questions referred to at the instance of the Revenue, is that the expenses are in relation to raising of capital. If the argument of the learned counsel is accepted, it would mean that any expenditure incurred in relation to raising capital, would always be of a capital nature. Since we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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