TMI Blog1981 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid order of the ITO, the assessee went up in appeal before the AAC. The AAC referred to the order of the ITO and observed that the assessee had submitted that the expenditure was in respect of business already being carried on by the assessee-company whose profits had been subject to assessment for tax purposes and therefore, the expenditure incurred long after the incorporation of the company was in no way an expenditure for the formation of the company and as such was an allowable deduction. The AAC was unable to accept this view and he had accordingly upheld the order of the ITO. Being aggrieved, the assessee went up in further appeal before the Tribunal. The Tribunal referred to the relevant contentions and referred to the relevant authorities upon which reliance was placed before the Tribunal. Thereupon, the Tribunal went on to observe as follows: " Expenditure incurred in connection with the increase in or addition to the existing share capital definitely affects the profit-making apparatus of the company and adds to the capital cost of the company. Any alteration in or addition to the capital structure of the company essentially involved capital expenditure. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Both the capital, according to the assessee, were available for the working funds of the company. It was further contended that, (d) the extension of the capital structure was necessitated for the working of the company as the company needed extra funds. We have to examine the validity of these contentions. There are numerous decisions on these points and many of those have been cited before us, as is usual in a case of this nature. We shall presently note those decisions. It appears that the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), at p. 251 of the report, the judicial Committee had noted that the question of capital or income was always capable of giving rise to a question of law. The judicial Committee also observed that it had to be remembered that all the phrases which were normally used, as used in this case also, as for instance " enduring benefit " or " capital structure " were initially descriptive rather than definitive and as each new case arose for adjudication and it was normally sought to reason by analogy from its facts to those of one previously decided, the court's primary duty was to enquire how far descriptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one case against that of another and none of the tests laid down in the various authorities was either exhaustive or universal. The Supreme Court, in the aforesaid decision in the case of Coal Shipments P. Ltd. [1971] 82 ITR 902, observed that the court had to bear in mind the distinction between an expenditure forming " part of the cost of the income earning machine or structure " as opposed to part of " the cost of performing income earning operation ". Referring to the observations of Lord Chancellor Cave in Atherton's case [1925] 10 TC 155 (HL), at p. 192, the Supreme Court observed, the House of Lords had dealt with fund which had been created by the assessee as a nucleus of pension fund for its employees. After handing over the money to the trustees for the employees, the company claimed that the money should be charged to revenue. The claim of the company was rejected by the House of Lords on the, ground that the payment of money created for itself an enduring benefit or advantage which was capital in nature. In the case of Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC), the payments made by the assessee, as found by the Supreme Court on an analysis of the facts in the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat case on the basis of which the Madras High Court upheld the decision. But, if the Madras decision is taken to be an authority for the proposition that moneys paid for increasing the capital of a company could be treated as revenue expenditure, in the light of the decision of the: Supreme Court in India Cements Ltd. v. CIT, with great respect, we are unable to accept that position. We are of the view that that is not the logical conclusion of the decision of the Supreme Court in the case of India Cements Ltd. [1966] 60 ITR 52 (SC). It is, therefore, appropriate at this stage that we should refer to the decision of the Supreme Court in the case of India Cements Ltd. v. CIT. There the assessee had obtained the loan of Rs. 40 lakhs from the Industrial Finance Corporation and secured it by a charge on its fixed assets. In this connection it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. It was held that the amount spent was not in the nature of capital expenditure but was laid out or expended wholly and exclusively for the purpose of the assessee's business and, therefore, was allowable as a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the decision in the case of lit Ye Tata Iron Steel Co. Ltd., AIR 1921 Bom 391. There the Division Bench of the Bombay High Court observed in the light of s. 9(2)(ix) of the Indian I.T. Act, 1922, that money paid to the underwriter on the issue of certain preference shares by the company was not an item of expenditure under s. 9(2)(ix) of the Act. There the facts were rather peculiar. Shah J., agreeing with the conclusion of the learned Chief justice, observed at p. 393 of the report as follows : " I am of opinion that the sum spent by way of commission for underwriting the shares as in the present case is in the nature of capital expenditure. The expression ' capital expenditure ' is not defined and the words ' in the nature of capital expenditure ' make the meaning of the expression more elastic in its application to the facts of each case. Having regard to the substance and not merely the form of the matter, I have come to the conclusion that the sum paid is in the nature of capital expenditure. There is no direct authority on this point. I think, however, that the ratio decidendi in Texas Land and Mortgage Company v. Holtham [1894] 3 TC 255 (QB) and the principles und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised money by shares with the intention of lending money on mortgage. . To increase its capital it raised money on debentures. The argument is that the cost of raising the money ought to be deducted from the profits in a particular year. We are clearly of opinion that that cannot be done. The amount paid in order to raise the money on debentures, comes off the amount advanced upon the debentures, and, therefore, is so much paid for the cost of getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation. This appears to me to be entirely concluded by the decision of yesterday. The appeal must be dismissed with costs." As would be evident from the observations of the learned judge, the facts in that case were entirely different from the facts in the instant case. Even on that basis, however, the ratio of the said decision is, in our opinion, against the contention advanced by the assessee in the instant case before us. Reliance was also placed on the decision in the case of Anglo-Continental Guano Works v. Bell (Surveyor of Taxes) [1894] 3 TC 239 (QB), where at pp. 244-245, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [1980] 124 ITR 1. The Supreme Court at p. 14 of the report, referring to the decision of the House of Lords, observed that a certain expenditure was incurred by the assessee-company for the purpose of obtaining a supplementary charter altering its constitution, so that the management of the company could be placed on a sound commercial footing and the restrictions on the borrowing powers of the assessee-company could be removed. The old charter contained certain antiquated provisions and also restricted the borrowing powers of the assessee-company and these features severally handicapped the assessee-company in the development of its trading activities. The House of Lords held that the expenditure incurred for obtaining the revised charter eliminating these features, which operated as an impediment to the profitable development of the assessee-company's business, was in the nature of a revenue expenditure since it was incurred for facilitating the day-to-day trading operations of the assessee-company and enabling the management and conduct of the assessee-company's business to be carried on more efficiently. Lord Reid emphasised that the expenditure was incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Our attention was drawn to the observations at p. 727, where the Supreme Court referred to the difficulty in laying down a fixed test as to enduring advantage and observed that in the case before the Supreme Court the royalty payment was not a payment for securing an enduring advantage. It related to the raw material to be obtained and, therefore, it was held to be an allowable expenditure. Learned advocate for the Revenue drew our attention to the observations of this court in the case of Hindustan Gas and Industries Ltd. v. CIT [1979] 117 ITR 549, where the assessee was claiming a relief by way of an allowable deduction in respect of an expenditure incurred by him, it was strictly for the assessee to establish that that expenditure was not of the nature of a capital expenditure and he could not claim any benefit of ambiguity or doubt in his favour. The court observed that under the Companies Act, 1956, when a company issued redeemable preference shares it did not obtain a loan as it would by issuing debentures. There was a fundamental difference, according to the court, between the capital made available to company by the issue of a share and money obtained by a company unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture was on capital account or revenue account. Our attention was drawn to the observations of this court in the case of Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 and reliance was placed on the observations of the court where the relevant authorities were discussed at pp. 361, 372. Incidentally we may mention that in that decision we referred to the decision of India Cements Ltd.'s case [1966] 60 ITR 52 (SC). There is a mistake in the printing in the reported judgment where it has been observed that in India Cements Ltd.'s case the Supreme Court held that " the loan was not a liability ". We have to observe that in that case the Supreme Court held that the loan was a liability. Reliance was also placed on the observations at different paragraphs of the said decision but that decision is on an entirely different set of facts. In our opinion, not much-'support can be had by either party from the observations in that decision. There we had also held that the loan had been utilised for the purchase of capital, the increase in liability due to the devaluation of the rupee was on capital account. Reliance was also placed on the observations of this court in the case of Chlor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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