TMI Blog1978 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Tribunal, inter alia, that the said amounts of expenditure should be treated as revenue expenditure. It was further contended that the said expenditure was incurred in respect of issue of not equity shares but redeemable preference shares. It was submitted that there was hardly any difference between a debenture and redeemable preference shares and, therefore, on the authority of India Cements Ltd. v. CIT [1966] 60 ITR 52, a decision of the Supreme Court, it was submitted that the expenditure incurred in connection with the issue of such shares had to be treated as a revenue expenditure. It was contended on behalf the revenue, on the other hand, that the said item must be treated as having been spent on capital account. The Tribunal accepted the contentions of the revenue and the appeal of the assessee on this point was dismissed. On an application of the assessee under s. 256(2) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising from the order of the Tribunal : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. Mr. Bhattacharyya also drew our attention to the relevant sections of the Companies Act, 1956. Section 80 of the said Act indicates the nature of redeemable preference shares. The section provides that no such share would be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of the redemption and, further, that such shares should not be redeemed unless they are fully paid. Where any shares are redeemed otherwise than out of the proceeds of a fresh issue, then, out of profits which would otherwise be available for dividend, there should be a transfer to a reserve fund to be called the capital redemption reserve account. It is also provided in the said section that redemption of preference shares would not be taken as reducing the amount of the authorised share capital of the company. Mr. Bhattacharyya next drew attention to the English law on the point. He first cited the decision in Isle of Thanet Electric Supply Co. Ltd. In re [1949] 2 All ER 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, it seems that they may be redeemed at the option of the company through the medium of a reduction of capital. And, under the canons of construction finally adopted, the probability is that they will confer only a right to a fixed return of both dividend and capital. In both respects they closely resemble debentures. Though their holders are members of the company, it is usual to deny them voting rights except in special circumstances, so that here too they do not greatly differ from debenture holders. That lawyers have effected a volte face was admitted by Evershed M.R. in In re Isle of Thanet Electric Supply Co. [1949] 2 All ER 1060 (CA) when he said : ' I think that during the sixty years which have passed since Birch v. Cropper [1889] 14 App Cas 525 (HL) was before the House of Lords, the view of the courts may have undergone some change in regard to the relative rights of preference and ordinary shareholders and to the disadvantage of the preference shareholders whose position has, in that interval of time, become somewhat more approximated to the role which Sir Horace Davey attempted to assign to them, but which Lord Macnaghten rejected in Birch v. Cropper [1889] 14 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a creditor of the company for his share capital, although he undoubtedly has a contractual right to share in the company's assets in a winding up after its creditors have been paid, and if the company has traded successfully, his share may amount to very much more than the money he originally subscribed. The reason why share capital is shown on the liabilities side of the company's balance sheet is that a balance sheet shows what payments would fall to be made out of the company's assets if it were wound up immediately, and one of these payments, is, of course, share capital. It does not follow that all such payments are debts of the company; share capital is one of the payments which is not. Share capital, then, is the amount contributed by the shareholders to the company's resources. The money with which the contribution is made becomes the company's property forthwith, but the company does not become the shareholder's debtor for its repayment. The shareholder has a number of contractual and statutory rights against the company, among which are a right to share in its assets when it is wound up, and a right, to receive dividends out of its profits when duly declared in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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