Bharat Carbon And Ribbon Manufacturing Co. Ltd. v. Commissioner Of Income-Tax, New Delhi

S. Ranganathan, J.:— It is a very short question that arises in this reference under s. 256(1) of the I.T Act, 1961, at the instance of M/s. Bharat Carbon & Ribbon Manufacturing Co. Ltd., New Delhi (hereinafter referred to as “the assessee”). During the previous year which ended on December 31, 1962, relevant for the assessment year 1963-64, the assessee increased its authorised capital from rupees twenty-five lakhs to rupees one crore and for doing so it paid registration fees of Rs. 5,625. The ITO disallowed the above amount but on appeal the AAC allowed the claim of the assessee for deduction of this expenditure. However, on a further appeal by the ITO, the Tribunal came to the conclusion that the amount had been spent for the purpose of profit making apparatus and not for the purpose of making profit and was, therefore, expenditure of capital nature.

2. At the request of the assessee, the following question of law has been referred to this court:

“Whether, on the facts and in the circumstances of the case, the expense of Rs. 5,625 for increase of the authorised capital of the assessee-company was allowable as a revenue expense?”

3. We are of opinion that the conclusion arrived at by the Tribunal is clearly correct and has to be upheld. The expenditure had been incurred by the assessee with a view to increase its authorised capital. It was held in the case of In re Tata Iron and Steel Co. Ltd., [1921] 1 ITC 125 (Bom) that an expenditure incurred by the company as under-writing commission paid in connection with an issue of preference shares by the company was of capital nature.

4. Referring to this decision the Supreme Court pointed out in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, at page 61, that though the Bombay High Court was wrong in relying, for arriving at this conclusion upon the case of Texas Land and Mortgage Company v. Holtham, [1894] 3 TC 255 (QB), the conclusion itself was correct. It was pointed out that obtaining capital by the issue of shares was different from obtaining amounts by the issue of debentures. It is thus clear that the expenditure incurred by an assessee-company in its attempt to raise additional share capital for the company would be capital in nature.

5. Shri Beri invited our attention to s. 35D of the I.T Act, 1961. This section does not help the assessee. This section has no direct relevance for the present assessment year because it was introduced only with effect from April 1, 1971. But that apart, even under these provisions, deduction of expenses incurred by way of legal charges and registration charges is spread over a period of ten years and is not allowable in the year in which the expenses are incurred. If at all, this section also only confirms the view that these are expenses of capital nature but the Legislature has permitted their deduction but over a period of ten years. Mr. Beri's further claim that the expenses in this case may also be spread over for ten years is obviously untenable as this section is inapplicable to the assessment year under consideration before us.

6. We, therefore, answer the question referred to us in the negative and against the assessee. As the assessee has failed he will pay the costs of the reference to the respondent, which we fix at Rs. 300.