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Indian Card Clothing Co. Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)3ITD170(Mum.)
AppellantIndian Card Clothing Co. Ltd.
Respondentincome-tax Officer
Excerpt:
.....observations of the high court at pages 391 and 392. he urged that the assessee did not get any enduring benefit out of these expenses. shri a.r. viswanathan, on the other hand, supported the disallowance, relying on the decision in the ease of mohan meakin breweries ltd. v. cit [1979] 117 itr 505 (hp) for the proposition that, obtaining capital by issue of shares is an activity in the capital field and the fees paid to the registrar of companies for increasing the authorised capital was an advantage of enduring nature and so, was capital expense. he also referred to the decision of the supreme court in the case of empire jute co. ltd. v.cit[198o] 124 itr 1, which, according to him, supported the disallowance. shri m.v. dalvi replied that the case of empire jute (supra) supported the.....
Judgment:
1. This appeal has been filed by the assessee against the order dated 6-2-1981 of the Commissioner (Appeals) relating to the assessment year 1977-78, the previous year of which ended 31-3-1977.

3. The only other ground in this appeal relates to the disallowance of a sum of Rs. 6,000, The assessee is a limited company. During the year under consideration, it spent a sum of Rs. 39,629 as legal and professional charges paid to seven parties. The ITO allowed a sum of Rs. 33,029 relating to five parties as admissible deduction. He did not allow the remaining two items, namely, Rs. 1,000 paid to the Controller of Capital Issues for approval of the bonus share issue and Rs. 5,600 paid to the auditors for examining the application to the Controller of Capital Issues, in connection with the aforesaid bonus shares. The sum of these two items comes to Rs. 6,600 but the ITO disallowed a sum of Rs. 6,000 only, apparently due to inadvertence. The reason given by the ITO for the disallowance is that the expenses were incurred on capital account.

4. On appeal, the Commissioner (Appeals) confirmed the disallowance on the same ground as given by the ITO.5. Shri M.V. Dalvi urged before us that the claim of the assessee should have been allowed. He relied on the decision of the Madras High Court in the case of CIT v. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385. He drew our attention to the observations of the High Court at pages 391 and 392. He urged that the assessee did not get any enduring benefit out of these expenses. Shri A.R. Viswanathan, on the other hand, supported the disallowance, relying on the decision in the ease of Mohan Meakin Breweries Ltd. v. CIT [1979] 117 ITR 505 (HP) for the proposition that, obtaining capital by issue of shares is an activity in the capital field and the fees paid to the Registrar of Companies for increasing the authorised capital was an advantage of enduring nature and so, was capital expense. He also referred to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v.CIT[198O] 124 ITR 1, which, according to him, supported the disallowance. Shri M.V. Dalvi replied that the case of Empire Jute (supra) supported the case of the assessee inasmuch as the assessee did not get any enduring benefit by the expense incurred by it.

6. We have considered the contentions of both the parties as well as the facts on record. We find that the case of Mohan Meakin (supra) is in favour of the department and this case has distinguished the earlier decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52. On the other hand, the case of Kisenchand (supra) is in favour of the assessee and this case also has considered the decision of the Supreme Court in the case of India Cements (supra).

Both these cases were concerned with the fees paid to the Registrar of Companies for increasing the authorised capital of the company. These two cases were not concerned with the fees paid in connection with the issue of bonus shares. Besides, these two decisions are in conflict with each other. Hence, we find it expedient to respectfully follow the guidelines laid down by the Supreme Court in the latest case of Empire Jute (supra). The test laid down in this case is that an expenditure incurred in connection with the business carried on by the assessee would be allowable unless it is a capital expenditure. An expenditure will be capital in nature if it is incurred to obtain an enduring benefit and that too, in the capital field. Applying the said test to the facts of this case, we find that the assessee must fail. The assessee had to issue bonus shares in order to improve the ratio between its capital and reserves, vis-a-vis its liabilities to third parties. In our opinion, this is an enduring benefit, because the benefit arising out of this improved picture of its capital structure, would be available to it for many future years. Again, the enduring benefit thus obtained, was obviously in the capital field. Hence, respectfully following the decision in the case of Empire Jute (supra), we hold that the expenditure under consideration, incurred by the assessee, was done with a view to obtain an enduring benefit in the capital field and so, they have been rightly disallowed by the revenue authorities as capital expenditure. We, therefore, uphold this disallowance and reject this ground.


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