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of <h1>Debenture Issuance Costs Not Deductible as Revenue Expense under Tax Law</h1> <h3>Western India Plywood Ltd. Versus Commissioner of Income-Tax, Madras</h3> Western India Plywood Ltd. Versus Commissioner of Income-Tax, Madras - [1960] 38 ITR 533 Issues Involved:1. Whether the expenditure of Rs. 12,924 incurred for issuing debentures is capital expenditure.2. Whether the sum of Rs. 3 lakhs raised by debentures is a capital receipt or a revenue receipt.Issue-Wise Detailed Analysis:1. Whether the expenditure of Rs. 12,924 incurred for issuing debentures is capital expenditure:The assessee, a public limited company, incurred an expenditure of Rs. 12,924 for issuing debentures to raise a loan of Rs. 3 lakhs. The expenses included costs for stamp paper, underwriting commission, registration, and lawyer's fees. The primary question was whether this expenditure is capital in nature and thus not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.The court noted that if the amount raised is considered a capital receipt, then the expenditure incurred to raise it must also be treated as capital expenditure. The court referenced several cases, including In re Tata Iron & Steel Co. Ltd. [1921] 1 I.T.C. 125, European Investment Trust Company Limited v. Jackson [1932] 18 Tax Cas. 1, and Ascot Gas Water Heaters Ltd. v. Duff [1942] 24 Tax Cas. 171, to illustrate that expenses related to raising capital are generally considered capital expenditures.The court concluded that the expenditure of Rs. 12,924 was indeed in the nature of capital expenditure and thus not deductible under section 10(2)(xv).2. Whether the sum of Rs. 3 lakhs raised by debentures is a capital receipt or a revenue receipt:The court examined whether the Rs. 3 lakhs raised by issuing debentures constituted a capital receipt or a revenue receipt. The assessee argued that the loan was for working capital and thus should be considered a revenue receipt. However, the court distinguished between capital borrowed for enhancing the capital structure and temporary accommodations or banking facilities.The court referenced several judgments, including Ward v. Anglo-American Oil Co. Ltd. [1934] 19 Tax Cas. 94 and Montreal Coke and Manufacturing Co. v. Minister of National Revenue [1945] 13 I.T.R. (Suppl.) 1, which held that raising money through debentures or mortgages affects the capital of a concern and its profit-making structure. The court also noted that the resolution of the board of directors explicitly stated that the loan was for working capital, indicating its capital nature.The court further clarified that the nature of the receipt, whether capital or revenue, is not solely determined by the subsequent use of the funds. The court emphasized that the expenditure for extending business is capital investment, as supported by In re Benarsidas Jagannath [1947] 15 I.T.R. 185.The court concluded that the Rs. 3 lakhs raised by debentures was a capital receipt. Consequently, the expenditure of Rs. 12,924 incurred for issuing these debentures was deemed capital expenditure and not deductible under section 10(2)(xv).Conclusion:The court answered the referred question by stating that the expenditure of Rs. 12,924 is a capital expenditure and not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee was ordered to pay the costs of the reference, including an advocate's fee of Rs. 150.
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