1990 (10) TMI 55 - HC - Income Tax

ROC fee for increased share capital held capital, but deductible over ten years as s.35D preliminary expense

HC held that the fee paid to the Registrar of Companies for increasing authorised share capital is not allowable as revenue expenditure and, therefore, ... Entitlement to get a deduction - covered by sub-clause (2)(c)(iv) of section 35D - Nature of fee for registration to the Registrar of Companies for raising the authorised capital - revenue expenditure or not - HELD THAT:- It is, no doubt, true that the distinction between 'revenue' and 'capital' expenditure is a fine one. Dealing with all those cases which took the view that expenses incurred in obtaining registration of the memorandum of association and articles for enhancing capital, the Kerala High Court held that the fee paid under the Companies Act, 1956, to the Registrar was revenue expenditure. To the same effect was the view taken by the Madras High Court in CIT v. Kisenchand Chellaram (India) P. Ltd. [1979 (10) TMI 27 - MADRAS HIGH COURT]. In coming to the conclusion, the Madras High Court had applied the ratio enunciated by the Hon'ble Supreme Court in India Cements Ltd. v. CIT [1965 (12) TMI 22 - SUPREME COURT]. The decision of the Madras High Court was followed by the Karnataka High Court in Hindustan Machine Tools Ltd. [1988 (3) TMI 14 - KARNATAKA HIGH COURT]. In its view as well, the expenditure incurred by way of remitting filing fee to the Registrar of Companies in respect of enhancement of the authorised share capital of the company was allowable as a revenue expenditure. The Rajasthan High Court decision in the case of Aditya Mills[1989 (10) TMI 50 - RAJASTHAN HIGH COURT] is clear and explicit on the point and we are bound by the same. We, consequently, answer the first question in the negative by saying that the fee paid to the Registrar of Companies for raising the authorised capital was not allowable as revenue expenditure. Deduction of expenditure incurred for registration is to be spread over a period of ten years and is not allowable in the year in which the expenses are incurred. To uphold the submission of the Revenue that expenditure incurred for obtaining registration would not be allowable either under sub-section (2)(c)(iii) or sub-section (2)(c)(iv) of section 35D would defeat the obvious intention of the Legislature and would produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result, we have to hold that under subsection (2)(c)(iv) of section 35D, the expenditure incurred for obtaining registration would be liable to be deductible. We, consequently, hold that the fee paid to the Registrar of Companies for raising authorised capital of the assessee-company was covered by subsection (2)(c)(iv) of section 35D of the Income-tax Act. Issues involved: Interpretation of whether fees paid to Registrar of Companies for raising authorized capital is allowable as revenue expenditure and whether it is covered by sub-clause (2)(c)(iv) of section 35D of the Income-tax Act, 1961.Issue 1 - Fees as Revenue Expenditure:The case involved a limited company that paid a fee for registration to the Registrar of Companies to amend its memorandum of association for increasing authorized capital. The Income-tax Officer initially treated this fee as capital expenditure, but the Commissioner of Income-tax allowed it as revenue expenditure. The Appellate Tribunal, citing a Supreme Court decision, upheld the deduction of the registration fee as revenue expenditure. The Tribunal also considered the fee under section 35D, which allows expenditure related to public subscription of shares to be spread over ten years. The Revenue challenged this decision, leading to a reference to the High Court.Issue 2 - Application of Section 35D:The Tribunal considered whether the fee paid to the Registrar could be covered under sub-clause (2)(c)(iv) of section 35D, which pertains to expenses related to public subscription of shares. The Revenue argued against the applicability of this clause, while the assessee contended that the language of section 35D should be interpreted broadly to benefit the assessee. The Tribunal found that the fee for enhancing capital could be deductible under sub-clause (2)(c)(iv) of section 35D, as spreading the deduction over ten years aligns with the legislative intent and produces a reasonable outcome.The High Court, in its judgment, disagreed with the Revenue's position that the fee paid to the Registrar for raising authorized capital was not allowable as revenue expenditure. It held that the fee fell under sub-clause (2)(c)(iv) of section 35D of the Income-tax Act, making it deductible over a ten-year period. The Court emphasized interpreting the law to benefit the assessee and ensuring a reasonable outcome. The case was remanded to the Income-tax Appellate Tribunal with the specified answers, and no costs were awarded due to the split decision.