Capital expenditure on shareholding compliance is not deductible as revenue expense under the Income-tax Act.

Expenditure incurred to comply with foreign exchange regulation by transferring foreign-held shares to Indian citizens was held to be capital in nature because it altered the company's capital structure and perfected title to share capital rather than being incurred for the ordinary conduct of business. The court treated the outlay as one made to create, cure, or perfect the company's capital position and change its status, so it was not allowable as a revenue deduction under section 37 of the Income-tax Act, 1961.

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Issues: Whether the expenditure incurred for compliance with the Foreign Exchange Regulation Act, 1973 in relation to transfer of foreign-held shares to Indian citizens was capital expenditure or admissible revenue expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The expenditure was incurred to alter the company's capital structure so as to comply with the statutory requirement of Indianisation of shareholding. It was not incurred to protect the business but to create, cure, or perfect title to the share capital and to change the company's status from non-resident to resident. Expenditure of this character is capital in nature and is not allowable as a business deduction.

Conclusion: The expenditure was capital expenditure and not deductible under section 37; the answer was therefore in favour of the Revenue.

Ratio Decidendi: Expenditure incurred to alter or perfect title to share capital or to bring about a change in the capital structure of a company is capital expenditure, even if incurred to comply with statutory requirements, and is not deductible as revenue expenditure.

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