Accrued contractual liability is deductible despite book entries; share capital increase is capital and not covered by section 35D.

Under the mercantile system, a contractual lease rental liability that had legally accrued during the relevant years was deductible in computing business income, even though a lower amount was entered in the books; book entries were relevant but not conclusive, and the actual contractual liability governed. Expenditure on stamp duty and registration fee for increasing authorised share capital was capital in nature, since it related to expansion of the capital base and did not become revenue merely because it supported business operations. It also did not fall within section 35D, as the statutory conditions for that allowance were not satisfied. The assessee obtained relief on the lease rental claim but not on the share capital expenditure claim.

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Issues: (i) Whether the full lease rental liability under the lease agreements was deductible in computing business income notwithstanding a lower amount being debited in the books under the mercantile system of accounting; (ii) Whether the expenditure incurred for stamp duty and registration fee for increase in authorised share capital was allowable as revenue expenditure or under section 35D.

Issue (i): Whether the full lease rental liability under the lease agreements was deductible in computing business income notwithstanding a lower amount being debited in the books under the mercantile system of accounting.

Analysis: The liability arose from the contractual terms and had accrued during the relevant previous years. Under the mercantile system, deduction depends on the existence of a legally accrued liability and not on whether the same has been fully reflected in the books. Entries in the books of account are relevant but not conclusive. The agreements could not be treated as a mere artificial device to defeat the contractual obligation, and the amount actually payable under the agreement was the proper basis for deduction.

Conclusion: The full lease rental liability was allowable as a deduction in favour of the assessee.

Issue (ii): Whether the expenditure incurred for stamp duty and registration fee for increase in authorised share capital was allowable as revenue expenditure or under section 35D.

Analysis: Expenditure incurred for expansion of the capital base is capital in nature. Such expenditure does not become revenue merely because it may incidentally facilitate business operations. The claim also did not fall within the limited scope of section 35D, as it was not connected with the kind of public issue or eligible preliminary expenditure contemplated by that provision.

Conclusion: The expenditure was not allowable as revenue expenditure or under section 35D and the disallowance was upheld.

Final Conclusion: The assessee succeeded on the lease rental issue, but failed on the claim relating to expenses for increase in authorised share capital, resulting in partial relief only.

Ratio Decidendi: Under the mercantile system, a legally accrued contractual liability is deductible notwithstanding contrary book treatment, but expenditure incurred for increasing authorised share capital is capital expenditure and is not allowable as revenue or as preliminary expenditure under section 35D absent the statutory conditions.

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