Capital raising costs are not deductible revenue expenditure when underwriting fees relate to a fresh share issue.

Commission paid for underwriting a fresh issue of preference shares was treated as expenditure incurred to raise capital, not as revenue expenditure. The court held that expenditure directed to procuring capital retains its capital character whether incurred at the company's flotation or later, and its accounting treatment cannot change that nature. Because the statutory deduction was limited to expenditure not of a capital nature, the underwriting commission was not allowable under Section 9(2)(ix). The argument that "profits" meant only the profits of the particular year was not finally decided, as it was unnecessary to the result.

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Issues: Whether the commission paid for underwriting a fresh issue of preference shares could be deducted as expenditure under Section 9(2)(ix) of the Indian Income Tax Act VII of 1918, as expenditure not being in the nature of capital expenditure and incurred solely for the purpose of earning the profits of the business.

Analysis: The amount represented the cost of raising fresh capital by the issue of shares. Expenditure incurred in procuring capital is of the same character whether incurred at the flotation of the company or later, and its treatment in the accounts cannot alter its real nature. The statutory deduction was confined to expenditure not in the nature of capital expenditure, and the sum paid for underwriting the shares was held to fall within capital expenditure rather than revenue expenditure. The further contention that the word profits was confined to the profits of the particular year was not accepted, although the decision did not require any final determination on that point.

Conclusion: The commission paid for underwriting the share issue was not an allowable deduction under Section 9(2)(ix) and the question was answered against the assessee.

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