1921 (2) TMI 4 - HC - Indian Laws

Court Rules Company's Share Issue Expense Not Deductible Under Tax Law, Emphasizes Capital Nature

In Re : Tata Iron and Steel Company Ltd.

In Re : Tata Iron and Steel Company Ltd. - [1921] AIR 1921 Bom 391 Issues:Interpretation of Section 9(2)(ix) of the Indian Income Tax Act regarding the deductibility of certain expenses incurred by a company for income tax assessment.Analysis:1. The case involved a reference by the Chief Revenue Authority under Section 51 of the Indian Income Tax Act VII of 1918 regarding the interpretation of Section 9(2)(ix) in the income tax assessment of a company. The company claimed a deduction of &8377; 28,00,000 paid to underwriters for issuing preference shares, contending it was an allowable expense. The Collector deemed it as capital expenditure, disallowing the deduction. The High Court was directed to review the matter.2. The key issue was whether the &8377; 28,00,000 expense could be allowed under Section 9(2)(ix) as a deductible expenditure. The section allows deductions for expenses not in the nature of capital expenditure, incurred solely for earning profits. It was argued that the term 'such profits' refers to profits earned generally by the business, not limited to a specific year. The court noted that expenses precede profit generation, indicating a broader interpretation of the term 'such profits.'3. The court analyzed that the &8377; 28,00,000 was spent on raising fresh capital, typically considered as preliminary expenses not deductible under Section 9. The court questioned the practice of allowing deductions for such expenses written off from profits in the first year. It emphasized that expenses in raising capital are of the same nature, whether at the company's inception or later, citing legal precedents. The court concluded that the expense was in the nature of capital expenditure, not solely for earning profits.4. The Chief Justice opined that the &8377; 28,00,000 could not be treated as a deductible expense under Section 9(2)(ix) for earning the company's profits. The court highlighted the treatment of preliminary expenses and goodwill as assets, indicating the nature of such expenditures as capital in essence.5. The court ruled that the petitioners were liable for the costs of the reference, with each party bearing their own costs of the rule.6. Justice Shah concurred with the Chief Justice's decision that the &8377; 28,00,000 expense could not be allowed as a deductible item under Section 9(2)(ix) of the Income Tax Act.7. Justice Shah emphasized that the expense represented the commission for underwriting shares to raise capital, which inherently classified it as capital expenditure. The real nature of the expenditure, not its accounting treatment, determined its deductibility under Section 9(2)(ix).8. The clause in question required the expenditure to be non-capital in nature and solely for earning profits. Justice Shah concluded that the sum paid for underwriting shares fell under capital expenditure based on substance over form, supported by legal principles from relevant cases.9. Justice Shah highlighted that the lack of a specific definition for 'capital expenditure' allowed for a flexible interpretation based on the case's facts. Considering the sum as capital expenditure aligned with the substance of the transaction, making it ineligible for deduction under Section 9(2)(ix).10. Referring to legal precedents, Justice Shah found support for his conclusion that the underwriting commission constituted capital expenditure. Despite the absence of direct authority, he drew parallels with relevant cases to justify his decision.11. Justice Shah dismissed the argument that the expenditure must be solely for earning profits of a specific year, noting the absence of such a limitation in the section. He expressed doubts on the expenditure meeting the criteria even if not capital in nature, but refrained from a definitive opinion due to the reference's scope.12. Justice Shah concurred with the cost order, aligning with the Chief Justice's decision on the cost liability of the petitioners.