1978 (8) TMI 58 - HC - Income Tax

Expenses for Issuing Shares Not Deductible as Business Costs

The High Court held that legal charges and underwriting commission/brokerage incurred for issuing redeemable preference shares were capital expenditures, ... Burden Of Proof, Capital Expenditure, Capital Or Revenue Expenditure, Preference Shares Issues Involved:1. Whether the legal charges incurred on the issue of a prospectus for offering redeemable preference shares to the public were of a capital nature.2. Whether the underwriting commission and brokerage paid for the issue of redeemable preference shares were of a capital nature.Summary:Issue 1: Legal Charges on Prospectus for Redeemable Preference SharesHindusthan Gas & Industries Ltd., the assessee, incurred Rs. 10,080 for professional charges to its solicitors for preparing a prospectus for the issue of its preference shares. The assessee claimed this expenditure as a deduction from its business income. The ITO disallowed the claim, considering it not of a revenue nature. The AAC confirmed the ITO's order. The Tribunal also dismissed the assessee's appeal, treating the expenditure as capital in nature. The High Court, considering the provisions of the Companies Act, 1956, and relevant case law, concluded that issuing redeemable preference shares is fundamentally different from obtaining a loan or issuing debentures. The court held that the expenditure incurred for the issue of redeemable preference shares is of a capital nature.Issue 2: Underwriting Commission and Brokerage for Redeemable Preference SharesThe assessee incurred Rs. 50,687 for underwriting commission and brokerage for the issue of redeemable preference shares. Similar to the legal charges, the assessee claimed this expenditure as a deduction. The ITO, AAC, and Tribunal all treated this expenditure as capital in nature. The High Court, referencing the Companies Act and English company law, reiterated that the issuance of redeemable preference shares does not equate to obtaining a loan. The court emphasized the fundamental differences between share capital and loan capital, noting that a shareholder does not have the same rights as a creditor. Consequently, the court held that the underwriting commission and brokerage paid for the issue of redeemable preference shares are also of a capital nature.Conclusion:The High Court answered both questions in the affirmative, ruling in favor of the revenue. The legal charges and underwriting commission and brokerage incurred for the issue of redeemable preference shares were held to be capital expenditures. There was no order as to costs. Banerji J. concurred with the judgment.