Capital computation under section 80J and redeemable preference share funding costs treated as revenue expenditure; business-purpose test applied to advertising.

For section 80J relief, liabilities including current liabilities were not deducted from capital, and capital could be taken on a practical average of opening and closing figures rather than a strict day-by-day computation. Expenditure incurred to raise funds through redeemable preference shares was treated as revenue expenditure because it secured only the use of money for a period and did not create an enduring asset or advantage. Advertisement payments to political committees were disallowed for lack of business purpose, and surtax liability was rejected following the Tribunal's earlier view.

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Issues: (i) Whether liabilities, including current liabilities, were deductible in computing capital for relief under section 80J; (ii) whether the average of capital at the beginning and end of the year should be adopted for section 80J computation; (iii) whether expenditure on redeemable preference shares was deductible as revenue expenditure; (iv) whether the claims for advertisement expenditure and surtax liability were allowable.

Issue (i): Whether liabilities, including current liabilities, were deductible in computing capital for relief under section 80J.

Analysis: The Tribunal followed its earlier view that liabilities, including current liabilities, are not to be deducted while computing capital for section 80J relief. On that basis, the departmental challenge to the assessee's computation failed.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Issue (ii): Whether the average of the capital at the beginning and end of the year should be adopted for section 80J computation.

Analysis: The Tribunal adopted its earlier approach that the proper method is to ascertain capital on a daily basis, but as a practical compromise the average of the opening and closing capital may be used as a rough and ready method. That approach was applied to the assessee's claim.

Conclusion: The issue was decided in favour of the assessee.

Issue (iii): Whether expenditure incurred on redeemable preference shares was deductible as revenue expenditure.

Analysis: The Tribunal treated redeemable preference shares, in substance, as a mode of securing long-term financial accommodation similar to borrowing by debentures or bank finance. It held that the expenditure incurred for raising such funds did not bring into existence an enduring asset or advantage and that the character of the later dividend or appropriation position did not alter the nature of the initial expenditure. Applying the principle that expenditure for obtaining the use of money for a period is allowable, the claim was accepted.

Conclusion: The issue was decided in favour of the assessee.

Issue (iv): Whether the claims for advertisement expenditure and surtax liability were allowable.

Analysis: The advertisement payment to political committees was not shown to have been incurred for the purpose of business and was therefore disallowed. The surtax liability claim was rejected following the Tribunal's earlier decision.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The Revenue's challenge to the section 80J computations failed, the assessee succeeded on the method of capital computation and on the deductibility of expenditure on redeemable preference shares, but failed on the claims for advertisement expenditure and surtax liability.

Ratio Decidendi: Expenditure incurred to secure funds by a borrowing-like mode of finance is allowable as revenue expenditure when it secures only the use of money for a period and does not create an enduring asset or advantage.

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