1996 (12) TMI 6 - SC - Income Tax

Registrar fee for company capital enhancement is capital expenditure, not deductible as revenue expense; decision favors Revenue.

Punjab State Industrial Development Corporation Limited Versus Commissioner of Income-Tax

SC held that the fee paid to the Registrar for enhancement of a company's capital is a capital expenditure, not a revenue expense. The court found the fee ... Nature of Payment to the Registrar of Companies as filing fee for enhancement of capital of the company - revenue expenditure or capital expenditure - HELD THAT:- We are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram's case [1979 (10) TMI 27 - MADRAS HIGH COURT]. We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the Revenue and against the assessee. Issues:1. Whether the amount paid to the Registrar of Companies as filing fee for enhancement of capital is revenue expenditure or capital expenditureRs.Comprehensive Analysis:The case involved a dispute regarding the nature of an expenditure of Rs. 1,50,000 paid by a company to the Registrar of Companies as filing fee for enhancement of capital. The Income-tax Appellate Tribunal referred the question to the Supreme Court due to conflicting opinions among various High Courts. The company initially claimed this amount as revenue expenditure in its profit and loss account. The Commissioner of Income-tax revised the order, disallowing the expenditure as revenue. The Tribunal upheld this decision, leading to the appeal. The High Courts had conflicting decisions on similar matters, with some ruling in favor of the Revenue and others in favor of the assessee.The Supreme Court referred to various High Court decisions on similar matters, highlighting the differing opinions. The Court emphasized the test laid down in the Empire Jute Co. Ltd. case to distinguish between capital and revenue expenditure. The Madras High Court had allowed a similar claim, stating that the expenditure for increasing capital was essential for the business's functioning. The Karnataka and Kerala High Courts also supported this view, considering the expenditure as revenue in nature.However, the Calcutta High Court held that if an expenditure affects the capital structure and results in an advantage, it should be considered capital expenditure. The Andhra Pradesh High Court initially supported revenue treatment but later aligned with the capital expenditure view. The Gujarat High Court and Bombay High Court also held similar opinions, considering such expenditures as capital in nature.The Supreme Court concluded that the fee paid for expanding the company's capital base was directly linked to capital expenditure and retained the character of a capital expense. Despite potential business benefits, the expenditure was primarily for capital expansion. Therefore, the Court favored the Revenue's position over the assessee's claim, aligning with the High Courts that viewed such expenses as capital in nature.In the final judgment, the Supreme Court ruled in favor of the Revenue, stating that the expenditure for enhancing the capital base should be treated as capital expenditure. The tax reference was answered accordingly, with no order as to costs.