1997 (2) TMI 11 - SC - Income Tax

Supreme Court: Expenses for Issuing Shares Not Deductible as Revenue

Brooke Bond India Limited Versus Commissioner of Income-Tax

The Supreme Court upheld the decision that expenses incurred by a public limited company in issuing fresh shares were capital expenditure, not deductible ... Expenses for issue of shares - though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company - Tribunal was not right in sustaining the disallowance Issues:1. Deductibility of expenses incurred in connection with the issue of fresh shares.2. Classification of expenditure as revenue or capital expenditure.Analysis:The appeal in this case involved the question of whether expenses amounting to Rs. 13,99,305 incurred by a public limited company in connection with the issue of fresh shares in 1967 were deductible as revenue expenditure for the assessment year 1969-70. The Income-tax Officer disallowed the deduction, considering the expenditure to be on capital account. This view was upheld by the Appellate Assistant Commissioner, the Tribunal, and the High Court. The High Court, relying on precedents, held that expenses incurred in issuing shares to increase capital constitute capital expenditure, not revenue expenditure. The appellant contended that the High Court erred in this determination, citing various decisions supporting the deductibility of such expenses as revenue expenditure. However, the Supreme Court found no merit in the appeal and dismissed it, emphasizing that expenses directly related to the expansion of the capital base of a company retain the character of capital expenditure, even if they may incidentally aid in business operations and profit-making.In a related case, the Supreme Court had previously considered a similar issue regarding the deductibility of an amount paid for the enhancement of capital as revenue expenditure. The Court observed that such payments directly linked to capital expenditure maintain their capital nature, even if they indirectly benefit the business and profit-making activities. The appellant argued that in cases where capital enhancement aims to provide more working funds for business operations and increased profits, the expenses incurred should be treated as revenue expenditure. However, the Court reiterated that expenses connected to the expansion of the capital base, regardless of their ancillary benefits to business operations, are deemed capital expenditure. The Court emphasized that the purpose of capital expansion, even if intended to facilitate business activities, does not alter the fundamental character of the related expenses as capital in nature.Overall, the judgments in both cases underscore the principle that expenses incurred in connection with the issuance of shares to enhance a company's capital base are classified as capital expenditure, irrespective of any incidental benefits to business operations or profit-making. The decisions emphasize the direct relationship between such expenses and capital expansion, maintaining their capital nature even if they indirectly contribute to business activities.