Revenue expenditure principle applied to advice for reducing foreign shareholding and continuing business operations

Expenditure incurred to obtain advice and effect dilution of foreign shareholding so as to comply with foreign exchange restrictions and continue business was held to be revenue in nature. The payments were not referable to any transfer of the business or acquisition or improvement of a fixed capital asset; they were made in the course of business to protect and maintain trading operations. Applying the capital-versus-revenue principle, the outlay was therefore allowable as a deduction.

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Issues: Whether the expenditure incurred for obtaining advice and effecting dilution of foreign shareholding, so as to comply with the foreign exchange restrictions and continue the business, was capital expenditure or revenue expenditure and was therefore allowable as a deduction.

Analysis: The expenditure was incurred to secure advice for reducing the foreign shareholding to the requisite level so that the assessee could continue its business. The liability did not arise from any transfer of the business or from the acquisition or improvement of any fixed capital asset. Applying the principle that expenditure incurred to create or improve capital is capital in nature, whereas expenditure incurred to protect or continue the business is revenue in nature, the payments were found to have been made in the course of business for maintaining the assessee's trading operations.

Conclusion: The expenditure was revenue expenditure and was admissible as a deduction in favour of the assessee.

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