1921 (2) TMI 4

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.... 61,84,848 earned in the previous year 1918-19. The Company claimed to deduct from this amount the sum of Rs. 28,00,000 paid to the under-writers on an issue of 7,00,000 preference shares of Rs. 100 each, as expenses which could be deducted under Section 9(2)(ix) of the Act. The Collector decided that the Rs. 28,00,000 were in the nature of capital expenditure and that expenditure incurred in connection with procuring capital was not an allowable deduction from profits for income tax purposes. An appeal to the Commissioner of Income Tax was rejected, and a petition to the Chief Revenue Authority to revise the order of the Commissioner was also rejected. The Chief Revenue Authority declined to refer the case to the High Court but by an order....

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....Company's existence. It is difficult to see what warrant there is for such a practice except that, as we are told, it was instituted under the advice of the Advocate General some years ago. If then it is admitted that the cost of raising the original capital cannot be deducted from profits after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the flotation of the Company or thereafter : The Texas Land and Mortgage Co. v. William Holtham (1894) 63 L.J.Q.B. 496. It was never suggested in that case that the expenses incurred in raising debentures were monies wh....

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....they can do so. This appears to me to be the real test. As long as the law allows preliminary expenses and good-will to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery. 4. In my opinion, therefore, these twenty-eight lacs cannot be treated as expenditure (not in the nature of capital expenditure) solely incurred for the purpose of earning the profits of the Company's business. 5. The petitioners must pay the costs of the reference. Each party to pay their own costs of the rule. Shah, J. 6. I agree that the item of twenty-eight lacs of rupees cannot be allowed as an item of expenditure under Sec....

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....n the nature of capital expenditure' make the meaning of the expression more elastic in its application to the facts of each case. Having regard to the substance and not merely the form of the matter, I have come to the conclusion that the sum paid is in the nature of capital expenditure. 10. There is no direct authority on this point. I think, however, that the ratio decidendi in The Texas Land and Mortgage Co. v. William Holtham (1894) 63 L.J.Q.B. 496 and the principles underlying the decision in The Royal Insurance Co. v. Watson [1897] A.C.I. lend support to this conclusion. 11. In this view of the matter it is strictly not necessary to consider whether the sum can be held to have been expended solely for the purpose of earning....