Kalpesh Classes

Raising debenture loan​​ 

Expenditure incurred by a company on stamp duty, registration fee, lawyer’s fee, etc., in respect of the issue of debentures by the company to secure a loan, is deductible - Premier Automobiles Ltd. V/s. CIT [1971] 80 ITR 415 (Bom.).

Issue of fresh capital​​ 

Expenditure incurred on issuing shares to increase its share capital by a company is not allowable as revenue expenditure - Brooke Bond India Ltd. V/s. CIT [1997] 91 Taxman 26 (SC).

When an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion)  ​​​​ for treating such an expenditure as properly attributable not to revenue but to capital. But this is not a strait-jacket formula and the question will have to be determined in the backdrop of the facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure.​​ The fees paid to the Registrar of Companies for expansion of the capital base of a company is 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 capital expenditure​​ since the expenditure is directly related to the expansion of the capital base of the company.​​ [1997] 225 ITR 0792- ​​​​ Punjab State Industrial Develoment Corporation Ltd. vs. Commissioner of Income-tax (Supreme Court of India)

Issue of right shares​​ 

Where share issue expenses are treated as capital expenditure, there cannot be any good ground to hold that expenses for issue of additional shares by way of right shares can be treated in any other way. Such expenses are also capital in nature - CIT V/s. Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar.).

Printing charges​​ 

Expenditure incurred on the drafting and printing of the articles of association of a company is deductible - CIT V/s. Wyman Gordon (India) Ltd. [1983] 144 ITR 911 (Bom.).

Test of ‘fixed v. Circulating capital’​​ 

The test of ‘Fixed v. Circulating capital’ also sometimes breaks down because there are many forms of expenditure which do not fall easily within either of the categories and not infrequently the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made out of assets and profits that is made upon assets or with assets.​​ Moreover there may be cases where expenditure though referable to or in connection with fixed capital is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets.​​ This test is therefore clearly not one of universal application - Empire Jute Co. Ltd. V/s. CIT [1980] 124 ITR 1 (SC); CIT V/s. Coal shipments (P) Ltd. [1971]82 ITR 902 (SC).

Expense on issue of bonus shares

The Supreme Court granted leave on the question whether the expenditure incurred in connection with the issuance of bonus shares is a capital expenditure or revenue expenditure. The Supreme Court held as under :

"On the question as to whether the expenses incurred in connection with the issue of bonus shares is a revenue expenditure or a capital expenditure there is a conflict of opinion between the High Courts of Bombay and Calcutta on the one hand and the Gujarat and Andhra Pradesh on the other. The Bombay High Court in Bombay Burmah Trading Corpn. Ltd.’s case (supra) and the Calcutta High Court - Wood Craft products Ltd. v. CIT [1993] 204 ITR 545 - have taken the view that expenses incurred in connection with the issue of bonus share are a revenue expenditure whereas the Gujarat High Court - Ahmedabad Manufacturing & Calico Private Ltd. v. CIT [1986] 162 ITR 800 (Guj.) - and the Andhra Pradesh High Court - Vazir Sultan Co. Ltd. v. CIT [1988] 174 ITR 689 - have held that the issuance of bonus shares increases the issued and paid up capital of the Company and as such it is an advantage of an enduring nature, and is in the nature of a capital expenditure.

Effect of issuance of bonus shares has been explained in Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC). The capital base of the company prior to or after the issuance of bonus shares remain unchanged. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalisation of reserves is merely a reallocation of company’s funds. If that be so, then it cannot be held that the company has a benefit of an enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company.

The view taken by the Bombay and Calcutta High Courts is correct to the effect that the expenditure on issuance of bonus shares is revenue expenditure.​​ The contrary judgments of Gujarat and Andhra Pradesh High Courts are erroneous and do not lay down the correct law."