COMMISSIONER OF INCOME TAX Vs. HINDUSTAN INSECTICIDES LIMITED

JUDGEMENT

(1.) THESE two reference applications are interlinked as they relate to the same order of the Appellate Tribunal Delhi Bench -C ('Tribunal' in short) dt. 23rd Feb., 1981, in ITA No. 5039 (Del)/1979. Tribunal has referred the following questions for opinion of this Court, under S. 256(1) of the IT Act, 1961 ('the Act' in short) : At the instance of assessee

(2.) FACTUAL position is almost undisputed and is as follows : Assessee is a public limited company and is a Government undertaking. At the relevant point of time it derived income from manufacture and sale of insecticides. Assessee increased its share capital from Rs. 1.30 crores to Rs. 8 crores during the assessment year in question. A sum of Rs. 1,00,500 was paid to the Registrar of Companies as fees for increasing the authorities capital. Assessee claimed that share capital had been increased to provide additional finance for the company's activities and as such the payment of fees was incidental to the assessee's business and it was revenue expenditure. The ITO rejected this stand. He held that it was capital expenditure because it was incurred to increase the share capital. He also rejected assessee's alternative claim for deduction of the amount under S. 35D(2)(iv), on the ground that the expenditure was not connected with the issue of shares for public subscription. Matter was carried in appeal by the assessee before the CIT(A). In agreement with the ITO's view CIT(A) held that assessee was not entitled to claim deduction because the same was incurred to increase the share capital and it has to be treated as capital expenditure. Alternative claim was also rejected by holding that neither s. 35D(2)(c)(iv) nor 35D(2)(c)(iii) had application to the facts of the case. Matter was carried in appeal before the Tribunal. Before the Tribunal, assessee's stand was that the fees paid to the Registrar of companies to increase share capital was revenue expenditure and for the purpose reliance was placed on a decision of the Madras High Court in CIT vs. Kishan Chand Chela Ram India (P) Ltd. (1980) Taxation 59 (3) 125. On the facts it was pleaded that there was similarity with the factual position in the Madras High Court decision and, therefore, claim should have been allowed. In the alternative, it was submitted that assessee was entitled to deduction in terms of s. 35D(2)(c)(iii) and/or S. 35D(2)(c)(iv). Department's stand was that the fees paid to the Registrar of Companies for increasing authorised capital was capital expenditure. Tribunal held that the expenditure was of capital nature but it accepted the assessee's stand that the claim was admissible under S. 35D(2)(iii). Both the assessee and the Revenue moved for references under s. 256(1) of the Act and questions as set out above have been referred for opinion of this Court. We have heard learned counsel for Revenue. There is no appearance on behalf of assessee in spite of notice.

(3.) COMING to the question referred at the instance of Revenue it would be necessary to quote the provision as it stood at the relevant point of time :