COMMISSIONER OF INCOME TAX Vs. COMMONWEALTH TRUST LIMITED

JUDGEMENT

(1.) THE following questions have been, at the instance of the Revenue referred to us by the Tribunal, Cochin Bench:

(2.) DURING the accounting year relevant to the asst. year 1978 79, the assessee company which was a non resident company expended Rs. 1,38,520 for payment to I.C.I.C.I., Billimoria & Co., and Menon & Menon for professional services rendered in regard to the steps taken for compliance with s. 29 and other provisions of the Foreign Exchange Regulation Act, 1973. This expenditure is referred to by the assessee as " dilution expenses " for Indianisation of the foreign holding as required under the said Act. The assessee claimed this amount as business expenditure deductible under S. 37 of the IT Act, 1961. The claim was disallowed by the officer on the ground that the so called " dilution expenses " were incurred for the purpose of transfer of equity capital held by foreign citizens to Indian citizens and such expenditure was capital expenditure and, therefore, not deductible as business expenditure. This finding was confirmed by the CIT (A). He held that the expenditure directly related to the capital structure of the company and was not business expenditure. On further appeal by the assessee, the Tribunal, relying upon certain decisions, particularly the decision of the Supreme Court in Dalmia Jain & Co. Ltd. vs. CIT (1971) 81 ITR 754 (SC), came to the conclusion, which in our view was totally unwarranted, that the expenditure in question was a business loss and not a capital expenditure. What the Supreme Court stated was that, if litigation expenditure was incurred to create or cure or perfect the assessee's title to capital, it was capital expenditure; whereas if such expenditure was incurred to protect the business of the assessee, it would be deductible as a business expenditure. The former, and not the latter, is the position in the present case.

(3.) WE direct the parties to bear their respective costs in this tax referred case.