COMMR OF INCOMETAX Vs. COMMON WEALTH TRUST LTD

JUDGEMENT

(1.) The following questions have been, at the instance of the revenue, referred to us by the Income Tax Appellate Tribunal, Cochin Bench:

(2.) During the accounting year relevant to the assessment year 1978-79, the assessee company which was a non resident company expended Rs.1,38,520/- for payment to ICICI, M/s. Billimoria and Co., and M/s. 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 Income Tax 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 the foreign citizens to Indian citizens and such expenditure was a capital expenditure and, therefore, not deductible as business expenditure. This finding was confirmed by the Commissioner of Income Tax (Appeals). He held that the expenditure directly related to the capital structure of the company and was not a business expenditure. On further appeal by the assessee, the Tribunal, relying upon certain decisions, particularly the decision of the Supreme Court in Dalmia Jain and Co. Ltd. v. 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 alienee'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.) On the admitted facts the expenditure was incurred for the purpose of changing the capital structure of the company to suit the requirements of the Foreign Exchange Regulation Act, 1973, by obtaining the shares held by the foreigners and transferring them to Indian citizens thereby converting what was a non resident company to a resident company. The structure, character and status of the company changed by this expenditure. The expenditure was incurred for creating or curing or perfecting title to the share capital of the company in accordance with the requirements of the statute and not for protection of the business of the company. The expenditure, in our view, was undoubtedly capital expenditure, and therefore not deductible as a business expenditure. In the circumstances, we answer question No. 3 in the negative, that is, in favour of the revenue and against the assessee. The other questions, in the light of this answer, do not require to be answered, and they are not accordingly answered.