AVERY INDIA LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference made at the instance of the assessee, the following questions of law have been referred for the assessment year 1980-81 by the Tribunal under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :

(2.) This reference relates to the income-tax assessment of the assessee-company for the calendar year 1979 corresponding to the assessment year 1980-81. The facts relating to the first question are that the assessee-company, in order to comply with the provisions of the Foreign Exchange Regulation Act, 1973, issued fresh share capital during the relevant previous year with the object of reducing the level of non-resident interest in the equity capital of the company from 60 per cent. to less than 40 per cent. The assessee-company incurred an aggregate expenditure of Rs. 19,36,797 in connection with the issue of shares as aforesaid. The Tribunal held that the share issue expenditure was capital in nature following the decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1987] 167 1TR 365. In that case, the Kerala High Court held that, where the expenditure was incurred for the purpose of changing the capital structure of the assessee-company to suit the requirements of the Foreign Exchange Regulation Act by obtaining shares held by foreigners and transferring them to Indian citizens, the structure, character and status of the assessee-company was changed by the expenditure. The expenditure was incurred for creating or curing or for perfecting title to the share capital of the company in accordance with the requirements of the statute and not for the protection of the business of the company. The expenditure was, accordingly, held to be capital in nature.

(3.) At the hearing before us, Dr. Pal, learned counsel for the assessee, has submitted that the expenditure was incurred in connection with the issue of shares required for the purposes of complying with the provisions of the Foreign Exchange Regulation Act, 1973. When the Foreign Exchange Regulation Act, 1973, came into existence, the assessee-company had to apply to the Reserve Bank of India under Section 29 of the Foreign Exchange Regulation Act for permission to carry on the business. The directors, in their report for the year 1977, pointed out that the Reserve Bank of India had granted permission to the company to carry on the business under Section 29 of the Foreign Exchange Regulation Act on the condition that the non-resident interest in the equity capital of the company shall be reduced to a level not exceeding 40 per cent. The directors, in their report for the year 1979, observed that in order to reduce the level of the non-resident interest in the equity capital of the company to slightly below 40 per cent., the shares of Rs. 10 each, at a premium of Rs. 9 per share, were offered to the Indian public. The object of the issue of the said shares, as will appear from the prospectus, was to reduce the non-resident interest in the equity capital of the company to a level not exceeding 40 per cent. in compliance with the direction of the Reserve Bank of India. Dr. Pal, therefore, contends that the object of the issue of the shares is, to reduce the non resident interest in the equity capital of the company in order to comply with the directions of the Reserve Bank of India. The direction of the Reserve Bank of India was, as pointed out earlier, that the company is permitted to continue to carry on the business on the condition that the non-resident interest in the equity capital of the company is reduced to a level not exceeding 40 per cent.