High Court Of Kerala
Federal Bank Ltd. vs. CIT
Sections 37, 37(1)
Asst. Year 1977-78
K. S. Paripoornan & K. A. Nayar, JJ.
IT Ref. No. 146 of 1983
31st May, 1989
P. Balachandran, for the Assessee : P.K.R. Menon for the Revenue
The applicant herein is an assessee to income-tax. It is a banking company. The Revenue is the respondent. At the instance of the assessee-applicant, the Tribunal has referred the following question of law, for the decision of this Court :
“Whether the Tribunal was right in holding that the filing fee paid under the Companies Act, 1956, in respect of enhancement of authorised capital was not an item of revenue expenditure deductible under s. 37(1) of the Act?”
We are concerned with the asst. yr. 1977-78. During the relevant previous year, the assessee incurred an expenditure of Rs. 7,500 as filing fee with the Registrar of Companies for enhancement of its authorised capital. The ITO disallowed the deduction claimed. In appeal, the CIT (Appeals) held that the assessee (banking company) is different from other companies, that the money raised by enhancing the capital is stock-in-trade in the hands of the assessee and not for the purpose of capital expenditure. He held that by enhancement of the authorised capital, no benefit of an enduring nature was brought into existence. He allowed the deduction claimed. The Revenue took up the matter before the Tribunal. The Appellate Tribunal held that the expenditure should be taken to be related to the capital structure of the company and so it is a capital expenditure. In this view, the deduction of Rs. 7,500 claimed was disallowed. At the instance of the assessee, the Tribunal has referred the question of law, formulated hereinabove, for the decision of this Court.
We heard counsel. Mr. P. Balachandran, counsel for the assessee, submitted that undue emphasis has been placed regarding the concept of enduring benefit or “asset or advantage of an enduring nature” and the notions of “capital” and “revenue” have not been understood in a pragmatic and businesslike manner. The formulation should be flexible so as to respond to the changing needs of the times and the economic realities of the business. In highlighting the above aspects, counsel for the assessee laid stress on the recent decisions of the Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), CIT vs. Associated Cement Companies Ltd. (1980) 70 CTR (SC) 28 : (1988) 172 ITR 257 and A Alembic Chemical Works Co. Ltd. vs. CIT (1989) 17 CTR (SC) 1 : (1989) 177 ITR 377 (SC). It was submitted that similar expenditure has been stated to be revenue expenditure and a permissible deduction by the Madras High Court in CIT vs. Kisenchand Chellaram (India) (P) Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385 (Mad), by the Andhra Pradesh High Court in Warner Hindustan Ltd. vs. CIT (1988) 171 ITR 224 (AP) and the Karnataka High Court in Hindustan Machine Tools Ltd. (No. 3) vs. CIT (1988) 71 CTR (Kar) 66 : (1989) 175 ITR 220 (Kar). On the other hand, counsel for the Revenue submitted that the very fact that the expenditure has been incurred for enhancement of authorised capital shows that the purpose was to augment the capital or to broaden the base of the capital structure and so the expenditure incurred is a capital expenditure. Counsel for the Revenue, Mr. P. K. R. Menon, laid emphasis on the test laid down by Lord Cave regarding “enduring benefit” in British Insulated and Helsby Cables Ltd. vs. Atherton (1926) AC 205 (HL), as also the decision of the Supreme Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) and contended that the expenditure was incurred once and for all with a view to bringing into existence an asset or advantage for the enduring benefit of the assessee and so it is properly attributable to capital. Counsel contended that amounts spent for similar purposes have been held to be only capital expenditure by the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. vs. CIT (No. 2) (1979) 117 ITR 505 ; the Delhi High Court in Bharat Carbon & Ribbon Manufacturing Co. Ltd. vs. CIT (1982) 28 CTR (Cal) 345 : (1981) 127 ITR 239 (Del) ; the Calcutta High Court in Brooke Bond India Ltd. vs. CIT (1983) 140 ITR 272 (Cal) and the Bombay High Court in Bombay Burmah Trading Corporation Ltd. vs. CIT (1984) 145 ITR 793 (Bom).
The distinction between “revenue” and “capital” expenditure is a fine one. No single test or formula is conclusive. The question should be answered in the light of all attendant facts and circumstances. There are innumerable decisions of the Supreme Court and of the High Courts on this question. An appraisal of various decisions will only be a guide or afford a background to approach the question. The recent decision of the Supreme Court in Emprire Jute Co. Ltd. vs. CIT (supra) has surveyed the law on the point in great detail. At page 10, the Court stated the law as follows: “The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem ; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L. C. in Atherton (H. M. Inspector of Taxes) vs. British Insulated and Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned law Lord stated : â. . . 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, I think that 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.” This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure ‘so long as the benefit is not so transitory as to have no endurance at all’. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case . . .”
6. Again at p 13, the Court stated as follows: “When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon J. said in Hallstorm’s Property Ltd. vs. Federal Commissioner of Taxation (72 CLR 634) : âwhat is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process’. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral Part of the Profitearning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business., the expenditure may be regarded as revenue expenditure..”
7. The above approach has been further elaborated in the recent decision of the Supreme Court in Alembic Chemical Works Co. Ltd.’s case (supra). In the said decision, the Supreme Court laid emphasis on the fact that the expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The dichotomy between the “profit-earning process” and “profit earning machinery or apparatus”, the distinction between the expenditure which is only supplemental to the existing
business by way of improvement in the operations of the existing business, its efficiency or profitability or for the better conduct of the business in contradistinction to a “new business” or a “fresh one” were highlighted. It is evident from the approach of the Supreme Court in the recent decision that for a revenue expenditure, what is material to consider is the nature of the advantage in a commercial or practical sense, and not to view the matter in a wooden manner. Viewed in the light of the test laid down by the Supreme Court and the approach to be made in the matter in the recent decisions in Empire Jute Co. Ltd.’s case (supra), Associated Cement Companies Ltd.’s case (supra) and Alembic Chemical Works Co. Ltd.’s case (supra) . We are of the view that the expenditure incurred for the enhancement of authorised capital is only for the purpose of bettering or improving an established business and cannot be said to be for the purpose of a new business. Viewed in a business sense, the enhancement of the authorised capital is only to broaden the capital base which will be conducive to the better conduct and efficiency and profitability of the business.
In this perspective, we are of the view that the expenditure incurred by the assessee is an item of revenue expenditure deductible under s. 37(1) of the IT Act. In view of the approach and dicta contained in the recent Supreme Court decisions aforesaid, we are inclined to concur with the decisions of the Madras, Andhra Pradesh and Karnataka High Courts in Kisenchand Chellaram’s case (supra), Warner Hindustan Ltd.’s case (supra) and Hindustan Machine Tools Ltd.’s case (supra), respectively.
We are of the view that in some of the decisions taking the contrary view, too much emphasis was placed on the concept of enduring benefit or advantage of enduring nature without effectively reckoning the new trends, needs and developments of modern society and the requirements of trade or business in an overall and practical manner. Moreover, the said High Courts had not the benefit of the liberal approach reflected in the recent decisions of the Supreme Court in Empire Jute Co. Ltd.’s case (supra), as further elaborated in Associated Cement Companies Ltd.’s case (supra) and Alembic Chemical Works Co. Ltd.’s case (supra). With great respect to the learned judges, we are not inclined to follow the decisions of the Himachal Pradesh, Delhi, Calcutta and Bombay High Courts mentioned above. We, therefore, answer the question referred to us in the negative, against the Revenue and in favour of the assessee. We hold that the Tribunal was in error in holding that the filing fees paid under the Companies Act, 1956, in respect of enhancement of authorised capital was not an item of revenue expenditure deductible under s. 37 (1) of the IT Act.
[Citation :180 ITR 241]