Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether where expenditure was incurred by assessee company for purpose of changing its capital structure to suit requirement of Foreign Exchange Regulation Act, 1973 and, thereby converting its non-resident status to resident company, it was an expenditure of capital nature, and therefore, not deductible as business expenditure - Held, yes FACTS The assessee which was a non-resident company expended certain amount for professional services rendered in regard to the steps taken for compliance with section 29 and other provisions of the Foreign Exchange Regulation Act, 1973. This expenditure was referred to by the assessee as "dilution expenses" for Indianisation of the foreign holding as required under the said Act. The assessee claimed said amount as business expenditure deductible under section 37. The claim was disallowed by the ITO 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 Commissioner (Appeals). On further appeal, the Tribunal came to the conclusion that the expenditure in question was a business loss and not a capital expenditure. On reference: HELD 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 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 the protection of the business of the company. The expenditure was undoubtedly capital expenditure and, therefore, not deductible as business expenditure. Note : The reference was decided against the assessee-company.…

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