Law: Income Tax Act, 1961

Section: 256

Income-tax---Capital or revenue expenditure ---Assessee-company managed by managing agents---Interest in managing agency held by two groups---Rift developing between the two groups---P representing one group appointed as Managing Director resulting in serious disturbances in proper functioning of day-to-day business of company---Consequent litigation resulting in a consent decree by which assessee required to purchase equity shares relating to minority group and effect reduction in capital ---Assessee's working funds affected adversely--¬Assessee issuing fresh equity shares to raise additional capital and incurring share issue expenditure and claiming deduction of same as revenue expenditure---Dispute settled in terms of consent decree had no direct nexus with carrying on of business by assessee--Expenditure incurred for raising additional capital is not revenue expenditure ---Additional capital raised by issue of shares utilised for investment in a project---Expenditure incurred on that account is not revenue expenditure. The assessee-company carried on business in the manufacture of textile and engineering goods and it was being managed by managing agents. The interest in the managing agency firm was held by two groups. There developed a rift between the two ,groups when the Government of India announced the policy of gradual abolition of the managing agency system. P belonging to one group was appointed managing director with the approval of the Central Government as a result of which there were serious disturbances in the proper functioning of the day-to-day business of the company. There was litigation in Court which ended in a consent decree under which the assessee ¬company was required to purchase 30,975 equity shares of the face value of Rs.100 each relating to the minority group at a price of Rs. 206.50 per share and effect suitable reduction in capital. The assessee-company was, thus, required to pay a sum of Rs.63,96,337 in instalments to the minority group of shareholders pursuant to the Court's order. As a consequence, the assessee¬ company's working funds were affected adversely. In order to get over the situation, the assessee-company decided to…

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