Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1980-81 - Assessee incurred expenditure in connection with issue of fresh share capital to comply with Foreign Exchange Regulation Act, 1973 - Whether capital structure of the company was changed by issuance of further share capital and therefore, such expenditure would be on capital account and, not allowable as deduction - Held, yes FACTS-I 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 incurred expenditure 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 ITR 365 . On reference: HELD-I If an expenditure has been made not for the purposes of bringing into existence an asset or advantage for the enduring benefit of the business but for running the business or working it with a view to producing profit, it is a revenue expenditure and the aim and object of the expenditure would determine the character of the expenditure, whether it is a capital or a revenue expenditure. Whether a particular expenditure is revenue expenditure incurred for the purposes of the business must be determined on a consideration of all the facts and circumstances and by the application of the principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for the acquisition of an asset or a right of a permanent character the possession of which is a condition for the carrying on of the business, the expenditure may be regarded as a revenue expenditure. Further, whether or not an expenditure is revenue expenditure or capital…

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