BROOKE BOND INDIA LTD. vs. COMMISSIONER OF INCOME TAX, WEST BENGAL-III.

CIVIL APPEAL No. 5771/1983Supreme Court[1997] 2 S.C.R. 52427 February 1997Bench: 2 JudgesAuthor: S.C. AGRAWAL, G.B. PATTANAIK BROOKE BOND INDIA LTD.5 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court dismissed the appeal, holding that the expenditure incurred for issuing shares to expand the company's capital base is capital expenditure and not deductible as revenue expenditure. The Court referred to its earlier decision in M/s. Punjab State Industrial Development Corporation Ltd., Chandigarh v. Commissioner of Income Tax, Patiala, which held that fees paid to the Registrar for expansion of the capital base are directly related to capital. The Court reasoned that even if the increase in capital incidentally helps the business and profit-making, the expenditure retains its character as capital expenditure because it is directly related to the expansion of the capital base. The Court found no merit in the assessee's argument that the object of increasing capital for working funds changes the nature of the expenditure, stating that the Punjab State Industrial Development Corporation Ltd. decision clearly indicates that such expenses remain capital in nature. The High Court's decision was affirmed.

What were the facts?

The assessee, Brooke Bond India Ltd., a public limited company, claimed a deduction of Rs. 13,99,305 for expenditure incurred in issuing shares to increase its share capital. This was for the assessment year 1969-70, pertaining to the accounting year ending June 30, 1968. The Income Tax Officer disallowed the deduction, classifying the expenditure as capital in nature. This decision was upheld by the Appellate Assistant Commissioner and the Income Tax Tribunal. The High Court affirmed the Tribunal's view, holding that the expenditure was capital and not revenue. The assessee appealed this decision to the Supreme Court.

What were the issues?

1. Whether the expenditure incurred by the assessee for issuing shares to increase its capital base constitutes revenue expenditure and is therefore deductible, as argued by the assessee, or capital expenditure, as argued by the Revenue. The assessee contended that the expenditure was for increasing working funds to earn more profit and relied on decisions such as Empire Jute Company Ltd. v. Commissioner of Income Tax, Commissioner of Income Tax, Bombay-II v. Associated Cements Co. Ltd., and Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, Gujarat, as well as High Court decisions from Madras, Andhra Pradesh, Kerala, and Karnataka. The Revenue contended that the expenditure was capital in nature, a view supported by the Income Tax Officer, Appellate Assistant Commissioner, Tribunal, and the High Court, which relied on India Cements Ltd. v. Commissioner of Income Tax, Madras.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 261

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A BROOKE BOND INDIA LTD. v. COMMISSIONER OF INCOME TAX, WEST BENGAL-III. FEBRUARY 27, 1997 B (S.C. AGRAWAL AND G.B. PATTANAIK, JJ.] Income Tax Act, 1961-Section 37(1)--Whether expenditure incu"ed for issuing shares for expanding capital base can be treated as revenue expen- diture and therefore allowed as a deductible expense-Held : Expenditure C incumd for issuing shares to expand capital base with the object of having more working funds and eaming more profit is capital expenditure and there- fore not a deductive expense.

The assessee, a public limited company, claimed deduction for the expenditure incurred by it for issuing shares with a view to increase its D share capital for the assessment year 1969-70. The deduction was disal- lowed by the Income Tax Ollicer on the ground that the expenditure incurred by the assessee was on the capital account. This view was allirmed by the Appellate Assistant Commissioner and the Tribunal. On appeal, the High Court, while upholding the view of the Tribunal, held that the E expenditure incurred by the assessee in issuing shares with a view to increase its capital could not amount to revenue expenditure and would fall under

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