COMMISSIONER OF INCOME-TAX VS GODFRAY PHILLIPS INDIA LTD., 1998 PTD-BOMBAY-HIGH-COURT-INDIA 1140 (1995)

(a) Income-tax---

----Business expenditure---Company---Expenses on share issue to comply with requirement of Government of dilution of foreign shareholding ---To be allowed---Indian Income Tax Act, 1961, S.37(1).

(b) Income-tax---

----Business Expenditure---Disallowance---Expenditure incurred on employee- directors--- Limits indicated in S.40(c) to be taken---Indian Income Tax Act, 1961, S.40(c).

The assessee claimed that in computing the disallowable expenditure in respect of employee-directors the limits under section 40(c) of the Income Tax Act, 1961, had to be considered. The Tribunal accepted the claim. The assessee's claim to deduction of share issue expenses under section 37(1) was not allowed by the Assessing Officer. But the Tribunal allowed its claim. The assessee had made an issue of new shares in the preceding assessment year as a result of the requirement of the Government Authorities under which dilution of foreign shareholding was a pre-requisite for carrying on its business in India. The Amount claimed was a part of the expenditure incurred in connection with the same issue which was made in the preceding assessment year. On a reference:

Held, (i) that the Tribunal was right in allowing deduction claimed by the assessee in respect of expenditure incurred in connection with the very same issue of shares in the present year.

CIT v. Glaxo Laboratories (India) Ltd. (1990) 181 ITR 59 (Bom.) fol. '

(ii) That the Tribunal was right in computing the disallowable expenditure of employee-directors by applying the limits under section 40(c) of the Act and not those under section 40-A(5).

CIT v. Hico Products (P) Ltd. (No.1) (1993) 201 ITR 567 (Bom. fol

T. U Khatri with J. P. Devadhar instructed by Mrs. S. G. Shah for the Commissioner. ,

J.D. Mistry instructed by Crawford Bayley & Co. for the Assessee.

JUDGMENT

DR. B.P. SARAF, J.---By this reference under section 2560) of the Income Tax Act, 1961, made at the instance of the Revenue; the Income-tax Appellate Tribunal has referred the following questions of law for the opinion of this Court:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in computing the disallowable expenditure in respect of the employee-directors the limits under section 40(c) and not those under section 40-A(5) are to be considered?

(2)Whether, on the facts and in the circumstances of the case, the assessee was entitled to the claim that the share issue expenses of Rs.29,021 was an expenditure under section 37(1) of the Income Tax Act, 1961?"

It is fairly conceded by counsel for the revenue that the first question is covered in favour of the assessee by the decision of this Court in CIT v. Hico Products (Pvt.) Ltd. (No. 1) (1993) 201 ITR 567. In view of the above, we answer the first question in the affirmative and in favour of the assessee.

So far as the second question is concerned, learned counsel for the assessee pointed out to us that the expenditure in question is an expenditure of revenue nature. It is also pointed out to us that an issue of new shares was made by the assessee in the preceding assessment year as a result of the requirement of the Government authorities under which dilution of foreign shareholding was pre-requisite for the carrying on of the company's business in India. Part of the expenditure in doing so was incurred in the preceding assessment year which was allowed by the Tribunal. The Revenue did not come in reference against the said order. The amount claimed in this year is a part of the expenditure incurred in connection with the very same issue which was made in the preceding assessment year. Learned counsel submits that the expenditure was allowed in the preceding assessment year, following the ratio of the decision of this Court in CIT v. Glaxo Laboratories (India) Ltd. (1990) 181 ITR 59. In view of the above, we do not find any infirmity in the order of the Tribunal allowing the deduction claimed by the assessee in respect of expenditure of Rs.29,021 in connection with the very same issue in this year also.

In view of the above, question No.2 is answered in the affirmative and in favour of the assessee.

No order as to costs

M.B.A./1438/FC Question answered in affirmative.