Dipak Kumar Sen, J.
1. Hindusthan Gas & Industries Ltd., the assessee, incurred expenditure of Rs. 10,080 and Rs. 50,687, respectively, for payment of professional charges to its solicitors, Messrs. Orr, Dignam & Co., for preparing a prospectus in connection with the issue of its preference shares and payment of underwriting commission and brokerage for the issue of the same, in the assessment year 1964-65, the corresponding previous year having ended on the 31st March, 1964. In its assessment to income-tax the assessee claimed deduction of the said expenditure from its business income. The ITO disallowed the claim on the ground that the said items were not expenditure of a revenue nature. On appeal, the AAC confirmed the order of the ITO. There was a further appeal by the assessee to the Tribunal. It was contended on behalf of the assessee before the Tribunal, inter alia, that the said amounts of expenditure should be treated as revenue expenditure. It was further contended that the said expenditure was incurred in respect of issue of not equity shares but redeemable preference shares. It was submitted that there was hardly any difference between a debenture and redeemable preference shares and, therefore, on the authority of India Cements Ltd. v. CIT : [1966]60ITR52(SC) , a decision of the Supreme Court, it was submitted that the expenditure incurred in connection with the issue of such shares had to be treated as a revenue expenditure. It was contended on behalf the revenue, on the other hand, that the said item must be treated as having been spent on capital account. The Tribunal accepted the contentions of the revenue and the appeal of the assessee on this point was dismissed.
2. On an application of the assessee under Section 256(2) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising from the order of the Tribunal :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the legal charges of Rs. 10,080 incurred on the issue of a prospectus for offering redeemable preference shares to the public was expenditure of a capital nature.
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 50,687 representing underwriting commission and brokerage paid for the issue of redeemable preference shares was expenditure of capital nature ?'
3. Mr. S. Bhattacharyya, learned counsel for the assessee, rested his submissions entirely on the decision of the Supreme Court in India Cements Ltd.v. CIT : [1966]60ITR52(SC) . The facts in that case were, inter alia, that India Cements Ltd., Madras, a public limited company, the assessee, had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation of India during the relevant accounting year. The loan was secured by a charge on the fixed assets of the assessee. The proceeds of the said loan were partly utilised as working funds. The assessee incurred an expenditure of Rs. 84,633 in connection with the said loan including stamp, registration fees and legal fees, etc. In the accounts, this amount was sought to be appropriated against the profits of the year. The ITO refused to allow the deduction of the said amount on the ground that the loan was utilised on capital assets of the company. The AAC confirmed the order of the ITO. The Tribunal held, on the other hand, that the said expenditure for obtaining the loan was allowable as a deduction. On a reference, the High Court of Madras accepted the view of the ITO and held that, to a large extent, the amount of loan was expended for the purposes of capital nature in order to bring into existence the capital assets and, therefore, the conclusion of the Tribunal was not justified.
4. On a final appeal, the Supreme Court held, inter alia, as follows :
(a) There is no distinction between interest paid on a loan and an expenditure incurred for obtaining a loan.
(b) A loan obtained is not an asset or advantage of an enduring nature.
(c) It is irrelevant to consider the object with which the loan was obtained.
(d) The expenditure for securing the use of money on loan for a certain period is an expenditure of a revenue nature.
5. The Supreme Cout also observed in its judgment that obtaining capital by issue of shares is different from obtaining loan on debentures and that a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee.
6. Mr. Bhattacharyya also drew our attention to the relevant sections of the Companies Act, 1956. Section 80 of the said Act indicates the nature of redeemable preference shares. The section provides that no such share would be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of the redemption and, further, that such shares should not be redeemed unless they are fully paid. Where any shares are redeemed otherwise than out of the proceeds of a fresh issue, then, out of profits which would otherwise be available for dividend, there should be a transfer to a reserve fund to be called the capital redemption reserve account. It is also provided in the said section that redemption of preference shares would not be taken as reducing the amount of the authorised share capital of the company.
7. Mr. Bhattacharyya next drew attention to the English law on the point. He first cited the decision in Isle of Thanet Ellectric Supply Co. Ltd. In re [1949] 2 All ER 1060, for the following observations from the judgment of Sir Raymond Evershed M.R. (at page 1067 of the report):
'I think that, during the sixty years which have passed since Birch v. Cropper [1889] 14 App Cas 525 was before the House of Lords, the view of the courts may have undergone some change in regard to the relative rights of preference and ordinary shareholders--and to the disadvantage of the preference shareholders, whose position has, in that interval of time, become somewhat more approximated to the role which Sir Horace Davey attempted to assign to them, but which Lord Macnaghten rejected in Birch v. Cropper [1889] 14 App Cas 525, namely, that of debenture holders. In his dissenting opinion in the Wilsons and Clyde's case [1949] 1 All ER 1068 ; [1949] AC 462, Lord Morton of Henryton, after citing a passage from Lord Macnaghten's speech in Birch v. Cropper [1889] 14 App Cas 525, based this conclusion on it (ibid, 1086):
'Thus, in the present case the preference stockholders are entitled to share in the surplus assets with the ordinary stockholders in proportion to their respective holdings, unless the articles of the company otherwise provide.' But that view, and that interpretation of Lord Macnaghten's speech, were rejected by the majority of the House of Lords.'
8. Mr. Bhattacharyya also cited passages from Gower's Principles of Modern Company Law, 3rd edn., at pages 358 and 364:
'Finally, they may be of the anomalous type known as redeemable preference shares ; that is to say, they may be repaid, otherwise than on a formal reduction of capital approved by the court, notwithstanding the fundamental principle of the maintenance of share capital. Reference has already been made to this matter in Chapter 6, where it was pointed out that the purity of the latter principle is preserved, in effect if not in name, by the strict provisions contained in Section 58 of the Companies Act, 1948. These only allow redemption either out of profits or out of the proceeds of a fresh issue and, in the former case, require the establishment of a 'capital redemption reserve fund' which is treated as if it were paid-up capital. From the point of view of the holders, however, the similarity to debentures is even more striking than in the case of other preference shares.' (page 358)
'Today, preference shares may be expressly created as redeemable and even if they are not, it seems that they may be redeemed at the option of the company through the medium of a reduction of capital. And, underthe canons of construction finally adopted, the probability is that they will confer only a right to a fixed return of both dividend and capital. In both respects they closely resemble debentures. Though their holders are members of the company, it is usual to deny them voting rights except in special circumstances, so that here too they do not greatly differ from debenture holders. That lawyers have effected a volte face was admitted by Evershed M.R. in In re Isle of Thanet Electric Supply Co. [1949] 2 All ER 1060 when he said :
'I think that during the sixty years which have passed since Birch v. Cropper [1889] 14 App Cas 525 was before the House of Lords, the view of the courts may have undergone some change in regard to the relative rights of preference and ordinary shareholders and to the disadvantage of the preference shareholders whose position has, in that interval of time, become somewhat more approximated to the role which Sir Horace Davey attempted to assign to them, but which Lord Macnaghten rejected in Birch v. Cropper [1889] 14 App Cas 525, namely, that of debenture-holders.' But though they share the disadvantages of debenture-holders they lack their advantages. They can only receive a return on their money if profits are earned and dividends declared, they rank after creditors on a winding up, and they have less effective remedies for enforcing their rights. Suspended midway between true creditors and true members they get the worst of both worlds.' (Page 364);
9. On the authority of the above Mr. Bhattacharyya contended that there was no effective difference between a redeemable preference share and a debenture and, therefore, the principles laid down by the Supreme Court in India Cements Ltd. : [1966]60ITR52(SC) would apply in the case where expenditure was incurred by an assessee in connection with the issue of redeemable preference shares. He submitted that by the issue of redeemable preference shares a company obtained a limited use of money which had to be returned after the prescribed period by redemption of the shares. Instead of interest such shareholders had the right to participate in the profits of the company usually at a fixed rate and if some profits were available such shareholders were also given some priority.
10. Mr. Ajit Sengupta, learned counsel for the revenue, has contended onthe other hand that in law there still remained a distinction between aredeemable preference share, and a debenture though they might be verysimilar to each other. He submitted that a holder of a redeemable preference share was not a creditor of the company nor was the amount contributed by such a shareholder as part of the loan capital of a company.From the point of view of accountancy also the amount represented byredeemable preference shares had to be treated as part of the capital of the company in the balance-sheet and if it was treated otherwise there might be serious complications in the assessment of a company, particularly in assessment of special taxes like surtax, super profits tax, etc.
11. Mr. Sengupta also submitted that the holder of a redeemable preference share did not stand on the same footing as a creditor and could not sue the company for redemption of the shares as an ordinary creditor. In support of his contentions Mr. Sengupta cited the following passages from the 'Company Law' by Robert R. Pennington, 2nd edn. at pages 127-128 and at page 164:
'A shareholder is not a creditor of the company for his share capital, although he undoubtedly has a contractual right to share in the company's assets in a winding up after its creditors have been paid, and if the company has traded successfully, his share may amount to very much more than the money he originally subscribed. The reason why share capital is shown on the liabilities side of the company's balance sheet is that a balance sheet shows what payments would fall to be made out of the company's assets if it were wound up immediately, and one of these payments, is, of course, share capital. It does not follow that all such payments are debts of the company ; share capital is one of the payments which is not.
Share capital, then, is the amount contributed by the shareholders to the company's resources. The money with which the contribution is made becomes the company's property forthwith, but the company does not become the shareholder's debtor for its repayment. The shareholder has a number of contractual and statutory rights against the company, among which are a right to share in its assets when it is wound up, and a right to receive dividends out of its profits when duly declared in accordance with the articles and it is primarily these two rights which give his shares a value, and make them saleable.' (Pages 127-128).
'Unlike 'capital' or 'share capital', the expression 'loan capital' is not a legal term of art, but a commercial expression used to indicate the total amount borrowed by a company otherwise than by short and medium term borrowing. Loan capital will be represented by mortgages, debentures and loan stock, and the law relating to these securities, which is vastly different from that relating to share capital, will be dealt with in Chapter 12. Loan capital appears on the liabilities side of the company's balance sheet beneath share capital and reserves, but unlike share capital, it does represent indebtedness by the company, and holders of loan capital have the remedies of creditors to recover what the company owes them.' (Page 164.)
Consequently, when the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders.'
12. On a consideration of the provisions of the Companies Act, 1956, as also similar provisions in the English company law we cannot persuade ourselves to accept the contentions of the assessee and hold that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures. There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. A debenture-holder as a creditor has a right to sue the company, whereas a shareholder has no such right. Apart from that the scheme of the Companies Act and in particular the forms and contents of its balance-sheets are extremely rigid and, in our view, by reason of the specific compartments in such accounts it is not possible to convert an item of capital into an item of loan as has been suggested on behalf of the assessee,
13. In the instant case, it is the assessee who is claiming a relief or advantage by way of an allowable deduction in respect of an expenditure incurred by it. Therefore, it is strictly for the assessee to establish that the expenditure in respect of which deduction is being claimed is not an expenditure in the nature of a capital expenditure and the assessee cannot claim any benefit of ambiguity or doubt in its favour.
14. For the reasons stated above, the reference is disposed of in favour of the revenue. Both the questions referred are answered in the affirmative. There will be no order as to costs.
Banerji ,J.
15. I agree.