TMI Blog1980 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of deferred payments made by the assessee for the purchase of capital equipments and the interest paid to the non-resident firm against such deferred payments were expenses of a revenue nature ?" The assessment years involved are 1962-63, 1963-64, 1964-65 and 1965-66. The assessee-company's business was to mine lead and zinc ores and prepare lead and zinc concentrates As the assessee did not have the plant for processing zinc concentrates, the metal ore was sent to Japan for processing on toll basis and the refined metal was brought back to India and supplied to " Tatas " and " Indian Iron " as per the direction of the Ministry of Commerce and Industry. The assessee took steps for the installation of a zinc smelter factory and applied to the Industrial Finance Corporation of India for a loan for purchasing zinc smelter and also for guaranteeing deferred payment for such purchase. The IFC sanctioned the loan for a sum of Rs. 1 crore and guaranteed for deferred payment to the extent of Rs. 4.5 crores for plant and equipments to be purchased. The loan and the guarantee were to be secured by a mortgage deed in their favour by hypothecating the present and future block assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and loss accounts but debited the same to a suspense account relating to the expansion programme. During the years under appeal the progress with the construction of the factory was going on and it could not be said that the business as such relating to new zinc smelter was actually carried on. The years under appeal were only pre-operational stage in respect of the expansion programme and the expenditure claimed could be allowed only for business which was carried on. But, in the instant case, it could not be said that the business was carried on. The expenditure was, according to the AAC, only in connection with the expansion programme undertaken. He, therefore, upheld the disallowance made by the ITO for the assessment years 1962-63 and 1963-64. For the assessment years 1964-65 and 1965-66, the appeals preferred by the assessee were disposed of by the AAC by two separate orders. It was urged before the AAC in those appeals that zinc refining was not new business but part of the same business of mining and manufacturing of lead, zinc and silver. Further, there was common management and common business organisation and it was only one business. The AAC, by his order dated Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese items of expenditure, according to the Tribunal, did not bring into existence of any asset of a capital nature, because guarantee commission as such did not bring into existence any asset nor did the interest payment. These were related to the debts of the assessee and the Tribunal, relying on the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, held that the allowance or commission or interest should be allowed. So far as the appeals for the assessment years 1962-63 and 1963-64 were concerned, after setting out the relevant contentions, the Tribunal allowed the claim of the assessee. Upon this, both these questions have been referred as directed by this court. Before we deal with the merits of the contentions, we must first deal with one contention raised on behalf of the assessee. On behalf of the assessee, it was contended that the questions, as directed by this court, did not arise from the order of the Tribunal. It was further urged that these questions, namely, whether the expenditure was to be allowed as revenue expenditure or should not be allowed being an expenditure in the nature of capital expenditure, was not canvassed befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal nor considered by it, it would not be a question arising, out of its order notwithstanding that it might arise on the findings given by it. In the case of CIT v. Smt. Anusuya Devi [1968] 68 ITR 750, at p. 756, the Supreme Court held that even though where an order was passed by the High Court calling upon the Tribunal to state case on a question which did not arise out of the order of the Tribunal, the High Court was not bound to advise the Tribunal on that question if the question did not arise out of the order of the Tribunal or it is a question of fact. The Supreme Court reiterated that the High Court might answer only a question referred to it by the Tribunal ; the High Court was not bound to answer a question merely because it was raised and referred. It was well settled, the Supreme Court stated, that the High Court might decline to answer a question of fact or a question of law which was purely academic, or had no bearing on the dispute between the parties or, though referred by the Tribunal, did not arise out of its order. The Supreme Court also emphasised that the High Court might also decline to answer a question arising out of the order of the Tribunal if it was u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture or capital expenditure though it might not have been argued in the same fashion as was canvassed before us in this court. It was looked at as a question whether it formed a part of the same business or it was an expenditure connected with a different business but essentially the question was, on the controversy, whether the expenditure claimed was allowable as revenue or capital expenditure. A different aspect of the same question under a different facet can be agitated if the point was before the Tribunal. In that view of the matter, we are unable to sustain the objection on behalf of the assessee for entering into this question, and we hold that the question, as directed by this court, did arise out of the order of the Tribunal though it was not argued in the manner and form as it was argued before us. Next aspect of the matter is, whether the expenditure mentioned hereinbefore could be allowed as revenue expenditure. On behalf of the revenue, it was argued that it was manifest from the finding of the Tribunal that this was for expansion or installation of a new plant. A plant, it was emphasised, would be a capital asset of enduring advantage. Therefore, it was stressed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact that it was a recurring payment was immaterial because one had to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring benefit was thus of the nature of capital expenditure and was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd incidentals thereto, would be actual cost of the asset and development rebate or investment allowance or depreciation allowance, as the case may be, would be allowable in respect of such expenses. Therefore, these expenses, being expenses which constituted the actual cost of the asset which was of an enduring nature, being a plant, should not be treated as revenue expenditure. About the meaning as to what should be the actual cost of an asset, reliance was placed on the decisions of the Calcutta High Court in the cases of CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799 and CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48, of the Kerala High Court in the case of CIT v. Travancore-Cochin Chemicals Ltd. [1975] 99 ITR 24 [FB] and of the Madras High Court in the cases of CIT v. South India Steels Sugars Ltd. [1977] 109 ITR 341 and Addl. CIT v. Kwality Spinning Mills (P.) Ltd. [1977] 109 ITR 646. The Supreme Court in the case of Challapalli Sugars Ltd. v. CIT and CIT v. Hindustan Petroleum Corporation Ltd. [1975] 98 ITR 167, held that the interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first case is concerned, the Gujarat High Court held that the Supreme Court had held, in the facts and circumstances of the case, that interest paid by the assessee on monies borrowed for the purpose of purchasing plantations was not capital expenditure as no new asset was acquired nor enduring benefit obtained as a result of the payment of interest and that it was an expenditure laid out and expended wholly and exclusively for the purpose of plantations. In the said decision itself, however, it was reiterated that outlay was deemed to be capital, when it was made for the initiation of business, for the extension of a business, or for a substantial replacement of equipment and that expenditure might be treated as properly attributable to capital when it was made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. The Gujarat High Court felt that if these tests should be applied to the borrowing in the present case, it would be apparent that the assessee having acquired with it machinery, which was an equipment of enduring benefit to its manufacturing activity, the entire outlay including interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, dyeing and printing cloth borrowed money in the year of account in order to extend its business, purchased land and erected plant and machinery and paid interest on the borrowed capital. In the relevant assessment year the claim of the assessee to deduction of the interest so paid under s. 10(2)(iii) of the Indian I.T. Act, 1922, was rejected on the ground that the plant and machinery were not used for the business in the year of account. It was held that the assessee was entitled to the deduction claimed, even though the plant and machinery were not used in the year of account. Chief justice Chagla held that where the assessee claimed deduction of interest paid on capital borrowed under s. 10(2)(iii) of the Indian I.T. Act, 1922, similar to s. 36 of the present Act, all that the assessee had to show was that the capital which was borrowed was used for the purpose of the business of the assessee in the relevant year of account. It did not matter whether the capital was borrowed in order to acquire revenue asset or a capital asset. If the capital was used in the year of account and the use was for the purpose of the business of the assessee, it was immaterial whether the user o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. In a recent case, State of Madras v. G. J. Coelho [1964] 53 ITR 186, this court had to consider the permissibility of a deduction under section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955. Section 5(e), it may be observed, is in terms similar to section 10(2)(xv) of the income-tax Act. Section 5 permits deductions of various items of expenditure in the computation of agricultural income. Clause (e) provides for the deduction of any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of plantation. The assessee in that case had purchased an estate consisting of tea, coffee and rubber plantat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved as follows (p. 63): " To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv)." There, the assessee had obtained a loan of Rs. 40 lakhs from the IFC secured by a charge on its fixed assets. In connection therewith it had spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. It was held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for guaranteeing the deferred payments for such purchase. On the facts found by the Tribunal, it was held that this was a part of the same business even though it was acquisition of an asset of some enduring advantage so as to facilitate the carrying on of the business and really for the purpose of the acquisition, a loan, which was a liability, had been incurred and for securing or for continuing the said loan certain commission and interest had to be paid. This, in our opinion, was so integrally and so intimately connected with the profit-earning process of the assessee-company that it should legitimately be considered in accordance with the principles laid down by the Supreme Court to be an expenditure of revenue nature. From this point of view, it is not necessary for us to consider whether it was liable to be disallowed as being part of the actual cost on account of depreciation or development rebate or investment allowance under the relevant sections of the Act. In that view of the matter, we will answer both the questions in the affirmative and in favour of the assessee. In the facts and circumstances of the case, there will be no order as to costs. SUIDHINDRA MOHAN GUH ..... X X X X Extracts X X X X X X X X Extracts X X X X
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