TMI Blog1997 (9) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... s as a routine business expenditure. (2) Capital expenditure produces benefits for several years whereas revenue expenditure is consumed within a previous year. (3) Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure on the other hand maintains the profit making capacity of a business. In view of these observations the AO found that these are of capital nature and he disallowed the claim of assessee by treating these expenses as capital nature and made an addition of this amount in the income of the assessee. 2. It was argued before the CIT(A) that this amount paid for raising capital was a revenue expenditure and reliance was placed in case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). Reliance was also placed on a decision of the Supreme Court in Jeewan lal (1929) Ltd. v. CIT [1969] 74 ITR 753. 3. The CIT(A) considered these submissions and he did not find any favour to the assessee. He further observed in his order that his predecessor vide his order dated 6-2-91 for A.Ys. 1986-87 and 88-89 in appeal Nos. 370 and 800/89-90 has confirmed these additions by following the judicial pronouncements in Mohan Meakin Breweries Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. First of all we would like to consider the ratio of these decisions as cited by both the parties. 6.1 In case of Mohan Meakin Breweries Ltd. v. CIT [1979] 117 ITR 505 (HP) wherein the Hon'ble Himachal Pradesh High Court has held that--- "By increasing its capital the company would be enabled to hold a more extensive business than it was holding before. Therefore, the increase in the limits of its authorised capital would not only increase its capital but would also result in an advantage of enduring nature. The advantage was so enduring that it would last till the company itself was alive." In this case the Hon'ble High Court distinguished the ratio in the case of India Cements Ltd. wherein the Hon'ble Apex Court has held that--- "A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this court in many cases." The Hon'ble H.P. High Court distinguished the case because the Hon'ble Supreme Court decided the case in case of debentures and not in case of share capital. 6.2 In case of Hindustan Gas Industries Ltd. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for a certain period, and it was irrelevant to consider the object with which the loan was obtained." By making these observations the Hon'ble Supreme Court held that the expenditure made by the assessee for the business purposes was revenue in nature and not capital in nature. 6.8 Now we will consider the ratio of decision of Hon'ble Supreme Court in the case of India Cements Ltd. Brief facts of that case were that the appellant obtained a loan of Rs. 40 lacs from Industrial Finance Corporation of India secured by a charge on its fixed assets. In connection therewith it 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 by the Hon'ble Supreme Court 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 section 10(2)(xv) of the Indian Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e how the distinction is valid under the Indian Income-tax Act. As the decision is mainly based on this distinction and relies, inter alia, on Tata Iron Steel Co. Ltd., In re and Nagpur Electric Light and Power Co. v. CIT we must, with respect, hold that the case was wrongly decided." 6.13 After considering the ratio of Calcutta High Court decision in case of Sri Annapurna Cotton Mills Ltd. v. CIT [1964] 54 ITR 592 the Hon'ble Supreme Court has observed that: "But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit of the business. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this court in many cases." It was further observed that: "we have to decide the case on principle, and with respect it seems to us that he erred in treating the loan as equivalent to capital for the purpose of section 10(2)(xv) of the Act." 6.14 After considering the ratio in case of S.E. Engineers v. CIT [1965] 57 ITR 455 the Bombay High Court has held that: "the expenditure incurred fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in obtaining this loan was revenue in nature. Therefore, the expenditure is deductible while computing the income of the assessee. 6.18 The break-up is not available before us that how much capital was raised through bonds and how much capital was raised through share capital. However, a figure of Rs. 75,64,486 is mentioned as expenditure on bonds in the order of the Tribunal in ITA Nos. 383 384/JP/90 dated 24-6-93 whereas in grounds of appeal before us, the figure is mentioned Rs. 85,77,737. Therefore, the AO is directed that after verification of the correct figure of expenditure made on account of Bonds deduction should be allowed. This ground of the assessee is allowed. 7. In the next ground the assessee has objected the sustenance of addition of Rs. 69,760 on account of Gratuity contribution. The assessee claimed deduction on account of Gratuity fund. The AO disallowed the claim of the assessee as the conditions were not fulfilled as per rules of Income-tax. The Gratuity fund was not approved by the Commissioner of Income-tax till date. Therefore, he disallowed this claim. 8. The CIT(A) upheld the action of the AO by stating that similar additions were disallowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961, will apply and unless the conditions laid down therein are satisfied, the Gratuity amount paid to employees will not be deductible." 12. After going through the ratio of decisions, we feel that the facts of the case are distinguishable as compared to the facts of the case before us. In the instant case, the assessee paid amount in Gratuity fund and the application for approval of the gratuity fund was filed long back and no reply whatsoever has been given by the CIT till date. In our considered view the only inference can be drawn that the CIT approved the Gratuity Fund as he has not rejected the application till date. In view of these facts and circumstances we hold that the amount deposited by the assessee is in approved gratuity fund and, therefore, the deduction is allowable. The AO is directed to allow deduction to the assessee. This ground of the assessee is allowed. 13. The next objection of the assessee is in regard to not allowing Rs. 3,01,127 on account of entertainment expenses. The ITO disallowed the claim of the assessee by stating that entertainment expenses under I.T. Act are not allowable as permissible deduction if they exceed prescribed limit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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