TMI Blog1979 (2) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... f the machinery, who were abroad, and the bank charged commission at a percentage of the amount guaranteed. This commission totalled to Rs. 33,238.28. It consisted of commission at 1% on the outstanding balance and also of commission guaranteed on the additional liability consequent on devaluation of the Indian rupee. The assessee claimed the aforesaid amount as deduction in its assessment for the assessment year 1968-69, for which the previous year ended on 31st December, 1967. The ITO held that the amount of guarantee commission was capital in nature and, therefore, disallowed it. On appeal, the AAC held that while the expenditure for the purchase of the assets was undoubtedly capital, the expenditure for discharging the liability in instalments could not be regarded as capital expenditure. He, therefore, allowed the expenditure as a revenue outgoing. The department appealed to the Tribunal, and the Tribunal, following the decision of the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48, held that the payment of guarantee commission was concerned with an expenditure incurred by the assessee in connection with purchase of machinery, that it went to inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the matter had to be considered only under s. 5(e). The Supreme Court held that in ordinary commercial practice payment of interest would not be termed as " capital expenditure " and that the expenditure was not also of a personal nature. At page 194, it was observed as follows : " In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts. There is nothing in the Act which prohibits such expenses from being deducted. No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses, and as long as the deductions he claims, apart from any statutory prohibition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act. In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations : both are for the purposes of the plantatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the assets of the assessee-company's business, but that cannot be regarded as a ground for holding that the expenditure fell within section 10(2)(xv). Even in respect of a liability wholly unrelated to the business, it would be open to a creditor to sequester the assets of the assessee's business and such sequestration, may result in stoppage of the operation of the business. Expenditure for satisfying liability unrelated to the business even if incurred for avoiding danger apprehended or real to the conduct of the business cannot be said to be revenue expenditure. Nor can it be said that because a liability has some relation to the business which is carried on, expenditure incurred for satisfaction of such liability is always to be regarded as falling within section 10(2)(xv). Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n loans, even if borrowed for the purchase of capital assets or for capital purposes would all be revenue in nature. However, there is a different line of cases where interest paid or other expenses incurred in the purchase or installation of machinery has been permitted to be capitalised and taken to form part of the actual cost of the machinery for the purposes of depreciation, etc. It is necessary to see under what circumstances this can be done. In CIT v. L. G. Balakrishnan and Bros. (P.) Ltd. [1974] 95 ITR 284 (Mad), a Bench of this court was concerned with a case where the assessee had entered into a collaboration agreement with a West German firm. It incurred a sum of Rs. 42,712 in a tour abroad undertaken by three of the directors and an engineer. A further sum of Rs. 33,000 was incurred by way of interest on the amount borrowed by the assessee for the purchase of the machinery for setting up the factory. The assessee claimed that these amounts of travelling expenses and interest should be added to the cost of the machinery on which depreciation and development rebate should be allowed. The Appellate Tribunal held that the assessee was entitled to capitalise the interest as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost' then it is possible to say that the interest payments in question cannot come in within the expression. The intention of the legislature in using the expression 'actual cost to the assessee' appears to be to take into account the assessee's peculiar position at the time of the purchase of the machinery while granting allowance for depreciation and development rebate. " This decision was cited before the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and was approved. In the case before the Supreme Court, the assessee was a public limited company engaged in the manufacture and sale of sugar. It had borrowed considerable sums of money from the Industrial Finance Corporation of India for the installation of machinery and plant and paid interest on the borrowings. It claimed the interest as an addition to the cost of the machinery and plant, so that depreciation would be admissible on the total amount of outlay including the interest. The Supreme Court quoted practically the same passage from the publication of the Institute of Chartered Accountants as was quoted by this court in CIT v. L. G. Balakrishnan and Bros. (P.) Ltd. [1974] 95 ITR 284 (Mad) and stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement with the LIC under which the LIC was to put up a multistoreyed building in Calcutta and make it available to the assessee for running a hotel. The assessee paid interest on the outlay made by the LIC in accordance with the terms of the agreement with it, and described the amount paid as rent in its profit and loss account, and claimed it as deduction in the computation of the business income. The Calcutta High Court pointed out that the Tribunal had found as a fact that the expenses were not in connection with any business carried on by the assessee in the year in question but were in connection with the setting up of a new hotel which had not commenced business at the end of the relevant previous year, and that in order to be allowable as expenses, it should be in respect of business, which was carried on by the assessee and the profits of which were computed and assessed, and should be incurred after the business was set up. Thus, it is clear from the cases considered above that an expenditure by way of interest or other charges incurred on borrowing of money for purchase of capital assets or other capital purposes, before the commencement of production or commencement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock. The directors passed a resolution that interest on that, stock should be treated as part of the cost of construction and chargeable to capital account during the construction of the works. There was no provision relating to this subject in the memorandum and articles of association. In an action by a shareholder, the question was whether the capitalisation of the interest till each unit of tramway started functioning was proper or not. Warrington J. referred to a number of earlier decisions and observed at page 659 as follows : " In considering the accounts of a company the only principle by which the court can be guided--of course unless there are some express words, express provisions, or express stipulations on the subject--is the consideration what a commercial man, acting fairly and honestly in the conduct of his business, would consider the proper thing to do. " At page 660, it was observed in relation to the case before the court as follows : " In my opinion, that asset which they are so constructing costs them not only the pound 10,000 but the pound 10,000 Plus the amount of interest during the period of construction; and that is what they are out of pocket du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and accordingly did not qualify for the allowance. The distinction between " capital expenditure on the provision of machinery or plant " and " capital cost to the taxpayer " was pointed out as showing that while the one drew a line round the taxpayer and plant, the other confined the limiting curve to the plant itself and that the words in the British statute " expenditure on the provision of " focussed attention only on the plant and the expenditure on the plant. It is in that view that the interest and the commitment charges were not allowed to be capitalised. Thus, the decision is not of assistance to the present case, because of the difference in the language of the statute. The Indian statute focusses attention on the assessee by providing for allowance of depreciation, etc., on the cost of the assets to the assessee. The allowance is not based on the abstract consideration of only the cost of the assets irrespective of the person who actually installed it and utilised it. Having considered the arguments of the learned counsel for the revenue, we may observe that the various decisions bearing on capitalisation of business expenditure have arisen in the different contexts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee placed an order with a British concern for the purchase of machinery worth Rs. 48,00,000. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. The question was whether this guarantee commission was properly capitalised by the assessee enabling it to obtain development rebate allowance on the cost of the asset including the guarantee commission. The Calcutta High Court held that it would be reasonable to conclude that the expenditure incurred by way of guarantee commission was essential for the acquisition of the machinery and should be treated as part of the " actual cost ". The facts themselves are not quite clear from the judgment to examine whether it was a case where the claim was made in respect of a period before commencement of business or after it. The decision is, however, not inconsistent with the assessee's claim in the present case, as it was not held there that the guarantee commission should invariably be capitalised, if it related to machinery--the question of its being revenue expenditure had not to be examined. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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