TMI Blog1978 (1) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... are. 1970] 0. 1. T. V. IZISHAIGH INVESTMPNT LTI). (Cal.) 063 First above two items of shares were to be delivered in the middle of July, 1956. The shares contracted under the last item were to be delivered by the 23rd August, 1956. The shares under the first two items were delivered piece-meal and the total delivery was completed by the 11 th July, 1956. These were billed at Rs. 23.13. By the company's letter dated 20th August, 1956, addressed to the share-brokers, it was suggested that the amount paid in excess, viz., Rs. 1,49,897, in respect of the first two contracts should be treated as advance payments towards the last contract and to this the broker agreed. At the same time, the assessee by its letter written on the same day pointed out that the delivery of the shares under the last mentioned contract would be taken not on 23rd August, 1956, as originally agreed to, but within the period of 9 months, that is to say, before 23rd May, 1957, and the assessee agreed to pay interest at Rs. 6% per annum on value of the shares from the 23rd August, 1956, to 23rd May, 1957, The reason for postponing the delivery was, it was stated, lack of funds. The interest was calculated at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued on behalf of the assessee that the nature of the transaction was not properly appreciated. It was urged on behalf of the assessee-company that the company had no available funds to take delivery of the shares on the stipulated date that it had agreed to pay the interest in question to the firm of share brokers as an inducement because the rate of purchase mentioned in the contract was found to be advantageous in view of the rising market and the fulfilment of the contract on a deferred date, even at the cost of paying the interest in question, was found profitable by the company. In the premises, it was urged that the payment of interest was definitely for the purpose of the company's business. On behalf of the revenue, it was argued that the arrangement for deferred delivery did not relate to the creation of any debt in favour of the share-brokers and, therefore, payment of interest did not constitute an expenditure laid out wholly and exclusively for the purpose of the company's business. The Tribunal rejected the revenue's point of view on the ground that the shares in question were stock-in-trade of the assessee-company and it was an arrangement with the share-brokers by wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for damages would have arisen. It appears, therefore, that in order to keep alive the contract which ensured the supply of the stock-in-trade, these payments had been incurred. Whether a particular expenditure is a revenue expenditure or a capital expenditure has to be determined by the application of well-known principles. While the principles are clear, their application to the particular facts of the case often present certain difficulties. In a given case of this type, one has to bear in mind the demarcation whether the payment was incurred in order to ensure the source of stock-in-trade or to obtain the stock-in-trade themselves. If the payment was to ensure the source of stock-in-trade then the expenditure incurred for that purpose would be capital expenditure. If, on the other hand, payments are made to obtain stock-in-trade under a source arranged for, then such payments would be payments for the supply of stock-in-trade and for carrying on the business. In the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, 53 the Supreme Court observed as follows : " In considering whether expenditure is revenue expenditure, the court has to consider the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the Excess Profits Duty was a tax on a continuing business, and that for the purposes of the question at issue the change of ownership should be disregarded. At page 282 of the report, Viscount Haldane observed as follows : " My Lords, profit may be produced in two ways. It may result from purchases on income account, the cost of which is debited to that account, and the prices realised therefrom are credited, or it may result from realisation at a profit of assets forming part of the concern. In such a case a prudent man of business will no doubt debit to profit and loss the value of capital assets realised, and take credit only for the balance. But what was the nature of what the appellant here had to deal with ? He had bought as part of the capital of the business his father's contracts. These enabled him to purchase coal from the colliery owners at what we were told was a very advantageous price, about fourteen shillings per ton. He was able to buy at this price because the right to do so was part of the assets of the business. Was it circulating capital ? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirements of the taxpayers' business make it expedient to do so?" Reference in this connection may also be made to the observations of Lord Greene M.R. in the case of Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. [1942] 24 TC 453, 460; [1943] 11 ITR (Suppl.) 10, 16 (CA). The true test, therefore, is whether by the payment in question, with which we are concerned in the instant reference, the assessee was purchasing the raw materials or the stock-in-trade, namely, the shares or whether the assessee was ensuring a source from which he could derive raw materials or stock-in-trade. It is true that by keeping the contract alive the assessee had deferred the supply of the stock-in-trade in order to be able to mobilise the funds in which the assessee was admittedly lacking. But by the contract the assessee was getting the supply itself. It was not a case of a contract which ensured supplies at a future time. It was a case of a contract under which the assessee acquired the very stock-in-trade. In order to keep alive that contract, which the assessee had entered into previously when the prices were low, the assessee agreed to pay the interest for its failure to pay the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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