TMI Blog1965 (12) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... he case, the Tribunal was right in law in holding that the sum of rupees 84,633 expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ? " The facts and circumstances of the case as stated by the Tribunal in the statement of the case are as follows : The appellant, India Cements Limited, Madras, hereinafter referred to as the assessee, is a public limited company. The question arises in respect of the assessment year 1950-51, accounting period April 1, 1949, to March 31, 1950. During the accounting year it obtained a loan of 40 lakhs of rupees from the Industrial Finance Corporation of India. This loan was secured by a charge on the fixed assets of the company. Since Mr. S. T. Desai, the learned counsel for the respondent, has disputed some facts as stated by the Appellate Tribunal, it would be convenient to give these facts in the words of the Appellate Tribunal. It is stated in the statement of the case that " the proceeds of this loan was utilised to pay off a prior debt of Rs. 25 lakhs due to Messrs. A. F. Harvey Limited and Madurai Mills Limited. It cannot be stated definitely how the balance of Rs. 15 lakhs was used but the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover the entire capital outlay of the company and that the further borrowal of Rs. 25 lakhs was for augmenting the working funds of the company. It appears to us that even at that early stage the money was borrowed and used not for capital purposes but for augmenting the working funds of the company. We, therefore, consider that the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25 lakhs and the balance for working funds and, as such, the whole of the amount was purely for the purposes of augmenting the working capital of the company and that it could not be stated that it was used for capital purposes. In this view of the matter, we hold that the money expended in obtaining the loan is an allowable expenditure." The High Court, after noticing the findings of the Income-tax Officer and the Tribunal, preferred the findings of fact made by the Income-tax Officer. It observed : "At this stage, we may point out that the conclusion reached by the Tribunal that the money was borrowed only for working expenses and not for capital investment proceeded on an inference based upon the balance-sheet. The Tribunal did not investigate how the sum of Rs. 25 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y its coming to that conclusion. " The learned counsel for the assessee-company, Mr. A. V. Viswanatha Sastri, urges that the expenditure is admissible as a deduction under section 10(2)(xv) of the Act. He says that the High Court erred in holding that the expenditure was made to acquire any asset or advantage of an enduring nature within the test laid down by Viscount Cave and approved by this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. He further says that what was secured by the expenditure was a loan and in India money expended in raising a loan, whether by means of a debenture or a mortgage and whether you call it a loan capital or not, is not an expenditure in the nature of capital expenditure. He further submits that the expenditure was expended wholly and exclusively for the purpose of the business of the company. The learned counsel for the revenue, Mr. S. T. Desai, supports the reasoning of the High Court. He says that the High Court was right in preferring the findings of the Income-tax Officer on the ground that there was no material for the finding made by the Appellate Tribunal and the finding was based on surmises and material evidence w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... floating capital of the assessee. In ordinary commercial practice payment of interest would not be termed as capital expenditure ". This court further held that the expenditure was for the purpose of business. Mr. Desai tried to distinguish that case on the ground that what was at issue was interest on loan and not expenditure incurred for obtaining the loan. In our opinion, there is no justification for drawing this distinction in India. As observed by Lord Atkinson in Scottish North American Trutst v. Farmer " the interest is, in truth, money paid for the use or hire of an instrument of their trade as much as is the rent paid for their office or the hire paid for a typewriting machine. It is an outgoing by means of which the company procures the use of the thing by which it makes a profit, and like any similar outgoing should be deducted from the receipts, to ascertain the taxable profits and gains which the company earns. Were it otherwise they might be taxed on assumed profits when, in fact, they made a loss ". It will be remembered that there was no section like section 10(2)(iii) of the Act in the English Income Tax Act. On the other hand, there were certain rules prohibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, give rise to a loan. There Shah J. observed : "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, 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." We will now biefly deal with the relevant decisions of the High Courts. The first case referred is In re Tata Iron and Steel Co. Ltd . In that case, the Tata Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to underwriters on an issue of Rs. 7 lakhs preference shares of Rs. 100 each and the company claimed to deduct this amount as expenses under section 9(2)(ix) of the Indian Income-tax Act, 1918 (VII of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of yesterday (Anglo-Continental Guano Works v. Bell). " In the course of arguments, Cave J. had remarked : "It is only so much capital. A man wants to raise pound 1,00,000 of capital, and in order to do that he has to pay pound 4,000. That makes the capital pound 96,000. That is all." In reply to the argument of Finlay Q.C. that " the capital of the company, properly so-called, is the share capital ", Cave J. remarked : " To the extent that you borrow you increase the capital of the company." In our opinion, if one keeps in mind the background of the English Income Tax Act, the observations reproduced above have no relevance to cases arising under the Indian Income-tax Act. In the face of rule 3, Case I, section 100 (5 and 6 Vict., Ch. 35) prohibiting the deduction of any expenditure in respect of any sum employed or intended to be employed as capital, Mathew and Cave JJ. were only concerned with the question whether the amount secured by debentures and the amount obtained by the issue of debentures and debenture stock could be called capital employed or intended to be employed within the meaning of this rule. Rightly or wrongly, the English courts have held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Texas Land and Mortgage Co. v. William Holtham and the decision in Western India Plywood Ltd. v. Commissioner of Income-tax, held that, on the facts and circumstances of that case, brokerage and commission of four annas on every maund of sugar paid by the assessee-company was not revenue expenditure but capital expenditure. In our opinion, the decision, as far as the brokerage was concerned, was wrong, but we do not say anything in this case with respect to the decision as far as the commission on sale of goods was concerned. The Calcutta High Court examined the question in great detail in Sri Annapurna Cotton Mills Ltd. v. Commissioner of Income-tax. Bachawat J. held that the loan of Rs.10 lakhs obtained by the company was an asset or advantage for the enduring benefit of the business of the assessee. He placed reliance on a number of cases, some of which we have already considered. 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 of the assessee. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was rightly held by the Nagpur Judicial Commissioner in Nagpur Electric Light and Power Co. v. Commissioner of Income-tax that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure. 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 a 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). The last contention of Mr. Desai is that even if it is revenue expenditure, it was not laid out wholly and exclusively for the purpose of business. Subba Rao J. reviewed the case law in Commissioner of Income-tax v. Malayalam Plantations and observed as follows : " The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is, wide : it may take in not only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a commercial sense expenditure wholly and exclusively laid out for the purpose of the assessee's business and they were, therefore, deductible revenue expenditure. Before we conclude, we must deal with the point raised by Mr. Sastri that the High Court erred in law in preferring the findings of the Income-tax Officer to that of the Appellate Tribunal. It is not necessary to decide this question but it seems to us that, in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under section 66(1). If he has failed to file an application under section 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other. To conclude, we hold that the expenditure of Rs. 84,633 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. The answer to the question referred, therefore, must be in the affirmative. The appeal is allowed, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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