PETITIONER: INDIA CEMENTS LTD., MADRAS Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS DATE OF JUDGMENT: 08/12/1965 BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C. CITATION: 1966 AIR 1053 1966 SCR (2) 944 CITATOR INFO : F 1967 SC 819 (5) R 1969 SC 840 (11) R 1969 SC 946 (5) E 1969 SC1160 (5) D 1975 SC 97 (20) R 1976 SC 772 (6) R 1986 SC1483 (4) ACT: Indian Income-tax Act, 1922, s. 10(2)(xv)-Loan obtained by company-Stamp duty and other expenditure incurred in obtaining the loan-Whether capital or revenue expenditure- Whether laid out for purpose of business. HEADNOTE: During the accounting period relevant for the assessment year 1950-51 the appellant company obtained a loan of 40 lakhs of rupees from the Industrial Finance Corporation of India. The loan was secured by a charge on the fixed assets of the company. A sum of Rs. 84,633 was shown in the Balance Sheet for the said accounting year as mortgage loan expenses; the sum was not charged as expenditure in the profit and loss account. In the accounts for the accounting year ending March 31, 1953, this sum was written off by appropriation against profits of that year. The Income-tax Officer disallowed the deduction; he held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which alone was admissible as a deduction under s. 10(2)(iii). In his view the expenditure was of a capital nature and therefore not admissible under s. 10(2)(xv) either. After intermediate proceedings the High Court in reference gave a finding upholding the view of the Income-tax Officer. The appellant by special leave, came to this Court. It was contended on behalf of the appellant that : (1) the expenditure in question was not incurred to acquire any asset or advantage of an enduring nature; (2) it was applied wholly and exclusively for the purposes of the business; and (3) was admissible as a deduction under S. 10 (2) (xv). HELD : In the circumstances of the case the expenditure in question was revenue expenditure within s. 10(2)(xv). (i)When there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income. On the facts of the instant case, the money secured by the loan was the thing for the use of which this expenditure was made. In principle, apart from any statutory provisions, there is no distinction, as drawn by the Income-tax Officer, between interest in respect of a loan and an expenditure incurred for obtaining the loan. [950 G-H] (ii)A loan obtained cannot 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 it is erroneous to consider a liability as an asset or an advantage. [955 C] (iii)The nature of the expenditure incurred in raising a loan cannot be made to depend on the nature and purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated but the company may after raising the lo-an change its mind and spend it on securing capital assets, [955 11-956 B] 945 (iv)The loan was voluntarily entered into in order to facilitate the running of the business of the company and it could not be said that it was not laid out wholly and exclusively for the purpose of the business. [958 B] Case law considered. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1106 of 1964.
Appeal by special leave from the judgment and order dated
the October 31, 1961 of the Madras High Court in Tax Case
No. 67 of 1958.
A. V. Viswanatha Sastri, R. Venkataraman and R. Gopala-
krishnan, for the appellant.
S. T. Desai, Gopal Singh, B. R. G. K. Achar and R. N.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This appeal by special leave is directed against
the judgment of the High Court of Judicature at Madras
answering the following question of law in favour of the
respondent :
“Whether on the facts and in the circumstances
of the 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
Appellant 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 25 lakhs due to
Messrs A. F. Harvey Limited and Madurai Mills, Limited. It
cannot be stated definitely how the balance of 15 lakhs was
used but the directors, while reporting on the accounts for
the year ended
946
31-3-1949 on 4-10-1949 stated that that was utilised towards
working funds.” The expenditure of Rs. 84,633/- in
connection with this loan was made up of thefollowing items
:
Stamps 60,02300
Registration Fee 16,,06700
Charges for certified copy of
the mortgage deed 2800
Indemnity deed by Essen and
Company, Limited 1500
Vakil’s fee for drafting deed 7,50000
Legal fees 1,00000
Total Rs. 84,633 0 0
The assessee did not charge this expenditure in the profits
and loss account for that year. It was shown in the Balance
Sheet as mortgage loan expenses. It continued to be so
shown till March 31, 1952. In the accounts for March 31,
1953 this was written off by appropriation against the
profits of that year.
The Income Tax Officer refused to allow the deduction of Rs.
84,633/-. He observed
“As per the information furnished by the
auditors, Rs. 25 lakhs of the loan was to be
paid to Messrs A. F. Harvey, Limited, and
Mathurai Mills, Limited in, discharge of the
amount borrowed from them and utilised on the
capital assets of the company.
Though in the Company’s books the amount of
Rs. 84,633 was not charged to revenue but
capitalised and carried forward in the Balance
Sheet, for purposes of income tax, the
Company’s auditors claim the same as an
admissible item of revenue expenditure.”
He held that the expenditure was incurred in obtaining
capital and should be distinguished from interest on
borrowed capital which was alone admissible as a deduction
under S. 10 (2) (iii). According to him, s. 10 (2) (xi)
specifically excludes from consideration any item of capital
expenditure. He further held that the case was not
distinguishable from the decision in The Nagpur Electric
Light and Power Co. v. Commissioner of Income-tax, Central
Provinces(1). The Appellate Assistant Commissioner agreed
with the Income Tax Officer. The Appellate Tribunal
distinguished the case of Nagpur Electric Light and Power
Co.
(1) 6 I.T.C. 28.
947
v. Commissioner of Income Tax(1) on the ground that in the
Nagpur Electric Light(1) case money was expended for
obtaining capital. It observed as follows
“Here we find the position to be different. A
study of the balance-sheets of the company as
at 31-3-1949 discloses the fact that the paid-
up capital was sufficient to cover the entire
capital outlay of the company and that the
further borrowal of Rs. 25 lakhs was for aug-
menting 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 earlier borrowed from A. H.
Harvey and Madurai Mills Ltd. was actually
utilised. Though in the order of the Income-
tax Officer it is found stated that that
amount was utilised on the capital assets of
the company and that statement was based on
the authority of the information furnished by
the auditors of the assessee, the Tribunal
either overlooked or ignored this
circumstance. In the face of the statement so
recorded by the Income-tax Officer, the
Tribunal does not appear to have been
justified in relying upon inferences in
ascertaining whether the earlier borrowal was
on capital or revenue account.”
(1)6 I.T.C. 28.
948
The High Court after reviewing various cases,
observed :
“If we ask for what purpose the expenditure in
the present case was incurred, the only answer
must be that it was incurred for the purpose
of bringing into existence an asset in the
shape of borrowing these Rs. 40 lakhs. The
further question would then be whether this
asset or advantage was not for the enduring
benefit of the business and whether the
expenditure incurred was one which was
incurred once and for all. The answer to both
questions would again be in the affirmative.
It is true that the borrowed money has to be
repaid and it cannot be an enduring advantage
in the sense that the money becomes part of
the assets of the company for all time to
come. But, it certainly is an advantage which
the company derives from the duration of the
loan and undoubtedly it could not have been
for any purpose other than an advantage to the
business that the borrowing was made. That it
is not enduring in the sense that the
borrowing has to be repaid after a short or
long period, as it were, cannot affect the
conclusion that it was nevertheless an asset
or an advantage that was secured. Viewed in
the light of the tests adumbrated in the above
decision Assam Bengal Cement Co. Ltd. v.
Commissioner of Income Tax(1) it seems to us
that the expenditure must be regarded as
capital expenditure. As the facts of the case
which we have set out earlier indicate, there
can be no doubt that at least to the extent of
Rs. 25 lakhs that amount was expended for
purposes of a capital nature, clearly in order
to bring into existence capital assets. We
have also pointed out that though it was
vaguely stated by the Tribunal that the other
sum of Rs. 15 lakhs was utilised as working
funds, there seems to be no material
whatsoever before the Tribunal to justify 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 s. 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(1). He
(1) 27 I.T.R. 34.
949
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 was
ignored. He says that the High Court in a reference is
entitled to ignore any findings of fact made by the
Appellate Tribunal if those findings are vitiated. In the
alternative, he says that the question referred is wide
enough to include the question whether there was any
material for the finding of the Appellate Tribunal. On the
merits he contends that expenditure takes the colour from
the thing on which the expenditure is made. If the money is
spent to obtain capital then the expenditure assumes the
nature of capital expenditure, but if the money is spent to
obtain raw-materials then the expenditure takes the colour
of revenue expenditure. He further says that the borrowed
money is an enduring asset and any expenditure made to
obtain this money falls within the test laid down by
Viscount Cave and approved by this Court.
A number of cases have been referred to during the hearing
of the case by both the counsel but we do not propose to
refer to all of them. We must start first with the cases
decided by this Court and see what principles have been laid
down for distinguishing revenue expenditure from expenditure
in the nature of capital expenditure, and especially those
cases which dealt with similar problems. We will first
consider State of Madras V. G. J. Ceolho(1). This was not a
case arising under the Indian Income Tax Act but under the
Madras Plantations Agricultural Income Tax Act, 1955, in
which a section exactly similar to s. 10 (2) (xv) existed.
In brief, the facts in that case were that the assessee had
borrowed money for the purpose of purchasing the plantations
and he claimed that in computing his agricultural income
from these plantations the entire interest paid by him on
moneys borrowed for the purpose of purchasing the plantation
should be deducted as expenditure, under s. 5(e) of the Act.
In
(1) [1964]8 S.C.R. 60 1 53 I.T.R. 186.
950
the Madras Act there was no provision similar to S. 10(2)
(iii) of the Act and thus interest was not expressly
deductible as an allowance. This Court applied the test
formulated by Viscount ,Cave, L. C., in Atherton v. British
Insulated and Helsby Cables Ltd.(1) and approved by the
Court in Assam Bengal Cement Co. Ltd. v. Commissioner of
Income Tax(1), and held that the payment of interest was a
revenue expenditure. It observed that “no new asset is
acquired with it; no enduring benefit is obtained.
Expenditure incurred was part of circulating or 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 Trust
v. Farmer(1) “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 procured 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 s.
10(2) (iii) of the Act in the English Income Tax Act. On
the other hand, there were certain rules prohibiting the
deduction in respect of “any capital withdrawn from, or any
sum employed or intended to be employed as capital in such
trade. ” or “any interest which might have been made if any
such sums as aforesaid had been laid out at interest.” Lord
Atkinson first held in that case that the express
prohibitions did not apply to the facts of the case and then
proceeded to discuss general principles. These observations
show that where there is no express prohibition, an
outgoing, by means of which an assessee procures the use of
a thing by which it makes a profit, is deductible from the
receipts of the business to ascertain taxable income. On
the facts of this case, the money secured by the loan was
the thing for the use of which this expenditure was made.
In principle, apart from any statutory provisions, we see no
distinction between interest in respect of a loan and an
expenditure incurred for obtaining the loan.
(1) 10 T.C. 155. (2)[1955] 1 S.C.R. 972 :
27 I.T.R. 34.
(3)5 T.C. 693 at 707.
951
Mr. Desai urges that these observations of Lord Atkinson
should be limited to a case where temporary borrowings are
made. It is true that the House of Lords. was dealing with
the case of a company and the moneys that were borrowed were
of a temporary character. But this fact was only relied on
to hold that the moneys secured were not ‘capital’ within
rule 3 of First Case, section 100 (5 and 6 Vic. Ch. 35) of
the Income Tax Act, 1842, for Lord Atkinson observed at p.
706;
“. . . it appears to me, simply, amounts to
this that the word “capital” must, in this
rule, be held to bear a wholly artificial
meaning differing altogether from the ordinary
signification, though there be no context in
the clause requiring that there should be
given to it a meaning different from that
which it bears in ordinary commercial
transactions.”
He then referred to the decision in Bryon v. The
Metropolitan Saloon Omnibus Company(1) to show that the
borrowing by a joint-stock company of money by the issue of
debentures does not amount to an increasing of the capital
of the company.
In Bombay Steam Navigation Co. Ltd. v. Commissioner of
Income Tax(2), this Court again examined the question of
distinguishing between capital expenditure and revenue
expenditure.
This Court first held that on the facts of the case, cl.
(iii) of s. 10(2) did not apply, because the assessee in
that case had agreed to pay the balance of consideration due
by the purchaser and this did not, in truth, give rise to a
loan. Then 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-earing 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:’
(1) 3 D.G. and J. 123. (2) [1965] 1 S.C.R. 770 :
56 I.T.R. 52
L8Sup. Cl/63-14
952
We will now briefly deal with relevant decisions of the High
Courts. The first case referred is In re Tata Iron and
Steel Company Ltd.(1) 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
7 lakhs preference shares of Rs. 100/- each and the company
claimed to deduct this amount as expenses under S. 9 (2)
(ix) of the Indian Income Tax Act (VII of 1918). Macleod,
C.J., observed:
“If it is admitted that the cost of raising
the original capital cannot be deducted from
profit after the first year, it is dffficult
to see how the cost of raising additional
capital can be treated in a different way.
Expenses incurred in raising capital are
expenses of exactly the same character whether
the capital is raised at the flotation of the
company or thereafter : The Texas Land and
Mortgage Company v. William Holtham (2)”.
He further observed that “as long as the law allows
preliminary expenses and goodwill to be treated as assets,
although of an intangible nature, the money so spent is in
the nature of capital expenditure just as much as money
spent in the purchase of land and machinery.” The Chief
Justice accordingly held that Rs. 28 lakhs could not be
treated as expenditure (not in the nature of capital
expenditure) solely incurred for the purpose of earning the
profits of the company’s business. Shah, J., also came to
the same conclusion, and he thought that the ratio decidendi
in Texas Land and Mortgage Company v. William Holtham (2 )
and the principles underlying the decision in Royal
Insurance Company v. Watson(1) lent support to this
conclusion.
At this stage it would be convenient to consider the Case of
Texas Land and Mortgage Company v. William Holtham (2)
relied on in this decision. We have already mentioned that
the statute law in England is different from the law in
India and the observations of the learned Judges in the
English cases must be appreciated in the light of the
background of the English Income Tax Act. In this case a
mortgage company had raised money by the issue of debentures
and debenture stock and incurred expenses for the issue of
mortgage and placing of such debentures and debenture-stock.
The Company claimed to deduct these expenses but the High
Court held that the expenses could not be deducted under
Schedule D of the English Income Tax Act as trading ex-
(1) 1 I.T.C. 125.
(3) [1897] A.C. 1
(2) 3 T.C. 2S5.
953
penses. Mathew, J., gave the following reasons for
disallowing the claim:
“The amount paid in order to raise the money
on debentures, comes off the ‘amount advanced
upon the debentures, and, therefore, is so
much paid for the cost of getting it, but
there cannot be one law for a company having
sufficient money to carry on all its
operations and another which is content to pay
for the accommodation. This appears to me to
be entirely concluded by the decision of
yesterday. (Anglo-Continental Guano Works v.
Bell(1)”.
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 face of rule 3, Case 1, S. 100 (5 & 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 that the amount
obtained by the issue of debentures is capital employed
within the meaning of the rule, but this does not give us
any guidance in interpreting the words ‘capital expenditure’
occurring in s. 10 (2) (xv) of the Act. In our opinion, the
Bombay High Court was wrong in relying on Texas Land and
Mortgage Company v. William Holtham(2). But we do not say
that the Tata Iron and Steel
(1) 3 T.C. 239. (2) 3
T.C. 255.
954
Co. (1) case was wrongly decided. Obtaining capital by
issue of shares is different from obtaining loan by
debentures.
In Nagpur Electric & Light Co. v. Commissioner of Income
Tax(1), the Court of the Judicial Commissioner, Nagpur, held
that expenses for raising debenture loan required for
changing the system of supplying current from D.C. to A.C.
and for discharging a prior loan was not allowable as
deduction of the company’s assessable income. The Judicial
Commissioner followed the case of Texas Land and Mortgage
Company v. William Holtham(3) and In re Tata Iron and Steel
Company Ltd.(1). After referring to these two cases, the
only additional reason given was that “apart from authority
it seems to us to stand to reason that money expended in
obtaining capital must be treated as capital expendiure.”
With great respect we must hold that this case was wrongly
decided.
The Kerala High Court in Western India Plywood Ltd.
v.Commissioner of Income Tax, Madras(4)held that the
expenditure incurred by the company a capital expenditure
and was 10(2)(xv). The High Court Trust Company v.
Jackson(5) Du#(1) and some other cases Madras(4) held that
the expenditure raise a loan by debenture was therefore not
deductible under s. relying on European investment and Ascot
Gas Water Heaters v. drew a distinction between the
borrowing of capital and securing merely temporary or
day-to-day accommodation or banking or trading facilities.
According to the High Court, the expenses for borrowing
capital could not be treated as revenue expenditure. This
distinction may be valid in English Law but we are unable to
appreciate 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 In re Tata Iron and
Steel Co. Ltd.(“) and Nagpur Electric and Light Co. v.
Commissioner of Income Tax (2 we must with respect hold that
the case was wrongly decided.
In Vizagapatnam Sugars and Refinery Ltd. v. Commissioner of
Income Tax(“) the Andhra Pradesh High Court relying on Texas
Land and Mortgage Company V. William Holtham(3) and the
decision in Western India Plywood Ltd. v. C.I.T., Madras(4)
held that on the facts and circumstances of that case,
brokerage and commission of four annas on every maund of
sugar paid by
(2) 6 I.T.C. 28. (3) 3 T.C. 255.
(1) 1 I.T.C. 125. (4) 38 I.T.R. 533.
(5) 18 T.C. 1. (6) 24 T.C. 171.
(7) 47 I.T.R. 139.
955
the assessee company was not revenue expenditure but capital
expenditure. In our opinion, the derision, 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(1), 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 down by Viscount Cave and
approved and applied by this Court in many cases. Sinha,
J., after referring to a number of cases, felt that the
raising of capital by issue of debentures was a recognised
mode of raising capital and he felt that the decided cases
had laid down the proposition that borrowing money by the
issue of debentures was an acquisition of capital asset and
that any commission or expenditure incurred in respect
thereof was of a capital nature and not to be considered as
in the nature of revenue. He was impressed by the fact that
not a single case to the contrary was brought to his notice.
But 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 s. 10(2) (xv) of
the Act.
In S. F. Engineer v. Commissioner of income Tax
(2) the Bombay High Court held that the expenditure incurred
for raising loan for the carrying on of a business cannot in
all cases be regarded as an expenditure of a capital nature.
On the facts of the case they held that as construction and
sale of the building was the sole business of the firm and
the building was its stock-intrade, and the loan was raised
and used wholly for the purpose of acquiring this stock-in-
trade and not for obtaining any fixed assets or raising any
initial capital or for expansion of the assessee’s business,
the expenditure incurred for the raising of loan was not an
expenditure of capital nature but revenue expenditure.
Although the conclusion of the High Court was correct, we
are not able to agree with the principle that the nature of
the expenditure incurred in raising a loan would depend upon
the nature and purpose of
(1) 54 I.T.R. 592. (2) 57
I.T.R. 455.
956
the loan. A loan may be intended to be used for the
purchase of raw-material when it is negotiated, but the
company may after raising the loan change its mind and spend
it on securing capital assets. Is the purpose at the time
the loan is negotiated to be taken into consideration or the
purpose for which it is actually used ? Further suppose that
in the accounting year the purpose is to borrow and buy raw-
material but in the assessment year the company finds it
unnecessary to buy raw-material and spends it on capital
assets. Will the income tax officer decide the case with
reference to what happened in the accounting year or what
happened in the assessment year ? In our opinion, it was
rightly held by the Nagpur Judicial Commissioner in Nagpur
Electric Light and Power Co. v. Commissioner of Income
Tax(1) 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 S.
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 Plantation(1) 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 day to day running of a business
but also the rationalisation of its
administration and modernization of its
machinery; it may include measures for the
preservation of the business and for the
protection of its assets and property from
expropriation, coercive process or assertion
of hostile tide; it may also comprehend pay-
ment of statutory dues and taxes imposed as a
precondition to commence or for carrying on of
a business; it may comprehend many other acts
incidental to the carrying on of a business.”
(1) 6 I.T.C. 28. (2) [1964] 7 S.C.R. 693: 53
I.T.R. 140.
957
Mr. Desai says that the act of borrowing money in this case
was not ‘incidental to the carrying on of a business. We
are unable to accept this contention. In Eastern
Investments Ltd. v. Commissioner of Income Tax(“) this Court
held that the Eastern Investments Ltd., an investment
company, when it borrowed money on debentures, the interest
paid by it was incurred solely for the purpose of making or
earning such income, profits or gains within the purview of
S. 12(2) of the Indian Income Tax Act. It held on a review
of the facts that the transaction was voluntarily entered
into in order indirectly to facilitate the running of the
business of the company and was made on the ground of
commercial expediency. This case, in our opinion, directly
covers the present case, although Mr. Desai suggests that
the case of an investment company stands on a different
footing from the case of a manufacturing company. In some
respects, their position may be different but in determining
the question whether raising money is incidental to a
business or not, we cannot discern any difference between an
investment company and a manufacturing company. We may
mention that in that case this Court was not considering
whether the expenditure was in the nature of a capital
expenditure or not, because it was agreed all through that
the expenditure was not in the nature of capital
expenditure, and the only question which this Court dealt
with was whether the expenditure was incurred solely for the
purpose of making or earning income, profits or gains.
The case of Dharamvir Dhir v. Commissioner of Income Tax(1)
also supports the conclusion we have arrived at on this part
of the case. It was held in that case that the payment of
interest and a sum equivalent to 11/16th of the profits of
the business of the assessee in pursuance of an agreement
for obtaining loan from the lender were in a commercial
sense expenditure wholly and exclusively laid out for the
purpose of the assessees 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 s.
66(1). If he has. failed to file an application under
(1) 20 I.T.R. 1. (2) [1961] 3 S.C.R. 359 : 42 I.T.R. 7.
958
S.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, the judgment of the High Court set aside and the
question referred answered in the affirmative. The
appellant will have its costs incurred here and in the High
Court.
Appeal allowed.
959