{"id":9840,"date":"1965-12-08T00:00:00","date_gmt":"1965-12-07T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/india-cements-ltd-madras-vs-commissioner-of-income-tax-on-8-december-1965"},"modified":"2018-09-13T02:17:58","modified_gmt":"2018-09-12T20:47:58","slug":"india-cements-ltd-madras-vs-commissioner-of-income-tax-on-8-december-1965","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/india-cements-ltd-madras-vs-commissioner-of-income-tax-on-8-december-1965","title":{"rendered":"India Cements Ltd., Madras vs Commissioner Of Income-Tax, … on 8 December, 1965"},"content":{"rendered":"
Supreme Court of India<\/div>\n
India Cements Ltd., Madras vs Commissioner Of Income-Tax, … on 8 December, 1965<\/div>\n
Equivalent citations: 1966 AIR 1053, \t\t 1966 SCR (2) 944<\/div>\n
Author: S Sikri<\/div>\n
Bench: Sikri, S.M.<\/div>\n
           PETITIONER:\nINDIA CEMENTS LTD., MADRAS\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, MADRAS\n\nDATE OF JUDGMENT:\n08\/12\/1965\n\nBENCH:\nSIKRI, S.M.\nBENCH:\nSIKRI, S.M.\nSUBBARAO, K.\nSHAH, J.C.\n\nCITATION:\n 1966 AIR 1053\t\t  1966 SCR  (2) 944\n CITATOR INFO :\n F\t    1967 SC 819\t (5)\n R\t    1969 SC 840\t (11)\n R\t    1969 SC 946\t (5)\n E\t    1969 SC1160\t (5)\n D\t    1975 SC  97\t (20)\n R\t    1976 SC 772\t (6)\n R\t    1986 SC1483\t (4)\n\n\nACT:\nIndian\tIncome-tax Act, 1922, s. 10(2)(xv)-Loan obtained  by\ncompany-Stamp\tduty  and  other  expenditure  incurred\t  in\nobtaining  the loan-Whether capital or revenue\texpenditure-\nWhether laid out for purpose of business.\n\n\n\nHEADNOTE:\nDuring\tthe  accounting period relevant for  the  assessment\nyear  1950-51  the appellant company obtained a loan  of  40\nlakhs  of rupees from the Industrial Finance Corporation  of\nIndia.\tThe loan was secured by a charge on the fixed assets\nof  the\t company.   A sum of Rs. 84,633\t was  shown  in\t the\nBalance Sheet for the said accounting year as mortgage\tloan\nexpenses;  the\tsum was not charged as\texpenditure  in\t the\nprofit and loss account.  In the accounts for the accounting\nyear  ending  March 31, 1953, this sum was  written  off  by\nappropriation against profits of that year.  The  Income-tax\nOfficer\t  disallowed  the  deduction;  he  held\t  that\t the\nexpenditure was incurred in obtaining capital and should  be\ndistinguished from interest on borrowed capital which  alone\nwas  admissible as a deduction under s. 10(2)(iii).  In\t his\nview  the expenditure was of a capital nature and  therefore\nnot   admissible   under   s.\t10(2)(xv)   either.    After\nintermediate proceedings the High Court in reference gave  a\nfinding\t upholding the view of the Income-tax Officer.\t The\nappellant by special leave, came to this Court.\nIt  was contended on behalf of the appellant that : (1)\t the\nexpenditure  in\t question was not incurred  to\tacquire\t any\nasset or advantage of an enduring nature; (2) it was applied\nwholly and exclusively for the purposes of the business; and\n(3) was admissible as a deduction under S. 10 (2) (xv).\nHELD  : In the circumstances of the case the expenditure  in\nquestion was revenue expenditure within s. 10(2)(xv).\n(i)When\t there\tis no express prohibition, an  outgoing,  by\nmeans  of which an assessee procures the use of a  thing  by\nwhich it makes a profit, is deductible from the receipts  of\nthe  business to ascertain taxable income.  On the facts  of\nthe  instant  case, the money secured by the  loan  was\t the\nthing  for the use of which this expenditure was  made.\t  In\nprinciple, apart from any statutory provisions, there is  no\ndistinction,  as  drawn by the Income-tax  Officer,  between\ninterest  in respect of a loan and an  expenditure  incurred\nfor obtaining the loan. [950 G-H]\n(ii)A  loan  obtained  cannot  be treated  as  an  asset  or\nadvantage  for the enduring benefit of the business  of\t the\nassessee.  A loan is a liability and has to be repaid and it\nis  erroneous  to  consider a liability as an  asset  or  an\nadvantage. [955 C]\n(iii)The  nature  of the expenditure incurred in  raising  a\nloan  cannot be made to depend on the nature and purpose  of\nthe  loan.   A\tloan  may be intended to  be  used  for\t the\npurchase  of  raw  material when it is\tnegotiated  but\t the\ncompany\t may  after raising the lo-an change  its  mind\t and\nspend it on securing capital assets, [955 11-956 B]\n\t\t\t    945\n(iv)The\t loan  was  voluntarily entered\t into  in  order  to\nfacilitate the running of the business of the company and it\ncould  not  be\tsaid that it was not  laid  out\t wholly\t and\nexclusively for the purpose of the business. [958 B]\nCase law considered.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1106 of 1964.
\nAppeal\tby special leave from the judgment and\torder  dated
\nthe  October 31, 1961 of the Madras High Court in  Tax\tCase
\nNo. 67 of 1958.\n<\/p>\n
A.   V.\t Viswanatha Sastri, R. Venkataraman and\t R.  Gopala-
\nkrishnan, for the appellant.\n<\/p>\n
S.   T.\t Desai,\t Gopal Singh, B. R. G. K. Achar\t and  R.  N.
\nSachthey, for the respondent.\n<\/p>\n
The Judgment of the Court was delivered by
\nSikri,\tJ. This appeal by special leave is directed  against
\nthe  judgment  of  the High Court of  Judicature  at  Madras
\nanswering  the\tfollowing question of law in favour  of\t the
\nrespondent :\n<\/p>\n
\t      “Whether on the facts and in the circumstances
\n\t      of the case, the Tribunal was right in law  in
\n\t      holding  that  the  sum  of  rupees   84,633\/-
\n\t      expended by the assessee in obtaining the loan
\n\t      or   any\t part  thereof\t is   an   allowable
\n\t      expenditure ?”\n<\/p><\/blockquote>\n
The  facts  and circumstances of the case as stated  by\t the
\nTribunal  in the statement of the case are as follows :\t The
\nappellant,   India  Cements  Limited,  Madras,\t hereinafter
\nreferred  to as the assessee, is a public  limited  company.
\nThe question arises in respect of the assessment year  1950-
\n51,  accounting\t period\t April 1, 1949 to  March  31,  1950.
\nDuring the accounting year it obtained a loan of 40 lakhs of
\nrupees\tfrom  the Industrial Finance Corporation  of  India.
\nThis loan was secured by a charge on the fixed assets of the
\ncompany.  Since Mr. S. T. Desai, the learned counsel for the
\nrespondent,  has  disputed  some  facts\t as  stated  by\t the
\nAppellant  Tribunal,  it would be convenient to\t give  these
\nfacts in the words of the Appellate Tribunal.  It is  stated
\nin the statement of the case that “the proceeds of this loan
\nwas  utilised  to pay off a prior debt of 25  lakhs  due  to
\nMessrs A. F. Harvey Limited and Madurai Mills, Limited.\t  It
\ncannot be stated definitely how the balance of 15 lakhs\t was
\nused but the directors, while reporting on the accounts\t for
\nthe year ended
\n946<\/span>
\n31-3-1949 on 4-10-1949 stated that that was utilised towards
\nworking\t  funds.”  The\texpenditure  of\t Rs.   84,633\/-\t  in
\nconnection with this loan was made up of thefollowing items
\n:\n<\/p>\n
     Stamps 60,02300
\n     Registration Fee 16,,06700
\n     Charges for certified copy of
\n     the mortgage deed 2800
\n     Indemnity deed by Essen and
\n     Company, Limited 1500
\n     Vakil’s fee for drafting deed 7,50000
\n     Legal fees 1,00000
\n     Total Rs. 84,633  0  0
\nThe assessee did not charge this expenditure in the  profits
\nand loss account for that year.\t It was shown in the Balance
\nSheet  as  mortgage loan expenses.  It continued  to  be  so
\nshown  till March 31, 1952.  In the accounts for  March\t 31,
\n1953  this  was\t written off by\t appropriation\tagainst\t the
\nprofits of that year.\n<\/p><\/blockquote>\n
The Income Tax Officer refused to allow the deduction of Rs.
\n84,633\/-.  He observed
\n\t      “As  per\tthe  information  furnished  by\t the
\n\t      auditors,\t Rs. 25 lakhs of the loan was to  be
\n\t      paid  to\tMessrs A. F.  Harvey,  Limited,\t and
\n\t      Mathurai\tMills, Limited in, discharge of\t the
\n\t      amount borrowed from them and utilised on\t the
\n\t      capital assets of the company.\n<\/p>\n
\t      Though  in the Company’s books the  amount  of
\n\t      Rs.  84,633  was not charged  to\trevenue\t but
\n\t      capitalised and carried forward in the Balance
\n\t      Sheet,   for  purposes  of  income  tax,\t the
\n\t      Company’s\t auditors  claim  the  same  as\t  an
\n\t      admissible item of revenue expenditure.”
\nHe  held  that\tthe expenditure was  incurred  in  obtaining
\ncapital\t and  should  be  distinguished\t from  interest\t  on
\nborrowed  capital which was alone admissible as a  deduction
\nunder  S.  10 (2) (iii).  According to him, s. 10  (2)\t(xi)
\nspecifically excludes from consideration any item of capital
\nexpenditure.   He  further  held  that\tthe  case  was\t not
\ndistinguishable\t from  the decision in The  Nagpur  Electric
\nLight  and Power Co. v. Commissioner of Income-tax,  Central
\nProvinces<\/a>(1).\tThe Appellate Assistant Commissioner  agreed
\nwith  the  Income  Tax\tOfficer.   The\tAppellate   Tribunal
\ndistinguished  the case of Nagpur Electric Light  and  Power
\nCo.\n<\/p>\n
(1)  6 I.T.C. 28.\n<\/p>\n
\t\t\t    947<\/span><\/p>\n
v.   Commissioner of Income Tax(1) on the ground that in the
\nNagpur\tElectric  Light(1)  case  money\t was  expended\t for
\nobtaining capital.  It observed as follows
\n\t      “Here we find the position to be different.  A
\n\t      study of the balance-sheets of the company  as
\n\t      at 31-3-1949 discloses the fact that the paid-
\n\t      up capital was sufficient to cover the  entire
\n\t      capital  outlay  of the company and  that\t the
\n\t      further borrowal of Rs. 25 lakhs was for\taug-
\n\t      menting the working. funds of the company.  It
\n\t      appears  to us that even at that\tearly  stage
\n\t      the  money  was  borrowed\t and  used  not\t for
\n\t      capital\tpurposes  but  for  augmenting\t the
\n\t      working funds of the company.  We,  therefore,
\n\t      consider\tthat the whole of the mortgage\tloan
\n\t      was used firstly to discharge the loan of\t Rs.
\n\t      25  lakhs\t and the balance for  working  funds
\n\t      and,  as\tsuch, the whole of  the\t amount\t was
\n\t      purely  for  the purposes\t of  augmenting\t the
\n\t      working  capital\tof the company and  that
\n\t      it  could not be stated that it was  used\t for
\n\t      capital purposes.\t In this view of the matter,
\n\t      we  hold that the money expended in  obtaining
\n\t      the loan is an allowable expenditure.”
\nThe  High Court, after noticing the findings of\t the  Income
\nTax Officer and the Tribunal preferred the findings of\tfact
\nmade by the Income Tax Officer.\t It observed
\n\t      “At  this\t stage, we may point  out  that\t the
\n\t      conclusion  reached by the Tribunal  that\t the
\n\t      money  was borrowed only for working  expenses
\n\t      and not for capital investment proceeded on an
\n\t      inference\t based upon the balance-sheet.\t The
\n\t      Tribunal\tdid not investigate how the  sum  of
\n\t      Rs.  25  lakhs  earlier borrowed\tfrom  A.  H.
\n\t      Harvey  and  Madurai Mills Ltd.  was  actually
\n\t      utilised.\t Though in the order of the  Income-
\n\t      tax  Officer  it\tis found  stated  that\tthat
\n\t      amount  was utilised on the capital assets  of
\n\t      the  company and that statement was  based  on
\n\t      the authority of the information furnished  by
\n\t      the  auditors  of the assessee,  the  Tribunal
\n\t      either\toverlooked    or    ignored\tthis
\n\t      circumstance.  In the face of the statement so
\n\t      recorded\t by  the  Income-tax  Officer,\t the
\n\t      Tribunal\t does  not  appear  to\t have\tbeen
\n\t      justified\t  in  relying  upon  inferences\t  in
\n\t      ascertaining whether the earlier borrowal\t was
\n\t      on capital or revenue account.”\n<\/p>\n
\t      (1)6 I.T.C. 28.\n<\/p>\n
\t      948<\/span><\/p>\n
\t      The High Court after reviewing various  cases,
\n\t      observed :\n<\/p>\n
\t      “If we ask for what purpose the expenditure in
\n\t      the present case was incurred, the only answer
\n\t      must  be that it was incurred for the  purpose
\n\t      of  bringing  into existence an asset  in\t the
\n\t      shape  of borrowing these Rs. 40\tlakhs.\t The
\n\t      further  question would then be  whether\tthis
\n\t      asset  or advantage was not for  the  enduring
\n\t      benefit  of  the\tbusiness  and  whether\t the
\n\t      expenditure   incurred  was  one\t which\t was
\n\t      incurred once and for all.  The answer to both
\n\t      questions\t would again be in the\taffirmative.
\n\t      It  is true that the borrowed money has to  be
\n\t      repaid and it cannot be an enduring  advantage
\n\t      in  the sense that the money becomes  part  of
\n\t      the  assets  of the company for  all  time  to
\n\t      come.  But, it certainly is an advantage which
\n\t      the  company derives from the duration of\t the
\n\t      loan  and undoubtedly it could not  have\tbeen
\n\t      for any purpose other than an advantage to the
\n\t      business that the borrowing was made.  That it
\n\t      is   not\tenduring  in  the  sense  that\t the
\n\t      borrowing\t has to be repaid after a  short  or
\n\t      long  period,  as it were, cannot\t affect\t the
\n\t      conclusion  that it was nevertheless an  asset
\n\t      or  an advantage that was secured.  Viewed  in
\n\t      the light of the tests adumbrated in the above
\n\t      decision\tAssam  Bengal  Cement  Co.  Ltd.  v.
\n\t      Commissioner  of Income Tax<\/a>(1) it seems to  us
\n\t      that  the\t expenditure  must  be\tregarded  as
\n\t      capital expenditure.  As the facts of the case
\n\t      which we have set out earlier indicate,  there
\n\t      can be no doubt that at least to the extent of
\n\t      Rs.  25  lakhs that amount  was  expended\t for
\n\t      purposes of a capital nature, clearly in order
\n\t      to  bring into existence capital\tassets.\t  We
\n\t      have  also  pointed  out that  though  it\t was
\n\t      vaguely stated by the Tribunal that the  other
\n\t      sum  of Rs. 15 lakhs was utilised\t as  working
\n\t      funds,   there   seems  to  be   no   material
\n\t      whatsoever before the Tribunal to justify\t its
\n\t      coming to that conclusion.”\n<\/p>\n
The  learned  counsel for the assessee company,\t Mr.  A,  V.
\nViswanatha Sastri, urges that the expenditure is  admissible
\nas a deduction under s. 10(2) (xv) of the Act.\tHe says that
\nthe  High  Court erred in holding that the  expenditure\t was
\nmade to acquire any asset or advantage of an enduring nature
\nwithin\tthe test laid down by Viscount Cave and approved  by
\nthis Court in Assam, Bengal Cement Co. Ltd. v.\tCommissioner
\nof Income-Tax<\/a>(1).  He
\n(1) 27 I.T.R. 34.\n<\/p>\n
949<\/span><\/p>\n
further says that what was secured by the expenditure was  a
\nloan and in India money expended in raising a loan,  whether
\nby  means of a debenture or a mortgage and whether you\tcall
\nit  a  loan  capital or not, is not an\texpenditure  in\t the
\nnature of capital expenditure.\tHe further submits that\t the
\nexpenditure  was  expended wholly and  exclusively  for\t the
\npurpose of the business of the company.
\nThe  learned  counsel  for the revenue,\t Mr.  S.  T.  Desai,
\nsupports the reasoning of the High Court.  He says that\t the
\nHigh  Court  was  right in preferring the  findings  of\t the
\nIncome Tax Officer on the ground that there was no  material
\nfor  the  finding  made by the Appellate  Tribunal  and\t the
\nfinding\t was  based on surmises and  material  evidence\t was
\nignored.   He  says that the High Court in  a  reference  is
\nentitled  to  ignore  any  findings  of\t fact  made  by\t the
\nAppellate  Tribunal if those findings are vitiated.  In\t the
\nalternative,  he  says that the question  referred  is\twide
\nenough\tto  include  the  question  whether  there  was\t any
\nmaterial for the finding of the Appellate Tribunal.  On\t the
\nmerits\the contends that expenditure takes the\tcolour\tfrom
\nthe thing on which the expenditure is made.  If the money is
\nspent  to  obtain capital then the expenditure\tassumes\t the
\nnature of capital expenditure, but if the money is spent  to
\nobtain\traw-materials then the expenditure takes the  colour
\nof  revenue expenditure.  He further says that the  borrowed
\nmoney  is  an  enduring asset and any  expenditure  made  to
\nobtain\tthis  money  falls  within the\ttest  laid  down  by
\nViscount Cave and approved by this Court.
\nA  number of cases have been referred to during the  hearing
\nof  the\t case by both the counsel but we do not\t propose  to
\nrefer  to all of them.\tWe must start first with  the  cases
\ndecided by this Court and see what principles have been laid
\ndown for distinguishing revenue expenditure from expenditure
\nin  the nature of capital expenditure, and especially  those
\ncases  which  dealt with similar problems.   We\t will  first
\nconsider State of Madras V. G. J. Ceolho<\/a>(1).  This was not a
\ncase  arising under the Indian Income Tax Act but under\t the
\nMadras\tPlantations  Agricultural Income Tax Act,  1955,  in
\nwhich  a section exactly similar to s. 10 (2) (xv)  existed.
\nIn brief, the facts in that case were that the assessee\t had
\nborrowed money for the purpose of purchasing the plantations
\nand  he\t claimed that in computing his\tagricultural  income
\nfrom  these plantations the entire interest paid by  him  on
\nmoneys borrowed for the purpose of purchasing the plantation
\nshould be deducted as expenditure, under s. 5(e) of the Act.
\nIn
\n(1)  [1964]8 S.C.R. 60 1 53 I.T.R. 186.\n<\/p>\n
950<\/span><\/p>\n
the  Madras Act there was no provision similar to  S.  10(2)\n<\/p>\n
(iii)  of  the\tAct  and thus  interest\t was  not  expressly
\ndeductible  as\tan allowance.  This Court applied  the\ttest
\nformulated by Viscount ,Cave, L. C., in Atherton v.  British
\nInsulated  and\tHelsby Cables Ltd.(1) and  approved  by\t the
\nCourt  in  Assam Bengal Cement Co. Ltd. v.  Commissioner  of
\nIncome\tTax<\/a>(1), and held that the payment of interest was  a
\nrevenue\t expenditure.\tIt observed that “no  new  asset  is
\nacquired   with\t it;  no  enduring  benefit   is   obtained.
\nExpenditure  incurred  was part of circulating\tor  floating
\ncapital\t of the assessee.  In ordinary\tcommercial  practice
\npayment\t  of  interest\twould  not  be\ttermed\tas   capital
\nexpenditure.”  This Court further held that the\t expenditure
\nwas  for  the  purpose\tof business.   Mr.  Desai  tried  to
\ndistinguish  that case on the ground that what was at  issue
\nwas  interest  on  loan and  not  expenditure  incurred\t for
\n,obtaining   the  loan.\t  In  our  opinion,  there   is\t  no
\njustification  for  drawing this distinction in\t India.\t  As
\nobserved  by Lord Atkinson in Scottish North American  Trust
\nv. Farmer(1) “the interest is, in truth, money paid for\t the
\nuse  or hire of an instrument of their trade as much  as  is
\nthe  rent  paid\t for their office or the  hire\tpaid  for  a
\ntypewriting  machine.  It is an outgoing by means  of  which
\nthe Company procured the use of the thing by which it  makes
\na  profit, and like any similar outgoing should be  deducted
\nfrom  the  receipts, to ascertain the  taxable\tprofits\t and
\ngains which the Company earns.\tWere it otherwise they might
\nbe  taxed  on  assumed profits when, in fact,  they  made  a
\nloss.”\n<\/p>\n
It  will  be remembered that there was no  section  like  s.
\n10(2)  (iii) of the Act in the English Income Tax  Act.\t  On
\nthe  other  hand, there were certain rules  prohibiting\t the
\ndeduction in respect of “any capital withdrawn from, or\t any
\nsum  employed or intended to be employed as capital in\tsuch
\ntrade. ” or “any interest which might have been made if\t any
\nsuch sums as aforesaid had been laid out at interest.”\tLord
\nAtkinson   first  held\tin  that  case\tthat   the   express
\nprohibitions did not apply to the facts of the case and then
\nproceeded to discuss general principles.  These observations
\nshow  that  where  there  is  no  express  prohibition,\t  an
\noutgoing, by means of which an assessee procures the use  of
\na  thing by which it makes a profit, is deductible from\t the
\nreceipts  of the business to ascertain taxable\tincome.\t  On
\nthe  facts of this case, the money secured by the  loan\t was
\nthe  thing for the use of which this expenditure  was  made.
\nIn principle, apart from any statutory provisions, we see no
\ndistinction  between  interest in respect of a loan  and  an
\nexpenditure incurred for obtaining the loan.
\n(1) 10 T.C. 155.\t\t   (2)[1955] 1 S.C.R. 972  :
\n27 I.T.R. 34.\n<\/p>\n
(3)5 T.C. 693 at 707.\n<\/p>\n
951<\/span><\/p>\n
Mr.  Desai  urges that these observations of  Lord  Atkinson
\nshould\tbe limited to a case where temporary borrowings\t are
\nmade.  It is true that the House of Lords. was dealing\twith
\nthe case of a company and the moneys that were borrowed were
\nof a temporary character.  But this fact was only relied  on
\nto  hold that the moneys secured were not  ‘capital’  within
\nrule 3 of First Case, section 100 (5 and 6 Vic.\t Ch. 35)  of
\nthe  Income Tax Act, 1842, for Lord Atkinson observed at  p.
\n706;\n<\/p>\n
\t      “.  . . it appears to me, simply,\t amounts  to
\n\t      this  that  the word “capital” must,  in\tthis
\n\t      rule,  be\t held to bear  a  wholly  artificial
\n\t      meaning differing altogether from the ordinary
\n\t      signification,  though there be no context  in
\n\t      the  clause  requiring that  there  should  be
\n\t      given  to\t it a meaning  different  from\tthat
\n\t      which   it   bears  in   ordinary\t  commercial
\n\t      transactions.”\n<\/p><\/blockquote>\n
He   then  referred  to\t the  decision\tin  Bryon   v.\t The
\nMetropolitan  Saloon  Omnibus Company(1) to  show  that\t the
\nborrowing by a joint-stock company of money by the issue  of
\ndebentures  does not amount to an increasing of the  capital
\nof the company.\n<\/p>\n
In  Bombay  Steam  Navigation Co. Ltd.\tv.  Commissioner  of
\nIncome\tTax<\/a>(2),\t this Court again examined the\tquestion  of
\ndistinguishing\tbetween\t capital  expenditure  and   revenue
\nexpenditure.\n<\/p>\n
This  Court  first held that on the facts of the  case,\t cl.\n<\/p>\n
(iii)  of  s. 10(2) did not apply, because the\tassessee  in
\nthat case had agreed to pay the balance of consideration due
\nby the purchaser and this did not, in truth, give rise to  a
\nloan.  Then Shah, J., observed :\n<\/p>\n
\t      “Whether\ta particular expenditure is  revenue
\n\t      expenditure   incurred  for  the\tpurpose\t  of
\n\t      business must be determined on a consideration
\n\t      of all the facts and circumstances, and by the
\n\t      application   of\tprinciples   of\t  commercial
\n\t      trading.\tThe question must ‘be viewed in\t the
\n\t      larger   context\tof  business  necessity\t  or
\n\t      expediency.  If the outgoing or expenditure is
\n\t      so  related to the carrying on or\t conduct  of
\n\t      the  business, that it may be regarded  as  an
\n\t      integral part of the profit-earing process and
\n\t      not for acquisition of an asset or a right  of
\n\t      a permanent character, the possession of which
\n\t      is  a  condition\tof the carrying\t on  of\t the
\n\t      business,\t the expenditure may be regarded  as
\n\t      revenue expenditure:’
\n(1)  3 D.G. and J. 123.\t\t  (2) [1965] 1 S.C.R. 770  :\n<\/p><\/blockquote>\n
56 I.T.R. 52
\nL8Sup.\tCl\/63-14
\n952<\/span>
\nWe will now briefly deal with relevant decisions of the High
\nCourts.\t  The  first case referred is In re  Tata  Iron\t and
\nSteel Company Ltd.(1) In that case, the Tata Iron and  Steel
\nCo.  Ltd.  had incurred an expenditure of Rs.  28  lakhs  as
\nunderwriting commission paid to underwriters on an issue  of
\n7 lakhs preference shares of Rs. 100\/- each and the  company
\nclaimed\t to  deduct this amount as expenses under S.  9\t (2)\n<\/p>\n
(ix)  of the Indian Income Tax Act (VII of 1918).   Macleod,
\nC.J., observed:\n<\/p>\n
\t      “If  it is admitted that the cost\t of  raising
\n\t      the  original capital cannot be deducted\tfrom
\n\t      profit  after the first year, it is  dffficult
\n\t      to  see  how the cost  of\t raising  additional
\n\t      capital  can  be treated in a  different\tway.
\n\t      Expenses\tincurred  in  raising  capital\t are
\n\t      expenses of exactly the same character whether
\n\t      the capital is raised at the flotation of\t the
\n\t      company  or  thereafter : The Texas  Land\t and
\n\t      Mortgage Company v. William Holtham (2)”.\n<\/p><\/blockquote>\n
He  further  observed  that  “as  long\tas  the\t law  allows
\npreliminary  expenses and goodwill to be treated as  assets,
\nalthough  of an intangible nature, the money so spent is  in
\nthe  nature  of capital expenditure just as  much  as  money
\nspent  in  the purchase of land and  machinery.”  The  Chief
\nJustice\t accordingly  held that Rs. 28 lakhs  could  not  be
\ntreated\t as  expenditure  (not\tin  the\t nature\t of  capital
\nexpenditure) solely incurred for the purpose of earning\t the
\nprofits\t of the company’s business.  Shah, J., also came  to
\nthe same conclusion, and he thought that the ratio decidendi
\nin  Texas Land and Mortgage Company v. William Holtham (2  )
\nand   the  principles  underlying  the\tdecision  in   Royal
\nInsurance   Company  v.\t Watson(1)  lent  support  to\tthis
\nconclusion.\n<\/p>\n
At this stage it would be convenient to consider the Case of
\nTexas  Land  and  Mortgage Company v.  William\tHoltham\t (2)
\nrelied on in this decision.  We have already mentioned\tthat
\nthe  statute  law in England is different from\tthe  law  in
\nIndia  and  the observations of the learned  Judges  in\t the
\nEnglish\t cases\tmust  be appreciated in\t the  light  of\t the
\nbackground  of the English Income Tax Act.  In this  case  a
\nmortgage company had raised money by the issue of debentures
\nand  debenture stock and incurred expenses for the issue  of
\nmortgage and placing of such debentures and debenture-stock.
\nThe  Company claimed to deduct these expenses but  the\tHigh
\nCourt  held  that the expenses could not be  deducted  under
\nSchedule D of the English Income Tax Act as trading ex-
\n(1)  1 I.T.C. 125.\n<\/p>\n
(3) [1897] A.C. 1
\n(2) 3 T.C. 2S5.\n<\/p>\n
953<\/span><\/p>\n
penses.\t   Mathew,  J.,\t gave  the  following  reasons\t for
\ndisallowing the claim:\n<\/p>\n
\t      “The  amount paid in order to raise the  money
\n\t      on debentures, comes off the ‘amount  advanced
\n\t      upon  the\t debentures, and, therefore,  is  so
\n\t      much  paid  for the cost of  getting  it,\t but
\n\t      there  cannot be one law for a company  having
\n\t      sufficient   money   to  carry  on   all\t its
\n\t      operations and another which is content to pay
\n\t      for the accommodation.  This appears to me  to
\n\t      be  entirely  concluded  by  the\tdecision  of
\n\t      yesterday.  (Anglo-Continental Guano Works  v.
\n\t      Bell(1)”.\n<\/p><\/blockquote>\n
\t      In  the  course  of arguments,  Cave  J.,\t had
\n\t      remarked
\n\t      “It  is only so much capital.  A man wants  to
\n\t      raise pound 1 00,000 of capital, and in  order
\n\t      to  do that he has to pay\t pound-4,000.\tThat
\n\t      makes the capital pound 96,000.  That is all.”\n<\/p><\/blockquote>\n
In reply to the argument of Finlay, Q.C., that “the  capital
\nof  the, company, properly-so-called, is the share  capital”
\nCave, J. remarked :\n<\/p>\n
\t      “To  the extent that you borrow  you  increase
\n\t      the capital of the company.”\n<\/p>\n
In  our opinion, if one keeps in mind the background of\t the
\nEnglish\t Income Tax Act, the observations  reproduced  above
\nhave  no relevance to cases arising under the Indian  Income
\nTax  Act.   In face of rule 3, Case 1, S. 100 (5 &  6  Vict.
\nCh.  35)  prohibiting the deduction of\tany  expenditure  in
\nrespect\t of any sum employed or intended to be\temployed  as
\ncapital,  Mathew and Cave, JJ. were only concerned with\t the
\nquestion  whether the amount secured by debentures  and\t the
\namount\tobtained  by the issue of debentures  and  debenture
\nstock  could  be called capital employed or intended  to  be
\nemployed  within  the  meaning of  this\t rule.\t Rightly  or
\nwrongly,  the  English\tCourts have  held  that\t the  amount
\nobtained  by  the issue of debentures  is  capital  employed
\nwithin\tthe meaning of the rule, but this does not  give  us
\nany guidance in interpreting the words ‘capital expenditure’
\noccurring in s. 10 (2) (xv) of the Act.\t In our opinion, the
\nBombay\tHigh  Court was wrong in relying on Texas  Land\t and
\nMortgage  Company v. William Holtham(2).  But we do not\t say
\nthat the Tata Iron and Steel
\n(1) 3 T.C. 239.\t\t\t\t\t     (2) 3
\nT.C. 255.\n<\/p>\n
954<\/span><\/p>\n
Co.  (1)  case was wrongly decided.   Obtaining\t capital  by
\nissue  of  shares  is  different  from\tobtaining  loan\t  by
\ndebentures.\n<\/p>\n
In  Nagpur  Electric & Light Co. v. Commissioner  of  Income
\nTax<\/a>(1), the Court of the Judicial Commissioner, Nagpur, held
\nthat  expenses\tfor  raising  debenture\t loan  required\t for
\nchanging  the system of supplying current from D.C. to\tA.C.
\nand  for  discharging  a prior loan  was  not  allowable  as
\ndeduction of the company’s assessable income.  The  Judicial
\nCommissioner  followed the case of Texas Land  and  Mortgage
\nCompany v. William Holtham(3) and In re Tata Iron and  Steel
\nCompany\t Ltd.(1).  After referring to these two\t cases,\t the
\nonly additional reason given was that “apart from  authority
\nit  seems  to us to stand to reason that money\texpended  in
\nobtaining  capital must be treated as  capital\texpendiure.”
\nWith  great respect we must hold that this case was  wrongly
\ndecided.\n<\/p>\n
The  Kerala  High  Court  in  Western  India  Plywood\tLtd.
\nv.Commissioner\t of  Income  Tax,  Madras(4)held  that\t the
\nexpenditure  incurred by the company a\tcapital\t expenditure
\nand  was  10(2)(xv).   The  High  Court\t Trust\tCompany\t  v.
\nJackson(5)  Du#(1) and some other cases Madras(4) held\tthat
\nthe expenditure raise a loan by debenture was therefore\t not
\ndeductible under s. relying on European investment and Ascot
\nGas  Water  Heaters  v.\t drew  a  distinction  between\t the
\nborrowing  of  capital\tand  securing  merely  temporary  or
\nday-to-day  accommodation or banking or trading\t facilities.
\nAccording  to  the High Court, the  expenses  for  borrowing
\ncapital\t could not be treated as revenue expenditure.\tThis
\ndistinction may be valid in English Law but we are unable to
\nappreciate  how\t the distinction is valid under\t the  Indian
\nIncome\tTax  Act.  As the decision is mainly based  on\tthis
\ndistinction  and  relies inter alia on In re Tata  Iron\t and
\nSteel  Co.  Ltd.(“)  and Nagpur Electric and  Light  Co.  v.
\nCommissioner of Income Tax<\/a> (2 we must with respect hold that
\nthe case was wrongly decided.\n<\/p>\n
In Vizagapatnam Sugars and Refinery Ltd. v. Commissioner  of
\nIncome Tax(“) the Andhra Pradesh High Court relying on Texas
\nLand  and  Mortgage Company V. William\tHoltham(3)  and\t the
\ndecision in Western India Plywood Ltd. v. C.I.T.,  Madras(4)
\nheld  that  on\tthe facts and circumstances  of\t that  case,
\nbrokerage  and\tcommission of four annas on every  maund  of
\nsugar paid by
\n     (2) 6 I.T.C. 28.\t (3) 3 T.C. 255.\n<\/p>\n
     (1) 1 I.T.C. 125.\t (4) 38 I.T.R. 533.\n<\/p>\n
     (5) 18 T.C. 1. (6) 24 T.C. 171.\n<\/p>\n
(7)  47 I.T.R. 139.\n<\/p>\n
\t\t\t    955<\/span><\/p>\n
the assessee company was not revenue expenditure but capital
\nexpenditure.   In our opinion, the derision, as far  as\t the
\nbrokerage  was\tconcerned,  was wrong, but  we\tdo  not\t say
\nanything in this case with respect to the decision as far as
\nthe commission on sale of goods was concerned.
\nThe  Calcutta  High  Court examined the\t question  in  great
\ndetail in Sri Annapurna Cotton Mills Ltd. v. Commissioner of
\nIncome\tTax<\/a>(1), Bachawat, J., held that the loan of  Rs.  10
\nlakhs obtained by the company was an asset or advantage\t for
\nthe  enduring benefit of the business of the  assessee.\t  He
\nplaced\treliance on a number of cases,some of which we\thave
\nalready considered.  But we are unable to agree that a\tloan
\nobtained  can  be treated as an asset or advantage  for\t the
\nenduring benefit of the business of the assessee.  A loan is
\na liability and has to be repaid and, in our opinion, it  is
\nerroneous  to  consider\t a  liability  as  an  asset  or  an
\nadvantage  within  the test laid down by Viscount  Cave\t and
\napproved  and applied by this Court in many  cases.   Sinha,
\nJ.,  after  referring to a number of cases,  felt  that\t the
\nraising\t of capital by issue of debentures was a  recognised
\nmode  of raising capital and he felt that the decided  cases
\nhad  laid down the proposition that borrowing money  by\t the
\nissue of debentures was an acquisition of capital asset\t and
\nthat  any  commission  or expenditure  incurred\t in  respect
\nthereof was of a capital nature and not to be considered  as
\nin the nature of revenue.  He was impressed by the fact that
\nnot a single case to the contrary was brought to his notice.
\nBut  we\t have  to decide the case  on  principle,  and\twith
\nrespect it seems to us that he erred in treating the loan as
\nequivalent  to capital for the purpose of s. 10(2)  (xv)  of
\nthe Act.\n<\/p>\n
In   S.\t  F.  Engineer\tv.  Commissioner   of\tincome\t Tax
\n(2) the Bombay High Court held that the expenditure incurred
\nfor raising loan for the carrying on of a business cannot in
\nall cases be regarded as an expenditure of a capital nature.
\nOn the facts of the case they held that as construction\t and
\nsale  of the building was the sole business of the firm\t and
\nthe building was its stock-intrade, and the loan was  raised
\nand used wholly for the purpose of acquiring this  stock-in-
\ntrade and not for obtaining any fixed assets or raising\t any
\ninitial capital or for expansion of the assessee’s business,
\nthe expenditure incurred for the raising of loan was not  an
\nexpenditure  of\t capital  nature  but  revenue\texpenditure.
\nAlthough  the conclusion of the High Court was\tcorrect,  we
\nare not able to agree with the principle that the nature  of
\nthe expenditure incurred in raising a loan would depend upon
\nthe nature and purpose of
\n(1)  54 I.T.R. 592.\t\t\t\t     (2)  57
\nI.T.R. 455.\n<\/p>\n
956<\/span><\/p>\n
the  loan.   A\tloan  may be intended to  be  used  for\t the
\npurchase  of  raw-material when it is  negotiated,  but\t the
\ncompany may after raising the loan change its mind and spend
\nit  on securing capital assets.\t Is the purpose at the\ttime
\nthe loan is negotiated to be taken into consideration or the
\npurpose for which it is actually used ? Further suppose that
\nin the accounting year the purpose is to borrow and buy raw-
\nmaterial  but  in the assessment year the company  finds  it
\nunnecessary  to\t buy raw-material and spends it\t on  capital
\nassets.\t  Will the income tax officer decide the  case\twith
\nreference  to what happened in the accounting year  or\twhat
\nhappened  in  the assessment year ? In our opinion,  it\t was
\nrightly\t held by the Nagpur Judicial Commissioner in  Nagpur
\nElectric  Light\t and  Power Co. v.  Commissioner  of  Income
\nTax<\/a>(1) that the purpose for which the new loan was  required
\nwas irrelevant to the consideration of the question  whether
\nthe   expenditure  for\tobtaining  the\tloan   was   revenue
\nexpenditure or capital expenditure.\n<\/p>\n
To  summarise this part of the case, we are of\tthe  opinion
\nthat  (a) the loan obtained is not an asset or advantage  of
\nan  enduring nature; (b) that the expenditure was  made\t for
\nsecuring  the  use of money for a certain period-,  and\t (c)
\nthat it is irrelevant to consider the object with which\t the
\nloan  was obtained.  Consequently, in the  circumstances  of
\nthe case, the expenditure was revenue expenditure within  S.
\n10(2)(xv).\n<\/p>\n
The  last  contention  of Mr. Desai is that even  if  it  is
\nrevenue\t expenditure,  it  was\tnot  laid  out\twholly\t and
\nexclusively  for  the purpose of business.  Subba  Rao,\t J.,
\nreviewed  the  case  law in Commissioner of  Income  Tax  v.
\nMalayalam Plantation<\/a>(1) and observed as follows :\n<\/p>\n
\t      “The  expression\t“for  the  purpose  of\t the
\n\t      business”\t  is   wider  in  scope\t  than\t the
\n\t      expression   “for\t the  purpose\tof   earning
\n\t      profits.”\t Its range is wide : it may take  in
\n\t      not only the day to day running of a  business
\n\t      but   also   the\t rationalisation   of\t its
\n\t      administration   and  modernization   of\t its
\n\t      machinery;  it  may include measures  for\t the
\n\t      preservation  of\tthe  business  and  for\t the
\n\t      protection  of  its assets and  property\tfrom
\n\t      expropriation,  coercive process or  assertion
\n\t      of  hostile tide; it may also comprehend\tpay-
\n\t      ment of statutory dues and taxes imposed as  a
\n\t      precondition to commence or for carrying on of
\n\t      a business; it may comprehend many other\tacts
\n\t      incidental to the carrying on of a business.”\n<\/p><\/blockquote>\n
(1) 6 I.T.C. 28.\t\t(2) [1964] 7 S.C.R. 693:  53
\nI.T.R. 140.\n<\/p>\n
957<\/span><\/p>\n
Mr. Desai says that the act of borrowing money in this\tcase
\nwas  not ‘incidental to the carrying on of a  business.\t  We
\nare   unable   to  accept  this\t contention.\tIn   Eastern
\nInvestments Ltd. v. Commissioner of Income Tax<\/a>(“) this Court
\nheld  that  the\t Eastern  Investments  Ltd.,  an  investment
\ncompany, when it borrowed money on debentures, the  interest
\npaid by it was incurred solely for the purpose of making  or
\nearning such income, profits or gains within the purview  of
\nS. 12(2) of the Indian Income Tax Act.\tIt held on a  review
\nof  the facts that the transaction was\tvoluntarily  entered
\ninto  in order indirectly to facilitate the running  of\t the
\nbusiness  of  the  company and was made\t on  the  ground  of
\ncommercial expediency.\tThis case, in our opinion,  directly
\ncovers\tthe present case, although Mr. Desai  suggests\tthat
\nthe  case  of an investment company stands  on\ta  different
\nfooting\t from the case of a manufacturing company.  In\tsome
\nrespects, their position may be different but in determining
\nthe  question  whether\traising money  is  incidental  to  a
\nbusiness or not, we cannot discern any difference between an
\ninvestment  company  and a manufacturing  company.   We\t may
\nmention\t that  in that case this Court was  not\t considering
\nwhether\t the  expenditure  was in the nature  of  a  capital
\nexpenditure  or not, because it was agreed all through\tthat
\nthe   expenditure   was\t not  in  the  nature\tof   capital
\nexpenditure,  and the only question which this\tCourt  dealt
\nwith was whether the expenditure was incurred solely for the
\npurpose of making or earning income, profits or gains.
\nThe case of Dharamvir Dhir v. Commissioner of Income  Tax<\/a>(1)
\nalso supports the conclusion we have arrived at on this part
\nof  the case.  It was held in that case that the payment  of
\ninterest  and a sum equivalent to 11\/16th of the profits  of
\nthe  business of the assessee in pursuance of  an  agreement
\nfor  obtaining\tloan from the lender were  in  a  commercial
\nsense  expenditure wholly and exclusively laid out  for\t the
\npurpose of the assessees business and they were,  therefore,
\ndeductible revenue expenditure.\n<\/p>\n
Before we conclude we must deal with the point raised by Mr.
\nSastri\tthat the High Court erred in law in  preferring\t the
\nfindings of the Income Tax Officer to that of the  Appellate
\nTribunal.   It is not necessary to decide this question\t but
\nit  seems  to  us that in a reference the  High\t Court\tmust
\naccept\tthe findings of fact made by the Appellate  Tribunal
\nand it is for the person who has applied for a reference  to
\nchallenge  those findings first by an application  under  s.
\n66(1).\tIf he has. failed to file an application under
\n(1)  20 I.T.R. 1. (2) [1961] 3 S.C.R. 359 : 42 I.T.R. 7.\n<\/p>\n
958<\/span><\/p>\n
S.66(1) expressly raising the question about the validity of
\nthe findings of fact, he is not entitled to urge before\t the
\nHigh Court that the findings are vitiated for one reason  or
\nthe other.\n<\/p>\n
To conclude we hold that the expenditure of Rs. 84,633\/- was
\nnot in the nature of capital expenditure and was laid out or
\nexpended  wholly  and  exclusively for the  purpose  of\t the
\nassessee’s  business.  The answer to the question  referred,
\ntherefore,  must  be  in the  affirmative.   The  appeal  is
\nallowed,  the judgment of the High Court set aside  and\t the
\nquestion   referred  answered  in  the\t affirmative.\t The
\nappellant will have its costs incurred here and in the\tHigh
\nCourt.\n<\/p>\n
Appeal allowed.\n<\/p>\n
959<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India India Cements Ltd., Madras vs Commissioner Of Income-Tax, … on 8 December, 1965 Equivalent citations: 1966 AIR 1053, 1966 SCR (2) 944 Author: S Sikri Bench: Sikri, S.M. 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. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-9840","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nIndia Cements Ltd., Madras vs Commissioner Of Income-Tax, ... on 8 December, 1965 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/india-cements-ltd-madras-vs-commissioner-of-income-tax-on-8-december-1965\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"India Cements Ltd., Madras vs Commissioner Of Income-Tax, ... on 8 December, 1965 - 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