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S.F. Engineer and ors. (a Firm) Vs. Commissioner of Income-tax, Bombay City I - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 63 of 1961
Judge
Reported in(1965)67BOMLR394; [1965]57ITR455(Bom)
ActsIncome Tax Act, 1961 - Sections 37
AppellantS.F. Engineer and ors. (a Firm)
RespondentCommissioner of Income-tax, Bombay City I
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
indian income-tax act (xi of 1922), section 10(2)(xv) - loan secured by assesses by mortgage of land and building constructed for sale--expenditure incurred over execution of mortgage--whether such expenditure a deductible revenue expenditure.;the assessee firm which was brought into existence solely for the purpose of constructing a building and selling it, not having sufficient funds for the construction of the building secured a loan from some persons. this loan was secured by executing mortgages of the land and the building under construction in favour of the creditors. the firm incurred a certain expenditure over the execution of the mortgages and in its assessment proceedings for the year 1956-57 it claimed this amount as an admissible deduction against the profits which it had made.....v.s. desai, j.1. the question which the income-tax appellate tribunal has referred to us under section 66(i) of the indian income-tax act, 1922, is : 2. whether, in the computation of its business profits under section 10, the assessee-firm is entitled to a deduction of the sum of rs. 15,172 ?' 3. the assessee-firm consists of three partners and was brought into existence solely for the purpose of constructing a building and selling the same. the firm acquired a piece of land, on which the building was to be constructed, in september, 1946. immediately after its construction it let it out to the government of india with effect from 15th november, 1954, and, ultimately sold it to the government in september, 1955. this business venture of the assessee-firm resulted in some profit, which.....
Judgment:

V.S. Desai, J.

1. The question which the Income-tax Appellate Tribunal has referred to us under section 66(I) of the Indian income-tax Act, 1922, is :

2. Whether, in the computation of its business profits under section 10, the assessee-firm is entitled to a deduction of the sum of Rs. 15,172 ?'

3. The assessee-firm consists of three partners and was brought into existence solely for the purpose of constructing a building and selling the same. The firm acquired a piece of land, on which the building was to be constructed, in September, 1946. Immediately after its construction it let it out to the government of India with effect from 15th November, 1954, and, ultimately sold it to the Government in September, 1955. This business venture of the assessee-firm resulted in some profit, which came to be assessed in the assessment year 1956-57 on the assessee in the status of an unregistered firm. Now, the assessee-firm having started with an initial capital of Rs. 60,000 had not sufficient funds for the construction of the building which it was going to construct. It therefore, secured a loan to the extent of Rs. 2,50,000 from two persons, borrowing 2 lakhs from one of them and Rs. 50,000 from the other and secured the said loans by executing mortgages of the land and the building under construction in favour of the creditors. It incurred a total expenditure of Rs. 15,172 over the execution of the mortgages and its assessment proceedings it claimed this amount as an admissible deduction against the profits from the construction and sale of the building. The departmental authorities held that the amount was not deductible either under section 10(2)(iii) or under section 10(2)(xv) as the expenditure was incurred not on the building but for acquiring loans for financing the building. In the appeal before the Income-tax Appellate Tribunal, the assessee contended that the building, for the construction of which the money was obtained, was the stock-in-trade and the amount taken by way of loan was actually expended on the construction of the building; that no capital asset was brought into existence, as the building constitution the assessee-firm's stock-in-trade and the money having been obtained for the acquisition of the stock-in-trade, the expenditure and not an expenditure of a capital nature. The Tribunal negatived the assessee's contention by holding that the expenditure was incurred solely for the purpose of raising capital and not for the purpose of running of the assessee's business or for acquiring the stock-in-trade. It observed :

4. It was not an expense incurred for the purpose of the assessee's business but for the purpose of enabling it to obtain capital with which the business was to be run. Whether the capital so raised was spent over the stock-in-trade of the assessee or over its capital assets is not all material for determining the admissibility of this expense, the expense having been incurred solely for the purpose of raising capital and not for the purpose of the running of the assessee's business or for acquiring the stock-in-trade.'

5. In other words, the view taken by the Tribunal was that the expenditure incurred in raising the loan was not a part of the activity of the assessee in running the business, though the loan itself was used for the purpose of the business, the expenditure incurred for raising the loan, therefore, could not be regarded as expenditure for the running of the business and for the purpose of obtaining profits and gains, and could not, therefore, be regarded as a deductible expenditure under section 10(2)(xv). The Tribunal was of the opinion that the view that it was taking was support by a decision of the Kerala High Court in Western India Plywood Ltd. v. Commissioner of Income-tax.

6. In our opinion the view taken by the tribunal is not correct. In commissioner of Income-tax v. Tata Sons Ltd, the assessee who were the managing agents obtained finances for the managed companies by entering into an agreement with a stranger, who agreed to lend a crore of rupees to the managed company on condition that the assessee gave and assigned to him a share of six annas in the rupee in the commission and other remuneration which the assessees might be entitled to recover from the managed company. The share of the commission, which was paid to the stranger under the said arrangement, was claimed to be deducted in computing the profits and gains of the assessee on two grounds; firstly, that the agreement operated as an assignment of the portion of the commission to the stranger and in that view the share assigned has ceased to be income of the assessee, and secondly, that the share of the commission given to the stranger was an expenditure incurred by the assessee solely for the purpose of earning profits and gains in the conduct of their business and was, therefore, an expenditure of a revenue nature. Both the contentions of the assesses were accepted in that case. Now the commission, which was agreed to be paid to the stranger, was clearly for the purpose of obtaining finances to the managed company. The finances, however, were used for the purposes of earning profits and gains in business and the expenditure, which was incurred for raising the said finances, was regarded as expenditure for the purpose of earning profits and gains in the course of the business. It would, therefore, appear that in order to determine whether the expenditure incurred in borrowing the loans would be a part of the expenditure for running the business would depend upon the nature and purpose of the borrowed money. In Dharamvir Dhir v. Commissioner of Income-tax, the assessee, not having requisite funds for its business, entered into an agreement with a public charitable trust for the advance to him of funds up to 1 1/2 lakhs of rupees on payment of interest at 6 per cent. per annum and II/16ths of the profits of the business. The share of the profits paid under this agreement was claimed as a revenue expenditure and the claim was allowed by the supreme court which held that in the commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the assessee's business and they were, therefore, deductible revenue expenditure. Here again, the agreement to give 11/16th of the profits was an expenditure incurred for the purposes of raising the moneys. But, since the purpose of raising the moneys was wholly for the running of the business of the assessee, the expenditure incurred in raising the moneys was also regarded as an expenditure of the business and not an expenditure, which was unconnected with it, but solely related to the transaction of borrowing.

7. Under the English Income-tax Act, there are prohibitions against allowing interest or other expenditure connected with capital employed or intended to be employed in the business of the assessee. There are, however, provisions which allow the deduction of revenue expenditure wholly laid out for the purpose of the assessee's business. In several cases of loans borrowed, the interest paid or the other expenditure incurred for obtaining the loans has been claimed on the basis of permissible revenue expenditure on the ground that the loans obtained were of short duration or in the nature of temporary or day to day accommodation by way of banking or overdraft facilities, which could not be regarded as capital employed or intended to be employed in the business of the assessee and the expenditure incurred for raising such loans which, therefore, be deductible as revenue expenditure incurred wholly for the purpose of earning profits or gains of the business. The decision in these cases have turned upon the questions as to whether the loans borrowed constituted capital employed or intended to be employed in the business of the assessee and in cases where it was held that it could not be so regarded, the interest paid or the other expenditure incurred in raising the loans has been allowed on the ground that it is an expenditure of a revenue nature. Thus in Texas Land and Mortgage Company v. Holtham, the assessee-company increased its capital by raising money on debentures and claimed the commission paid to the brokers and the other expenses incurred in raising the money as deductible revenue expenditure. The claim was considered on the footing as to whether the raised money was capital of the company and having held that it was the capital of the company, the claim was disallowed. It may be pointed out that the disallowance of the claim was not on the ground that the expenditure incurred was solely connected with the raising of the capital and not for the purposes of running the business.

8. In Scottish North American Trust Ltd. v. Farmer, the assessee, who were company and whose main business was to buy and sell investments, having found that the value of their purchases of investments abroad exceeded the amounts of their available cash, pledged certain of their securities with their bankers in New York to obtain a fluctuating overdraft, on which interest was charged at current rates from day to day. Subsequently, in addition to the overdraft, the bank granted the company a loan with a fixed maximum for six months at 6 percent which as renewed for a further six months and then terminated. A question arose as to whether the interest that was paid to the bankers in New York was deductible as an outgoing for the purpose of the business in computing the liability of the company for assessment. It may be remembered that if the borrowings constituted capital employed or intended to be employed in the business of the assessee, the interest would not be deductible in view of the prohibitions contained in the English Income-tax Act. if, however, the borrowings did not constitute capital employed or intended to be employed in the business of the company, the interest paid on the borrowings could be regarded as an expenditure incurred for the purpose of obtaining the borrowed money for the purpose of the business could be claimed as a revenue deduction. Lord Atkinson observed, after having considered several authorities, as follows :

'These authorities show that money borrowed by such a company as the appellant company in this case in the fluctuating temporary manner in which it has been borrowed by them - the daily borrowing and lending of money being part of their trade and business - is not to be treated under the joint stock companies Act as 'capital'. There is nothing to show that word should bear a different meaning in the Income-tax Acts when applied to the proceedings of joint stock companies. 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 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 to be taxed on assumed profits when, in facts, they made a loss.'

9. In a recent case of the supreme court, State of Madras v. G. J. Celho, under the Madras Plantations Agricultural Income-tax Act, 1955, the assessee claimed in computing his agricultural income from his plantations, the entire interest paid by him on monies borrowed for the purpose of purchasing the plantations as expenditure laid out wholly and exclusively for the purposes of the plantation under section 5(e) of the said Act. It may be pointed out that the in the Madras Plantations Agricultural Income-tax Act there was no provision corresponding to section 10(2)(iii), of the Indian Income-tax Act, which allowed the deductions of interest on borrowed capital. The provision of section 5(e) of the said act was identical with the provision if section 10(2)(xv) of the Indian Income-tax Act. It was held that the payment of interest on the amount borrowed for them purchase and the working of the plantations viewed as an integrated whole was so closely working of the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations.

10. In view of these authorities, in our opinion, the short work which the Tribunal has made of the question which was before it by holding that the expenditure was solely for the purpose of raising capital and not for the purpose of running the assessee's business or acquiring the stock-in-trade will not be permissible, and it will have to be further seen, having regard to the nature and the purpose of the loan, the manner in which it was raised and the manner in which it was used, whether the expenditure incurred in raising the loan was an expenditure, not in the nature of a capital expenditure or personal expenses and wholly laid out for the purpose of the assessee's business within the meaning of section 10(2)(xv) of the Act.

11. Now, 'capital expenditure' has not been defined in the Act, and it has often been said that it is difficult to lay down a general test, which is both sufficiently accurate and sufficiently exhaustive to cover all all or even a great number of possible cases : Rowlatt J. in Countess Warwick Steamship Co, Ltd. v. Ogg. In Benarsidas Jagannath, In re Justice Mahajan of the Lahore High Court as he then was, observed :

12. In order to distinguish between a revenue expenditure,...... which is deductible in assessing income-tax and a capital expenditure which is not so ordinary course of business usually consider the nature of the concern, the concern and the object with which an expense in incurred by him and then decide the category under which it falls.'

13. The learned judge also observed;

14. It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test in discriminate between a capital and revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time.'

15. He them formulated three tests, which will be helpful in determining whether a given item of expenditure was a capital or a revenue expenditure. These three tests are as follows :

'(i) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment;....

(2) Expenditure may be treated as properly attributable to capital when it is made only once and for all, but with a view to bringing into existence as asset or an advantage for the enduring benefit of a trade;... and

(3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit by parting with it or letting it change masters. Circulating capital is capital which is turned over yields profits or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.'

16. These tests were approved of and accepted by the supreme court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. Bhagawati J, after having enumerated the said tests, observed :

'This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concerns is certainly in the nature of capital expenditure. The question however arises for consideration when expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantages for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into, existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was a part of fixed capital of the business it would be of the nature of capital expenditure and it is was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Indian Income-tax Act.'

17. These tests have again been referred to as the principles formulated in determined the question as to whether a given item of expenditure is a capital or a revenue expenditure in State of Madras v. G. J. Coelho already referred to. In a still more recent decision of the supreme court given in the case of Bombay Steam navigation Co. Ltd. v. Commissioner of Income-tax, decided on 21st October, 1964, (not only fully reported), it has been observed :

'The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business 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 acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure.'

18. What will have to be seen, therefore, is whether on the application of these tests the expenditure in the present case is an expenditure in the nature of a capital expenditure or in the nature of a revenue expenditure. As we have already pointed out earlier, the nature of the expenditure incurred in raising a loan will depend upon the nature and purpose of the loan. In the present case, the assessee had embarked upon a single venture, which was for obtaining a land and constructing of a building on it and selling the same after construction and make profit in the transaction. It is undisputed that the land and the building constructed on it was the stock-in-trade of the assessee, and the entire venture consisted of acquiring the stock-in-trade and disposing it of. The assessee had no fixed, assets and did not require any fixed asset for it business. Its asset was the only trading asset or the stock-in-trade, which it proposed to acquire and dispose of. It had commenced its venture in the year 1946 with the funds of Rs. 60,000 which it possessed. In the course of acquiring the stock-in-trade viz, the building to be constructed, it required monies, which were to be spent solely for the purpose of the construction of the building. The whole purpose of the loans, which it borrowed, was for completing the acquisition of the stock-in-trade and it is contended that the amount has not been utilised solely for that purpose. Applying the tests, we find that the amount of Rs. 2,50,000 which was borrowed by the assessee, did not form its initial outlay because it was obtained not at the initiation of the business but during the course of it. It was not for the expansion of the business or for the replacement of any equipment. The business of the assessee was the single venture of the assessee of constructing only one building and selling it off after its completion. This business was never expanded by the assessee. No equipments in the nature of fixed assets were also required by the assessee and no part of the loan borrowed was utilised for any such purpose. Applying the second test, the expenditure incurred did not bring into existence any fixed asset or advantage of the nature of an enduring benefit of trade. The amount obtained was wholly spent on the construction of the building, which was the stock-in-trade itself. It was contended that the expenditure was incurred for obtaining a facility of money, which endured for the entire duration of the venture by providing money for the business of the assessee. It was, therefore, argued that the expenditure incurred was for the purposes of obtaining something more than mere finances for the acquisition of the stock-in-trade, viz., a right or facility to carry on or continue the business. In our opinion, this argument cannot be accepted. Every time money is borrowed for the purpose of business it undoubtedly helps or facilitates the business and thus allows it to continue to run, which, but for the help of finance, would ultimately cripple and stop. That, however, would not necessarily give the borrowed money the status of capital of the assessee. As observed by Lord Atkinson in Scottish North American Trust Ltd., v. Framer already referred to the borrowed monies may be as well as an instrument of the trade, and the expense of borrowing, the hire for the instrument as much as is the rent paid for the office or the hire paid for a typewriting machine. There is no doubt in the present case that building was the circulating capital or the stock-in-trade of the assessee. The monies, which were borrowed were towards the circulating capital and did not form any part of the fixed capital of the assessee, which as we have already pointed out, was not there altogether. The three tests, therefore, which were laid down by the Full Bench of the Lahore high Court and subsequently adopted b y the supreme court, when applied to the present case, would show that the monies borrowed by the assessee in the present case were for the purpose of being employed as circulating capital to earn profits and gains and could not be regarded as on account of capital and consequently the expenditure incurred in connection with the borrowing could not be regarded as an expenditure of a capital nature. The treats given by the supreme court in the last decision referred to viz., the decision in Bombay Steam Navigation Co. Ltd. v. Commissioner of Income-tax would also, when applied to the borrowings in the present case, show that it was a borrowing on account of revenue. Viewed in the larger context of business necessity or expediency of the assessee's business, the borrowing in the present case was related to the carrying on or conduct of the business that it could be regarded as the integral part of the profit-earning process and for the acquisition of an asset pr a right of permanent character, the possession of which was a condition to the carrying on of the business. The expenditure, therefore, incurred in obtaining the borrowed money must be regarded as a revenue expenditure. In State of Madras v. G. J. Coelho, which we have already referred to above, the assessee purchased an asset of tea, coffee and rubber plantations for a sum of Rs. 3,10,000 and for the purpose of the said purchase borrowed a sum of Rs. 2,90,000 at interest varying from 7 to 8 percent per annum. The annual interest paid by the assessee to the creditors was ought to be deducted by the assessee from the profits and gains of his business for the under a provision of the Madras Plantation Agricultural Income-tax Act, which was identical with the provision of section 10(2)(xv) of the Indian Income-tax Act. After having applied the tests, the supreme court held that the payment of interest was a revenue expenditure because no new asset was acquired with it, no enduring benefit was obtained and the expenditure incurred was a part of the circulating or floating capital of the assessee.

19. In our opinion, therefore, the expenditure incurred by the assessee for executing the mortgages in favour of the mortgages creditors for obtaining monies for constructions and completion of the building was an expenditure not of a capital nature but wholly laid out in the business of the assessee for obtaining profits and gains therefrom.

20. The Income-tax Appellate Tribunal, for the view that it has taken, has relied on Western India Plywood Ltd. v. Commissioner of Income-tax. In that case the assessee was a company carrying on business of manufacturer of plywood and plywood articles. It raised a loan of Rs. 3 lakhs by way of first mortgage debentures redeemable in three successive years at Rs. 1 lakhs a year to be utilised towards the working capital of the company. A major part of the borrowed amount was paid for the purchase of raw materials. Some part was extended for discharging loans on suspense account and a part was deposited in a separate account for the payment of dividends. The assessee had incurred an expenditure of Rs. 12,924 in issuing the debentures by way of expenses towards the purchase of stamp paper for the trust deed underwriting commission and registration and lawyer's fees. The question was whether the sum of Rs. 12,924 was a business expenditure and allowable under section 10(2)(xv) of the Indian Income-tax Act as a deduction. On the facts of the case, the court held that the raising of money by debentures or mortgages by the company could not be regarded as an ordinary incident in carrying on the business, or be treated as on a part with trading or banking facilities, but must, prima facie, and in the absence of other indications, be considered to affect the capital of the concern and its profit-making structure. The learned judges proceeded to consider the question before than by finding out whether the money raised by debentures could be regarded as having been received by the assessee as a capital receipt and took the view that the manner in which the money had been raised by the raised by the company, viz., by issuing mortgages debentures showed that it was not raising money as by way of temporary or day to day accommodation as an ordinary incident in carrying on the business but that it was raising it with a view to affect its capital and profit-making structure. According to them the monies having been borrowed with this object and purpose, the subsequent utilisation of that part of the money borrowed for the stock-in-trade did not affect the character of the borrowing, which was of a capital nature. They pointed out that the company in the resolution of its board of directors had referred to the loan that they were raising as 'the working capital' of the company and the expenses incurred in raising the said capital, therefore, was an expenditure of a capital nature. It was urged before the court that the borrowing was for the purpose of augmenting the circulating capital of the company, if not wholly, at least to the extent of a major part of it and to the extent to which the borrowed money was used as a circulating capital or for the acquisition of the law material for the business the expenditure Pro tanto should be considered as a revenue expenditure. The argument, however, was not accepted. The learned judges held that the money was borrowed for the purpose of enlarging or extending the business, if it was paying its way, or was by way of establishing its business, if it was not; in either of which case the borrowed money must be taken to have been obtained on capital account.

21. As to the utilisation of part of money for the stock-in-trade, they observed that in the first place the nature of the receipt of borrowing whether capital or revenue, was not to be judged solely by the use, which the assessee had found for it subsequently and, secondly, the argument that a part of the borrowed money was utilised for purchasing the stock-in-trade conceded a dual character to the borrowing and involved a notional splitting of the borrowed amount and the expenses, for which there was no rational basis and besides it was also contrary to the prescription in section 10(2)(xv) which was implicit in the expression 'laid out or expended wholly and exclusively.'

22. In our opinion, this decision cannot be said to be an authority for the view which has been taken by the tribunal that the expenses incurred for raising capital can never be regarded as expenses for the running of the business. The view taken in this case was that on the facts and in the circumstances of the case the borrowing by the company was for the purposes of enlarging and extending its business and borrowed money affected the capital of the company and entered the capital structure of the company. It was for that reason that the court held that the expenses incurred for raising the loan, which was on capital account, could not be treated as a revenue expenditure deductible under section 10(2)(xv) of the Act.

23. In two other cases, which were referred to us in the course of the argument's where money was borrowed by a company on the security of the company's assets, the expenses of the borrowing were regarded as on capital account. In commissioner of Income-tax v, India Cements Ltd. which is a case of Madras High Court, the assessee-company obtained a loan of Rs. 40 lakhs from a finance corporation on the mortgage of the company's assets agreeing to pay the loan in 10 annual installments of Rs. 4 lakhs each. It incurred an expenditure of Rs. 84,633 for acquiring the loan by way of stamp duty, counsel's fee, etc., and claimed that amount as business expenditure. It was admitted that out of the amount of Rs. 40 lakhs, 25 lakhs, was used for repaying a loan, which had been utilised for capital assets, and there was no material to show that the balance of Rs. 15 lakhs was incurred wholly and exclusively for the purposes of business and was not used for capital purposes. It was held, in view of these facts, that the amount was not a revenue expenditure and could not be allowed under section 10(2)(xv) on the ground that the loan was incurred for securing an enduring benefit to the assessee and the expenditure was incurred once and for all. It was further held that the loan was to be repaid within ten years could not affect the nature of the loan, which was raised on capital account. This case, in our opinion, would not help the department. It would be seen that the nature and purpose of the loan in that case, to the extent to which it could be determined on the facts of the case, was that it was obtained for bringing into existence an advantages of an enduring nature to the company. The purpose of the loan, therefore, being that the amount borrowed was to be spent on capital account, the expenses incurred for the borrowed was to be spent on capital account, the expenses incurred for the borrowing was an expenditure in the nature of capital expenditure.

24. In Annapurna Cotton Mills Ltd. v. Commissioner of Income-tax, the assessee-company by a debenture trust deed raised a loan of Rs. 10 lakhs, the debentures being redeemable in 10 annual installments. The loan was secured by the mortgage of movable and immovable properties of the company and carried interest at 7 percent per annum. The company also the gross sales of the assessee's products. Pursuant to this agreement the assessee paid the assignees of the brokerages a sum of Rs. 21,798 during the relevant previous year, for which it claimed deduction under section 10(2)(xv) of the Indian Income-tax Act. It was held that the sum was capital expenditure and, therefore, not an allowable deduction under section 10(2)(xv). This conclusion was arrived at on the ground that having regard to the long term of the loan and having regard to the nature and purpose of the loan and the manner of raising it, the loan formed a part of the capital assets of the company and the commission paid in connection therewith was an expenditure of a capital nature and not allowable as a revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act. In our opinion, this case also cannot help the department. In the case before us the loan was only for the duration of the acquisition and disposal of the stock-in-trade of the single venture of the assessee. The purpose for which it was raised was only for the acquisition of the stock-in-trade and the manner in which it was raised was the ordinary commercial manner, where a trader for the purpose of acquiring its stock-in-trade borrows monies and utilises them for the acquisition of the stock-in-trade of the business and after disposal of the raising the loan, therefore, was a ordinary incident of the trade, where circulating capital or stock-in-trade is held by borrowing temporary loans.

25. In our opinion, therefore, the sum of Rs. 15,172, could be claimed by the assessee as a deductible revenue expenditure under section 10(2)(xv) of the Act and the departmental authorities and the Income-tax Appellate tribunal were in error in not allowing the said deduction.

26. Our answer, therefore, to the question referred to us is in the affirmative. The assessee will get his costs from the department.

27. Question answered in the affirmative.


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