CHANDRASEKHARA SASTRY J. - This is a reference under section 66(1) of the Indian Income-tax Act. The assessee is a public limited company incorporated in 1935 manufacturing sugar and its bye-products. The assessments relate to the years 1950-51, 1951-52 and 1952-53, the accounting years being the three years ending with June 30, 1949, June 30, 1950 and June 30, 1951. In respect of its business, the company resolved to issue mortgage debentures of the value of Rs. 2.5 lakhs. The resolution of the board of directors relating thereto is dated April 15, 1941. This resolution of the board of directors was confirmed by a resolution of the company at its extraordinary meeting held on June 4, 1941. It was further resolved that the company do pay brokerage not exceeding 2.5% and such commission on the sales of sugar for such period as the company may determine to such person or due course, the debentures of the value of Rs. 2.5 lakhs were issued and subsequently allotted. The brokerage of 2.5% mentioned above was also paid. As regards the commission on the sales of sugar mentioned above, an agreement was entered into between the assessee company and Jivanchand Ratanchand Motishaw of Bombay on December 28, 1941, that he was to be paid a commission of 4 annas per Bengal maund of sugar sold during the period commencing from January 1, 1941, and ending with December 31, 1961. In respect of the three years to which the concerned assessments are made, the commission so paid to the underwriters was Rs. 45,503, Rs. 13,362 and Rs. 40,465 respectively. These amounts were claimed by the assessee as admissible deductions in the respective assessment years. The Income-tax Officer and the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal, Hyderabad Bench, disallowed this claim. The assessee filed three applications before the Income-tax Appellate Tribunal to refer to the High Court the question of law which arose out of the decision of the Tribunal. The three applications were consolidated and the Tribunal referred the following question to the High Court for decision :
'Whether, on the facts and circumstances of the case, the sums of Rs. 45,503, Rs. 13,362 and Rs. 40,465 are admissible deductions in respect of the assessments for the assessment years 1950-51, 1951-52 and 1952-53 respectively ?'
The relevant portion of the resolution dated April 15, 1941, of the board of directors is as follows :
I. (1) To issue first mortgage participating debentures of Rs. 2.5 lakhs on the security of the plant and machinery of both the sugar factory & distillery for repaying the loan to the Central Bank and the share capital of the society as per agreements dated June 29, 1938. ..
III. (a) That the company hereby approves the agreement to be entered into between the company on the one part and Mr. J. R. Motishaw, share and stock-broker, Bombay, on the other part and the terms contained therein for giving a brokerage of 2.5 per cent. on the debenture loan...
(c) That in consideration of the valuable services rendered, the company do hereby enter into an agreement with Mr. J. R. Motishaw of Bombay as per terms of the agreement submitted to the meeting giving four annas as commission on every Bengal maund of sugar sold, for a period of twenty years commencing from January 1, 1941.'
In the agreement dated December 28, 1941, entered into between the assessee company and Jivanchand Ratanchand Motishaw of Bombay, it is provided that :
'Whereas the said Motishaw negotiated and procured subscription of the said debentures of the face value of Rs. 2,50,000 (Rupees two lakhs and fifty thousand) which have been duly allotted by the company and whereas in consideration aforesaid the company agreed to pay 2 1/2 (two and half) per cent. brokerage on the amount of the sale of every Bengal maund of the companys sugar effected for a period of 20 years and whereas the company has already paid to the said Motishaw the amount of the said brokerage..... It is hereby agreed by and between the parties herein as follows :
1. In pursuance of the said agreement and in consideration of the promises and in consideration of the negotiating for procuring the subscription of the said debentures the company hereby agree to pay to the said Motishaw commission at the rate and on the basis of four annas on the sale of every Bengal maund of the companys sugar during the period commencing from the 1st day of January, 1941, and ending with the 31st day of December, 1961.'
It is on these facts that the assessee claimed the three amounts of Rs. 45,503, Rs. 13,362 and Rs. 40,465 as admissible deductions in respect of the assessments for the three assessment years. The claim of the assessee that these three amounts are admissible deductions is based on section 10, Clause (2), sub-clause (xv), of the Indian Income-tax Act, which is as follows :
'10. (2) Such profits or gains shall be computed after making the following allowances, namely :
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
The stand taken by the department is that these amounts are in the nature of capital expenditure and that, therefore, they are not admissible deductions under the Indian Income-tax Act; whereas, the contention of the assessee is that this is an expenditure laid out or expended wholly and exclusively for the purpose of the business and is not in the nature of a capital expenditure, but a revenue expenditure.
On the facts stated above, it is clear that the amounts of commission paid every year to Jivanchand Ratanchand Motishaw were for the purpose of obtaining the debenture loan of Rs. 2 1/2 lakhs which went towards the capital of the business. That was an expense incurred for the purpose of raising the capital for the business of the company. The only difference is that this expense is spread over a period of 20 years in the form of commission on the sales of the companys sugar. These amounts are expended for obtaining capital and the asset of Rs. 2 1/2 lakhs that was brought into existence was an asset of an enduring benefit to the trade. Instead of one payment in a lump sum, it was spread over a number of years, the only difference being the mode of payment. The tests by which any particulars expenditure is to be held to be in the nature of a capital expenditure or a revenue expenditure are laid down by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. After referring to the several decisions bearing on the question, Bhagwati J., who delivered the judgment, summarised the position as follows :
'The question however arises for consideration where 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 advantage 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 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.'
In the present case, the resolution dated April 15, 1941, of the board of directors of the assessee company shows that the debenture loan of Rs. 2 1/2 lakhs was raised for the purpose of repaying the loan to the Central Bank and the share capital of the society as per agreements dated June 29, 1938. If this loan was not raised, the company would have been forced to repay the loan to the Central Bank and the share capital of the society from out of the capital of the assessee company. Thus, it is clear that the debenture loan was raised for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business. Therefore, the expenditure incurred for raising this debenture loan is properly attributable to capital and is of the nature of capital expenditure. The fact that the payment which is part of the expenditure incurred for raising the debenture loan is made periodically does not affect the question and does not convert this expenditure into a revenue expenditure. Applying the above tests laid down by the Supreme Court, we hold, on an appreciation of the whole situation, that the expenditure in question incurred in this case is of the nature of capital expenditure and not revenue expenditure and is not a deductible allowance under section 10, clause (2), sub-clause (xv), of the Indian Income-tax Act.
Sri Kuppuswamy, learned counsel for the assessee, argued that, as this debenture loan was raised for the purpose of repaying the loan to the Central Bank and the share capital of the society, this expenditure comes under the head of revenue expenditure. His contention is that this expenditure was incurred for preserving the assets of the company and is therefore a deductible expenditure. To meet this argument, the learned counsel for the department relied upon the decision in Montreal Coke and Manufacturing Co. v. Minister of National Revenue. In that case, the assessee company, with a view to reducing their interest charges by redeeming their existing bonds before maturity, reborrowed at lower rates on less onerous conditions as to payment. The carrying through of these financial operations involved necessarily substantial outlays, and the question was whether those outlays were permissible deductions under the Income War Tax Act, 1927, in the assessment of the appellants taxable income. The expenditure incurred amounted to Rs. 1,33,884.81 nP. and the assessee company decided to amortise by spreading it over twelve years, involving a charge annually against income of Rs. 10,535.16 nP. It was contended before the Privy Council on behalf of the necessarily for the purposes of earning income and were not payments on account of capital. But the Judicial Committee of the Privy Council rejected that contention. Lord Macmillan, who delivered the judgment, pointed out that :
'It is not the business of either of the appellants to engage in financial operations. The nature of their business is sufficiently indicated by their titles. It is to these businesses that they look for their earnings. Of course, like other business people, they must have capital to enable them to conduct their enterprises, but their financial arrangements are quite distinct from the activities by which they earn their income. No doubt the way in which they finance their business will or may reflects itself favourably or unfavourably in their annual accounts, but expenditure incurred in relation to the financing of their businesses is not, in their Lordships opinion, expenditure incurred in the earning of their income within the statutory meaning.'
In view of this decision, we cannot accept the contention of the learned counsel for the assessee. In Texas Land and Mortgage Company v. Holtham, the assessee company, in order increase its capital, raised money on debentures and claimed that the expenditure incurred for raising the money ought to be deducted from the profits in a particular year. But, it was held that 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, could not be deducted. In our opinion, the decision of the Kerala High Court in Western India Plywood Ltd. v. Commissioner of Income-tax also relied upon by the learned counsel for the department is against the assessees contention in this case. In that case, the assessee, a company carrying on business as manufacturer of plywood and plywood articles, raised a loan of Rs. 3 lakhs by way of first mortgage debentures redeemable in three successive years at Rs. one lakh every year to be utilised towards the working capital of the company. In issuing the debentures the company incurred Rs. 12,924 by way of expenses towards purchase of stamp paper for the trust deed, underwriting commission and registration and lawyers fees. The question was under section 10(2) (xv) of the Income-tax Act as a deduction. The learned judges held that the expenditure of Rs. 12,924 incurred by the company to raise the loan was a capital expenditure and was not therefore deductible under section 10(2) (xv). It was further held that :
'The raising of money by debentures or mortgage cannot be regarded as an ordinary incident in carrying on the business, or be treated as on a par 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 decision in Southern v. Borax Consolidated, Ltd. relied upon by the learned counsel for the assessee does not support his contention. In that case, the assessee company purchased certain property for the purposes of its business and subsequently an action was commenced against the company claiming that its title to the property was invalid. The company defended the action and thereby had to incur expenses amounting to pounds 6,249, which sum it claimed to be entitled to deduct as business expenses in computing its profits for the purposes of assessment to income-tax. Lawrence J. held that the expenditure was properly attributable to revenue. The principle is stated thus :
'..... where a sum on money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company.'
Lawrence J. pointed out that, in that case, there was nothing added to the title or taken away and the title of the company to the property has simply been maintained by that payment. This decision, in our opinion, has no bearing on the question to be decided in this case. The decision in Morgan v. Tate & Lyle Ltd. also does not help the assessee. In that case, the assessee company, engaged in sugar refining, incurred expenses in a propaganda campaign to oppose the threatened nationalization of the industry and that expenditure was claimed by the assessee as an admissible deduction from its profits for income-tax purposes. The House of Lords, by a majority, held that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits, there was no reason in law to prevent the Commissioners from so finding. It was pointed out that :
'On the evidence it was not to be assumed that the trade of the company would have continued, in an income-tax sense, in other hands, after nationalization and accordingly that the expenditure was incurred for the purpose of preventing a change of ownership.'
The question that arose for decision in Eastern Investments Ltd. v. Commissioner of Income-tax was one under section 12, clause (2), of the Income-tax Act. The assessee, in that case, was an investment company formed originally for acquiring, holding and otherwise dealing with the shares and Government securities held by one A. On his death, B was appointed the administrator of As estate in India and in that capacity B held 50,000 shares belonging to A. Subsequently, as the executors of A required money, B entered into an agreement with the company whereby company agreed to reduce its capital by 50 lakhs and for that purpose took over the shares from B issuing to B debentures of the face value of Rs. 50 lakhs carrying interest at the rate of 5 per cent. per annum redeemable at the option of the registered holder at any time. The question was whether the 5 per cent. interest paid to B on these debentures by the company could be deducted from its income under section 12(2) of the Income-tax Act. It was pointed out by the Supreme Court that :
'... the transaction was voluntarily entered into in order indirectly to facility the carrying on of the business of the company and was made on the ground of commercial expediency. It, therefore, fell within the purview of section 12(2).'
It was further held that the assessee, being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans would clearly be a permissible deduction under section 12(2) of the Income-tax Act and that whether the loan is taken on an overdraft or is a fixed deposit or on a debenture makes no difference in law. It is thus seen that this decision also does not support the contention of the learned counsel for the assessee.
We, therefore, hold that, on the facts and circumstances of this case, the sums of Rs. 45,503, Rs. 13,362 and Rs. 40,465 are not admissible deductions in respect of the assessments for the assessment years 1950-51, 1951-52 and 1952-53 respectively. We answer the question referred to the High Court in the negative. The assessee shall pay the costs of this reference. Advocates fee Rs. 250.
Question answered in the negative.