WESTON, C.J. - This is a reference by the Income-tax Tribunal under Section 66(1) of the Income-tax Act.
The facts which have occasioned the reference are these. The assessee is the Associated Hotels of India Limited, a company with its head office at Delhi. About the year 1916 the assessee issued four thousand debentures each of Rs. 500. These debentures were to carry interest at 6 per cent. per annum. They were for a period of forty years and therefore were redeemable in the year 1956. There was a condition however that the assessee company was at liberty at any time after the 1st of July, 1921 to give notice of its intention to pay off any particular debentures and after the expiration of six months from such notice being given the debentures became payable together with the bonus of 5 per cent. It appears that this power to redeem was exercised in the case of certain debentures, and in the year 1946, in view of the lesser rate of interest prevailing, the assessee company resolved to redeem all outstanding debentures and to issue a fresh set of debentures bearing interest at 4 1/2 per cent. only. Notices were accordingly given to the debenture-holders and in the accounting year ending 31st of March the company paid under the term of debentures a total of Rs. 68,050 as the 5 per cent. bonus. The company claimed that this amount of Rs. 68,050 was expenditure laid out wholly and exclusively for the purpose of the purpose of the business and must be allowed as a business deduction. The Income-tax Officer rejected this claim. He seems to have thought that the position would be different had the assessee company been content to redeem only the debentures without issuing new debentures, and it is not very easy to follow the reasoning of his order.
In appeal before the Appellate Assistant Commissioner the contention of the assessee company was again rejected. The learned Assistant Commissioner held that the payment of bonus was not a business expenditure and that the assessee was not entitled to claim the deduction sought.
In further appeal before the Income-tax Appellate Tribunal the assessee company again failed. The Tribunal rejected the assessees contention on the authority of two cases one of which is Montreal Coke and Manufacturing Company v. Minister of National Revenue, while the other is cited as 3 Tax Cas. 149 (Arizona Copper Co. v. Smiles) which is not available in this library. The assessee company then applied under Section 66(1) of the Act for a reference and a reference accordingly has been made by the Tribunal in these terms :-
'Whether on the facts and circumstances of the case the bonus paid to the debenture-holders on redemption of the debentures was an expenditure laid out for the purpose of the business as contemplated in Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'
Mr. Sethi for the assessee has urged that the payment of bonus was payment of interest falling within Section 10(2)(iii). Apart from the circumstance that this is not a matter covered by the reference made to us, in my opinion the contention could not be accepted. Clause (2) of Section 10 contains the allowance which may be deducted from profits and gains of a business taxable under clause (1) of that section and sub-clause (iii) of claus (2) sets out one of those allowances, namely the amount of interest paid on capital borrowed for the purposes of the business, profession or vocation. There is proviso and an explanation which are not material. It is true that in one sense anything other than return of capital paid by the borrower to his creditor may be called interest, but for the purposes of this clause I think interest must be restricted to its ordinary meaning, namely the money contracted to be paid during the continuance of the loan an consideration of the loan being given. The bonus of the debentures in the present instance was not something which the assessee company was bound to pay in any event. It was not consideration paid for the loan. It was the price to be paid for liberty to vary the terms of the loan and was only payable if the terms of the loan were varied. In my opinion therefore the allowance could not be brought within Section 10(2)(iii) of the Act.
The question raised by the reference under sub-clause (xv) is more difficult. On the facts the Montreal Coke Co.s case is directly in point. The Montreal Coke Company was financed in part by money borrowed on interest-bearing bonds. In January, 1935, the company had outstanding a series of such bonds bearing interest at 5 1/2 per cent. maturing in 1947, but redeemable prior to maturity at a premium. Market conditions being favorable the company decided, with a view to reducing their interest charges, to redeem their existing bonds before maturity and to reborrow at lower rates. The carrying through of the redemption involved substantial expenditure, this expenditure including the premia payable to the bond-holders, certain exchange expenses, commission and so on, and the company decided to spread these charges over a period of twelve years involving a charge in their accounts of a certain amount annually against income. The result of the operation was a considerable saving in interest charges with of course a lesser amount to be deducted as interest charges for future income-tax allowances. The company claimed that the annual deduction made by them for the expenses incurred in this operation was a claimable allowance. It was held by the Privy Council that it was not.
While as I have said on the facts the case is on all fours with the present the law applicable to that case was not identical with the Indian Income-tax Act. The scheme of the Canadian Act, namely the Income War Tax Act, 1927, so far as allowances or deductions were concerned, was to prohibit certain deductions. So far as is material to the case the provision in that Act was as follows :-
'In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of (a) disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income; (b) any outlay, loss or replacement of capital or any payment on account of capital or any depreciation, depletion or obsolescence, except as otherwise provided in this Act.'
The decision of the Judicial Committee was that the expenditure was not incurred in earning the companys income within the meaning of the statute. Now the scheme of the Indian Income-tax Act is to specify affirmatively the allowances which may be deducted and in the allowances set out in Section 10(2) there is no provision prohibiting the deduction of disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income. What at least is the main ground of the decision in the Montreal Coke Co.s case therefore has no application whatever to the present matter. Lord Macmillan delivering the judgment of the Board after dealing with the first point however said as follows :-
'It was conceded in the courts in Canada, and in any event it is clear, that the expenses incurred by the appellants in originally borrowing the money represented by the bonds subsequently redeemed were properly chargeable to capital and so were not incurred in earning income. If the bonds had subsisted to maturity the premiums and expenses then payable on redemption would plainly also have been on capital account. Why then should the outlays in connection with the present transactions, compendiously described as refunding operations, not also fall within the same category Their Lordship are unable to discern any tenable distinction. In the history of both companies the financial re-adjustment of their borrowed capital was an isolated episode, unconnected with the day to day conduct of their businesses, and the benefit which they derived was not earned by them in their businesses. In the courts in Canada the deductions claimed were held to be struck at both by paragraph (a) of Section 6 as not being expenditure for the purpose of earning the income and by paragraph (b) as being payments on account of capital. It may well be that items of expenditure may be open to both objections. The first objection, which their Lordships uphold, is sufficient for the disposal of the cases, but their Lordships in no way dissent from the view that the second objection also applies.'
It is necessary for the assessee in the present case to show that the expenditure in respect of which allowance is claimed was not in the nature of capital expenditure for sub-clause (xv) of Section 10(2) of the Indian Income-tax Act so requires. Although the Privy Council decided The Montreal Coke Co.s case on the first point their statement that they in no way dissent from the view that the second objection namely that the payments were payments on account of capital would require the same result, must I think be given weight, particularly when it appears that in no case on facts similar to the present and those in that case it has been held otherwise.
It is true that the line between capital and revenue expenditure is one which it is often very difficult to draw. We have been referred to several cases such as the Anglo Persian Oil Company case where compensation paid to their agents upon termination of their agencies was held to be a revenue disbursement allowable to the principal company; also to Scammell & Nephew v. Rowles, where a sum paid as the price of getting rid of a life director whose presence on the board was regarded as detrimental to the business was allowed as a revenue expenditure. These case I think are distinguishable from the present. It is true that the expenditure made by the assessee company was perfectly legitimate and was in fact an act of prudent management, but the propriety of expenditure is not the criterion upon which its allowance under Section 10(2) is to be judged. Clearly, the payment of the amounts of the debentures themselves would be a capital expenditure and it seems to me the premium or bonus is part and parcel of the amount of the debenture and is not distinguishable from the other amount paid to the debenture-holder.
For these reasons I think the reference should be answered by saying that the expenditure was not expenditure in respect of which allowance could be claimed under Section 10(2)(xv) of the Indian Income-tax Act. I would make no order as to costs in this matter.
BHANDARI, J. - I agree in the order proposed.
Reference answered accordingly.