K. Srinivasan, J.
1. The India Cements, Limited, Madras, obtained a loan of Rs. 40 lakhs from the Indian Finance Corporation on the mortgage of the company's assets. The necessary expenditure incurred in connection therewith came to Rs. 84,633 such expenditure including the stamps and the registration fee for the document,, counsel's fee and legal fees for drafting, etc., and certain other minor incidental charges. The transaction was entered into on 4th October, 1949 in the account year relevant to the assessment year 1950-51. The loan was repayable by the assessee in annual instalments of Rs. 4 lakhs from 1st October, 1952. This expenditure was carried on the accounts of the assessee in its balance-sheet as mortgage loan expenses. In the accounts for the year ending 31st March, 1953, it was written off by appropriation against the profits of that year. During the assessment proceedings for the assessment year 1950-51, the claim was made by the assessee before the Income-tax Officer that this expenditure should be allowed as an item of necessary expense coming within the scope of Section 10(2)(xv). The Income-tax Officer found that even according to the information furnished by the Auditors, Rs. 25 lakhs out of the amount borrowed was paid in discharge of a loan taken earlier from Messrs. Harvey, Ltd., which amount had been borrowed and ' utilised on the capital assets ' of the assessee company. It was not however clear how the balance of Rs. 15 lakhs was dealt with. The Income-tax Officer took the view that Section 10(2)(xv) specifically excluded any item of capital expenditure and that since money had been obtained only for capital purposes, the expenditure incurred in relation thereto should also be treated aseapital expenditure. The deduction claimed was disallowed. The appeal to the Appellate Assistant Commissioner shared the same fate, the Appellate Authority agreeing with the Income-tax Officer that the circumstances indicated the capital nature of the loan and the expenditure.
2. In the further appeal to the Tribunal, a different view was taken. The Tribunal recorded:
A study of the balance-sheets of the company as at 31st March, 1949 discloses the fact that the paid-up capital was sufficient to cover the entire capital outlay of the company and that the borrowal of Rs. 25 lakhs was for augmenting the working funds of the company. It appears to us that even at that earlier stage the money was borrowed and used not for any capital purposes but for augmenting the working funds of the company. We therefore consider that the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25,000 and the balance for working funds and as such the whole of the amount was purely for the purpose of augmenting the working capital of the company and that it could not be stated that it was used for capital purposes.
On this reasoning, the Tribunal allowed the claim of the assessee.
3. On the application of the Commissioner of Income-tax the Tribunal referred the following question to this Court:
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 84,633 expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ?
In the Statement of the Case, the Tribunal noticed:
On a study of the balance-sheet as on 31st March, 1949...the Tribunal found that the paid-up capital of the company was Rs. 93,19,230; as against that the expenditure on fixed capital of the company was only Rs. 92,9,2,970. From this it inferred that the borrowal of Rs. 25 lakhs from A.'F. Harvey and Madurai Mills, Ltd., could only be for augmenting its working funds and the subsequent repayment did not change the character of the loan. It is not usually possible to earmark each asset against the particular source, whether it is out of own capital or borrowed capital or funds set apart for the working fund. Only an overall view is possible. In that view even from 1949, the money that was borrowed from the two parties above referred to was only borrowed for working expenses and not for capital investment....
4. At this stage, we may point out that the conclusion reached by the Tribunal that the money was borrowed only for working expenses and not for capital investment proceeded on an inference based upon the balance-sheet. The Tribunal did not investigate how the sum of Rs. 25 lakhs earlier borrowed from A.F, Harvey and Madurai Mills, Ltd. was actually utilised. Though in the order of the Income-tax Officer, it is found stated that that amount was utilised on the capital assets of the company, and that statement was based on the authority of the information furnished by the Auditors of the assessee, the Tribunal either overlooked or ignored this circumstance. In the face of the statement so recorded by the Income-tax Officer, the Tribunal does not appear to have been justified in relying upon inferences in ascertaining whether the earlier borrowal was on capital or revenue account.
5. The argument on either side present two extreme points of view. Mr. Ranga-nathan, for the Department, contends that any loan secured by a business must be regarded as a capital asset and any expenditure incurred for the acquisition of such loan must also be an expenditure of a capital nature. In any event, it is argued that . a loan of the kind in question, viz., secured by the mortgage of the fixed assets of the company, can only be regarded as a conversion of the capital, the attendant expenditure being also one of a capital nature. On the other hand, Mr. Venkataraman, for the assessee, urges that there is a distinction between a capital in the nature of a share-capital which is not repayable, and a borrowing which is repayable. According to the learned Counsel, in the case of the latter kind of borrowing, the expenditure must be regarded as having been necessarily incurred for the purpose of the business, bringing it squarely within the scope of Section 10(2)(xv). These contending views call for an examination.
6. Learned Counsel for the Department claims that the decision in Western India Plywood, Ltd. v. Commissioner of Income-tax, Madras : 38ITR533(Ker) is a direct authority on the point. In that case, the assessee a manufacturer of plywood and plywood articles, raised a loan by way of first mortgage debentures redeemable in three successive years. The amount was to be utilised towards the working capital of the company. Out of this amount, more than half was paid for the purchase of raw materials. Certain loans in the suspense account were discharged and the balance of about Rs. 50,000 was retained for the payment of dividends. The company incurred expenses towards purchase of stamp paper, commission, etc., to the extent of Rs. 12,954. The question was whether this expenditure was business expenditure allowable under Section 10(2)(xv). The learned Judges of the Kerala High Court took the view that the raising of money by debentures or mortgage cannot be treated as an ordinary incident in the carrying on of the business or be treated on a par with trading or banking facilities and must prima facie in the absence of other indications be considered to affect the capital of the concern. A large number of English cases were examined. In dealing with the argument whether the nature of the borrowing could be adjudged by the use which the assessee subsequently found for it, the learned Judges observed that that cannot be taken as the criterion. That the subsequent expenditure may be of a revenue nature would not, according to the learned Judges, attach the same character to the receipt in question. They stated:
The resolution of the Board of Directors which authorised the borrowing only declared that the amount was to be utilised as the working capital of the assessee and made no mention of the discharge of trade debts. While pursuing this line of reasoning, the learned Counsel had necessarily to agree that there is no evidence as to the nature of the hand loans on suspense account in discharge of which a sum of over Rs. 82,000 was paid and also that the deposit of Rs. 51,500 for the payment of dividend could not in any view be debited to revenue. He therefore maintained that at least the balance of the amount borrowed which may be taken to have been applied towards the purchase of stock-in-trade may be treated as not capital and the proportionate part of the expenditure out of Rs. 12,924 allowed to be deducted. It was not disputed by him that in submitting the return of income and in the computation of the profits of the business, the cost price of the raw materials or stock-in-trade was brought into account. The argument thus concedes a dual character to the borrowing and involves a notional splitting of the borrowed amount and the expenses for which we see no rational basis, which is also contrary to the prescription in Section 10(2)(xv) implicit in the expression 'laid out or expended wholly or exclusively'. But the argument is useful for one purpose as indicating the limit to which it can be extended.
7. The reasoning adopted by the learned Judges of the Kerala High Court would certainly apply with greater force to the facts of the present case. As we have indicated, it was conceded before the Income-tax Officer by the Auditors of the assessee that the earlier loan of Rs. 25 lakhs, which had been taken from Harvey Mills, had been expended on capital account. We have also pointed out that the Tribunal in holding to the contrary had no materials before it except for a vague inference which they purported to draw from the circumstance that the paid-up capital was almost equal to the expenditure on fixed capital of the company and that any amount utilised by the company over and above should have correlation only to the working capital. How the further balance of the amount of Rs. 15 lakhs was in fact utilised is not clear from the records of the case. Though, if we accept the validity of the Kerala decision, the point has to be straightaway determined against the assessee, we consider it desirable to examine the several cases that have been cited before us.
8. In so far as the English cases are concerned, the matter stands on a somewhat different footing. In the Indian Act, interest on capital borrowed for the purpose of the business is an allowable item, which can be deducted from the gross profits of the concern before arriving at the assessable profits. But the position under the English Law is entirely different in that no deduction is permissible
for any sum employed or intended to be employed as capital in such trade, manufacture, adventure or concern...nor on account or under pretence of any interest which might have been made on such sums if laid out at interest.
Most of the English cases that have been cited before us proceed upon the interpretation of the above prohibition contained in the relevant enactment. Except in so far as these is any reference to any principle allowing a deduction of an item of expense of the nature in the present case, on the ground that such expense had been laid out wholly and exclusively for the purpose of the business, these English decisions cannot generally speaking be treated as being directly in point.
9. Anglo-Continental Guano Works v. Bell (1894) 3 T.C. 239 dealt with interest on short loans taken from bankers. The London branch of a foreign company obtained advances from its head office outside England and also raised loans from bankers paying interest thereon. It was conceded that the interest on advances made by the Central Office was not a permissible deduction. Loans were taken from the local bankers only for the purpose of paying for purchases of guano, a commodity in which the assessee dealt. The claim to deduction was dealt with on the terms of the relevant provisions of the statute, it being taken for granted that it was really in the nature of borrowed capital. The correctness of this decision however was considered in Scottish North American Trust, Ltd. v. Farmer (1911) 5 T.C. 693. Lord Atkinson observed:
What was decided in the case was that the sum paid for interest on these loans would not be deducted under Rule 3 on the ground that the money borrowed was employed as capital and that this interest was a sum deducted ' for' this capital; but the case was treated as if it were a case between partners engaged in a partnership business, one or all of whom is or are trading with borrowed capital.
The House of Lords accordingly distinguished that case as not applicable to one where the business of the assessee, is one of borrowing and lending of money or is that of an investment company. The case before the House of Lords was one of an investment company which in order to raise money to obtain a fluctuating overdraft pledged certain of their securities with their bankers in New York. The bank also granted the company a loan. The bank collected interest of the pledged securities and after charging interest due to themselves on account of the loan advanced, credited or debited the balance to the company. The House of Lords decided that the borrowings in that particular case were not sums employed as capital and that the interest paid to the bankers was therefore deductible as an outgoing for the purposes of the business. Texas Land and Mortgage Company v. Holtham (1894) 3 T.C. 255 was also a case where it was capital that was borrowed. The company in that case raised money by shares with the intention of lending the money on mortgages. It issued debentures in order to increase its capital. Mathew, J., observed:
The amount paid in order to raise the money on debentures comes off the amount advanced upon the detentures and, therefore, is so much paid for the cost of getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation.
In re Tata and Steel Company, Ltd. 1 I.T.C. 125 also dealt with a case of an increase of capital of the assessee by the issue of preference shares. This issue was underwritten by underwriters to whom a commission of Rs. 28 lakhs was paid. This was clearly a case of the issue of fresh capital, the expenses connected with which issue were held not allowable under Section 9(2)(ix), as it stood then. The learned Judges observed in this connection:
The expenses incurred in raising capital on the floatation of a company are included in the term ' preliminary expenses ' which are not included in any of the deductions mentioned in Section 9 ....If then it is admitted that the case of raising original capital cannot be deducted from the profit after the first year, it is difficult to see how the case of raising additional capital can be treated in a different way. The expenses incurred in raising capital are expenses exactly of the same character, whether the capital is raised at the floatation of the company or thereafter... and if these Rs. 28 lakhs could not be treated as wholly laid out for the purpose of the trade of the petitioners, they could not be treated as incurred solely for the purpose of earning the profits of the petitioner's trade....As long as the law allows preliminary expenses to be treated as assets' although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery.
10. In The European Investment Trust Company, Ltd. v. Jackson (1932) 18 T.C. 1 the assessee company obtained its finances from the American Finance Corporation. The company's business was advancing the money for the purchase of motor cars under the hire-purchase system. The company itself bought the car in the first instance and finally sold it to the hire-purchaser. As the company's capital was the sum of 1,000, it had need for a considerable amount of capital in order to enable it to purchase the motor cars, which it sold on the hire-purchase system. For this purpose, it obtained finances from the American Finance Corporation and the question arose whether the interest on these advances was an admissible deduction. It was found as a question of fact that the company could not carry on its business except with a considerable amount of capital and it was not disputed that the moneys advanced by the American Finance Corporation were for the purpose of enlarging the capital of the company. Finlay, J., observed:
In the first place it was quite obvious that for the sort of business that was being undertaken the thousand pounds capital was quite inadequate. That was met first by the advance of 10,000 and it is not disputed that that has to be regarded as capital....Fortunately for the company, it (the business) appears to have increased very much with the result that a very great deal of capital was wanted and the capital was supplied and supplied in very large amounts.
In dealing with the principle applicable to this class of cases, the learned Judge stated:
Now, here it seems to me that the principle may be stated in this way : if you get a company dealing with money, buying or selling stocks or shares, treasury bills, bonds, all sorts of things, and if you get that company getting, as such companies constantly do get, temporary loans from their bank-accommodation, I suppose, for some times twenty-four hours, or even less, sometimes for a good deal longer--if you get that sort of thing, then the interest on that money, the hire, so to speak, paid for that money, may properly be regarded as an expenditure of the business, an outgoing to earn the profits. On the other hand, if the truth of the thing is that by the payment of the interest the company does not obtain mere temporary accommodation, day to day accommodation of that sort, but does, in truth, add to its capital and get sums which are used as capital and nothing else, then I think that in that case all the authorities show that that deduction cannot properly be made.
In the Court of Appeal, though the decision of Finlay, J., was affirmed and it was held that the finding of the Commissioners that the money was used as capital was one of fact, reference was made to the Scottish North American Trust, Ltd. v. Farmer. Romer, L.J., dealing with that decision, observed:
The House of Lords affirming the decision of the Court of Sessions in Scotland held that the moneys so borrowed were not sums employed as capital in the trade....In point of fact, the money which was held not to be capital--although it was capital, as I say, in the sense that it was not income--was really what is frequently referred to as circulating capital. But, again, it is impossible, I think, to treat the decision of the House of Lords as laying down that capital, which is used as circulating capital, is not capital within the meaning of Sub-rule (f). To start with, they did not, in terms draw any distinction between circulating capital and fixed capital and, in the next place, they did not overrule, although they commented upon, the decision in the Anglo-Continental Guano Works v. Bell (1894) 3 T.C. 239 where money that, so far as I can see, was borrowed and used as a circulating capital, was treated as capital within the meaning of Sub-rule (f)....
It would be seen from the above that the Scottish North American Trust, Ltd. v. Farmer (1911) 5 T.C. 693 apparently marked a departure from the line of cases that went before. A distinction was drawn between cases where the company borrowed funds for the purpose of ulilising it as part of its circulating capital in the sense that it was required for its trading assets as distinct from its fixed assets. That distinction was followed in Ascot Gas Waterheaters, Ltd. v. Duff 24 T.C. 171 That such a distinction is a substantial one for the purpose of determining whether any expense connected with such borrowings are deductible or not is very clear in this decision. In that case, the appellant company purchased raw materials from a German Company, being allowed nine months credit. Subsequently the German Company reduced the period of credit and demanded a guarantee of the appellant's company's indebtedness. A guarantee of 2 lakhs was given by a Dutch Company for which the appellant company paid a commission of 3 per cent, per annum. At the same time, for the purpose of providing credit and,, reserves necessary for the extension of the business, the company borrowed 1,50,000. The service and repayment of this loan was guaranteed by a Dutch banking firm to which the appellant company paid a similar commission. The Special Commissioners found that the commission paid on the first guarantee was wholly and exclusively expended for the purpose of the company's trade and was a proper deduction but that the commission under the second guarantee was not a proper deduction. Lawrence, J., stated, after referring to the European Invest- ment Trust Company v. Jackson (1932) 18 T.C. 1:
It appears therefore from those observations of Romer, L.J., that the matter cannot be concluded by considering simply whether the sum in respect of which the sum is sought to be deducted is fixed capital or circulating capital and it appears to me that the only true principle must be the principle which is laid down by Finlay, J., and which is binding on me, no other decision or criticism of his statement of the principle having been brought to my notice. The principle therefore which the Commissioners ought to have applied in each of these cases was whether the sums in respect of which the commission dealt with in these two cases were temporary in their nature and might be regarded as an ordinary incident in the carrying on of the business of the company.... ....In my opinion, they were clearly right in that decision, both because the money was lent in payment for first mortgage debenture a capital (which cannot, in my opinion, be in any sense regarded as within the sort of temporary accommodation of which Finlay, J., spoke).
Dealing with the first guarantee, he said:
Having regard to the fact that the commission was payable in respect of a sum of money which was raised in respect of the guarantee of the amount of an existing trade debt and the fact that that trade debt was very largely reduced in the two years after the guarantee had been given and the fact that the parties were, according to the evidence, anxious that this loan should be repaid as quickly as possible, I feel unable to say that there was no evidence upon which the Commissioners might come to the conclusion of fact which they did.
It would be obvious from the above that notwithstanding that the particular provisions of the English statute placed restrictions upon such allowances and there is in fact no allowance of the kind contemplated under Section 10(2)(iii) of the Indian Act, decisions have made a distinction between cases where temporary accommodations for the purpose of carsying on the business are obtained and long-term loans for whatever purpose such loans might be taken. A distinction is also apparent between businesses which deal in money or the equivalent of money, such as shares, bonds and the like and other business. In such cases, loans taken for the purpose of acquiring what may be called the trading assets have been regarded as utilised only for the increasing of the working capital. Though the English statute makes no distinction between fixed and circulating capital, any expenditure involved in respect of loans for amplifying the circulating capital by way of temporary accommodation has been held in these decisions to be expenditure laid out wholly and exclusively for the purpose of business and therefore allowable as a deduction.
11. Mr. Venkataraman, for the assessee, refers to Moolchand v. Commissioner of Income-tax (1954) 29 I.T.R. 449. In this case, a partner of a firm borrowed moneys for investment in the partnership. The question arose whether the interest paid by the partner on the capital borrowed was an allowable deduction under Section 10(2)(iii) of the Hyderabad Income-tax Act, a provision corresponding to Section 10(2)(iii) of the Indian Act. This was answered in favour of the assessee. The further question in that case was whether the commission paid by that partner to his agent for the purpose of procuring the money which was later invested in the partnership business was money laid out or expended wholly and exclusively for the purpose of the business and whether that commission was deductible from the partner's share of the income from the firm. This question also was answered in the affirmative, but unfortunately, we find no discussion on this aspect of the matter. The learned Judge observed:
In order to claim deduction under the residuary Clause (xv) it must be shown that the expenditure was in respect of the business which was carried on by the assessee in the accounting year and the profits of which are computed and assessed; that it was not in the nature of personal expenses of the assessee, that it was not in the nature of a capital expenditure and that it was laid out wholly and exclusively for the purpose of such business.
There is no doubt that the amount paid to Mohammad Yakub is neither in the nature of a capital, expenditure nor can it be said to be the assessee's personal expenses....
We are unable to agree with the above observation. It seems to us that the commission so paid in order to raise a sum of money has neither any real or even apparent connection with the business in which that sum of money was subsequently invested. How that particular expenditure incurred even before the amount so borrowed was put into the business could be treated as having been expended purely and exclusively for the purpose of that business is difficult to follow. It may be that the partner was anxious to increase his share of the investment in that business. That he had to incur some expenditure in securing the money to be invested in the firm does not seem to result in the conclusion that that expenditure was for the purpose of that business. For instance, if a person sold certain securities of his own and had to pay brokerage or commission in that connection, it is difficult to see how such brokerage or commission could be deemed to have been money expended for the purpose of the business in which the money so raised was later invested. Obviously, the partner had capital in his own hands in one form. That he had to expend the moneys to convert it into another form, such conversion being necessary before the money could be invested in the firm, is hardly sufficient to establish the connection between the expenditure incurred by the assessee principally on his own account and an expenditure laid out wholly and exclusively for the purpose of the business.
It is true that in The Assam Bengal Cement Company, Ltd. v. Commissioner of Income-tax : 27ITR34(SC) their Lordships of the Supreme Court laid down certain tests for distinguishing between capital and revenue expenditure. We are unable to see how far the tests can be of help in determining whether the payment of expenses in connection with the securing of a loan would or would not be an allowable item of expenditure. Not only should such payments not be of a capital nature, but such expenditure should have been laid out wholly and exclusively for the purpose of the business before the deduction could be allowed under Section 10(2)(xv). Their Lordships-observe:
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.... he question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for an extension of a 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 an 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 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 the 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 part of the fixed capital of the business, it would be of the nature of capital expenditure and if it 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.
12. If we ask for what purpose the expenditure in the present case was incurred, the only answer must be that it was incurred for the purpose of bringing into existence an asset in the shape of borrowing these Rs. 40 lakhs. The further question would then be whether this asset or advantage was not for the enduring benefit of the business and whether the expenditure incurred was one which was incurred once and for all. The answer to both questions would again be in the affirmative. It is true that the borrowed money has to be repaid and it cannot be an enduring advantage in the sense that the money becomes part of the assets of the company for all time to come. But, it certainly is an advantage which the company derives for the duration of the loan, and undoubtedly it could not have been for any purpose other than an advantage to the business that the borrowing has to be repaid after a short or long period, as it were, cannot affect the conclusion that it was nevertheless an asset or an advantage that was secured. Viewed in the light of the tests adumbrated in the above decision, it seems to us that the expenditure must be regarded as capital expenditure. As the facts of the case which we have set out earlier indicate, there can be no doubt that at least to the extent of Rs. 25 lakhs that amount was expended for purposes of a capital nature, clearly in order to bring into existence capital assets. We have also pointed out that though it was vaguely stated by the Tribunal that the other sum of Rs. 15 lakhs was utilised as working funds, there seems to be no material whatsoever before the Tribunal to justify its coming to that conclusion.
13. The result accordingly is that the sum of Rs. 84,633 expended by the assessee in obtaining the loan is not allowable as an item covered by Section 10(2)(xv). The question is answered against the assessee. He will pay the costs of the Department. Counsel's fee Rs. 250.