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Commissioner of Income-tax Vs. Metal Corporation of India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 188 of 1976
Judge
Reported in[1982]133ITR130(Cal)
ActsIncome Tax Act, 1961 - Sections 10(15), 66(1) and 256(2); ;Indian Income Tax Act, 1922 - Sections 10(2), 10(5) and 36; ;Companies Act, 1956 - Section 208; ;Madras Plantations Agricultural Income-tax Act, 1955 - Section 5
AppellantCommissioner of Income-tax
RespondentMetal Corporation of India Ltd.
Appellant AdvocateBalai Pal and ;A. Sengupta, Advs.
Respondent AdvocateS.R. Banerjee, ;S.N. Mukherjee and ;D.C. Nandi, Advs.
Cases ReferredState of Madras v. G.J. Coelho
Excerpt:
- sabyasachi mukharji, j. 1. in this reference under section 256(2) of the i.t. act, 1961, two questions have been referred to this court by the tribunal as directed by the court. the questions are as follows : 2. for the assessment years 1962-63 & 1963-64. ' whether, on the facts and in the circumstances of the case, the tribunal is right in holding that the commission paid to the industrial finance corporation of india for standing guarantor in respect of deferred payments made by the assessee for the purpose of capital equipments and the interest paid to the non-resident firm against such deferred payments were expenses of a revenue nature '3. for the assessment years 1964-65 & 1965-66. ' whether on the facts and in the circumstances of the case, the tribunal was right in holding that.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(2) of the I.T. Act, 1961, two questions have been referred to this court by the Tribunal as directed by the court. The questions are as follows :

2. For the assessment years 1962-63 & 1963-64.

' Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the commission paid to the Industrial Finance Corporation of India for standing guarantor in respect of deferred payments made by the assessee for the purpose of capital equipments and the interest paid to the non-resident firm against such deferred payments were expenses of a revenue nature '

3. For the assessment years 1964-65 & 1965-66.

' Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid to the Industrial Finance Corporation of India and the Government of Rajasthan for standing guarantor in respect of deferred payments made by the assessee for the purchase of capital equipments and the interest paid to the non-resi-dent firm against such deferred payments were expenses of a revenue nature? '

4. The assessment years involved are 1962-63, 1963-64, 1964-65 and 1965-66. The assessee-company's business was to mine lead and zinc ores and prepare lead and zinc concentrates. As the assessee did not have the plant for processing zinc concentrates, the metal ore was sent to Japan for processing on toll basis and the refined metal was brought back to India and supplied to 'Tatas' and 'Indian Iron ' as per the direction of the Ministry of Commerce and Industry. The assessee took steps for the installation of a zinc smelter factory and applied to the Industrial Finance Corporation of India for a loan for purchasing zinc smelter and also for guaranteeing deferred payment for such purchase. The IFC sanctioned the loan for a sum of Rs. 1 crore and guaranteed for deferred payment to the extent of Rs. 4.5 crores for plant and equipments to be purchased. The loan and the guarantee were to be secured by a mortgage deed in their favour by hypothecating the present and future block assets of the assessee-company. The zinc smelter factory was located at Debari near Udaipur, In consideration of the IFC issuing letters of guarantee they were paid the customary guarantee commission of 1% which amounted to Rs. 3,23,828 and Rs. 3,71,567 in the assessment years 1962-63 and 1963-64, respectively. In addition, the assessee had to pay interest on deferred payments which came to Rs. 1,18,984 in the assessment year 1962-63 and Rs. 8,58,941 in the assessment year 1963-64. In the assessment year 1964-65, the assessee paid the sums of Rs. 1,56,856 and Rs. 4,15,143 on account of guarantee commission to the Rajasthan Govt. and the IFC, respectively, and also paid a sum of Rs. 15,79,093 on account of interest on deferred payments made to the non-resident for the supply of materials. Similarly, in the assessment year 1965-66, the assessee paid Rs. 4,80,744 representing guarantee commission to the IFC and the Govt. of Rajasthan, and Rs. 17,23,126 representing interest on deferred payment. The aforesaid amounts were claimed as deductions on revenue account by the assessee in all the four years. The fact that these amounts were claimed as revenue expenditure would be apparent if one peruses the relevant assessment orders for the aforesaid four years.

5. The ITO in the assessment order for the first year observed, for instance, ' All these expenses do not constitute revenue item, the same is not allowed '. More or less, for similar reasons for the other years, these were not allowed for the four years. '

6. The ITO held that those payments did not constitute revenue items because they were related to the expansion programme of the assessee and the payments had also been made to a non-resident and no tax had beendeducted. Thus, he disallowed the claim of the assessee in all the four years, as stated hereinbefore.

7. The assessee, being aggrieved by the orders of the ITO, preferred appeals before the AAC. It was urged in the appeals for the assessment years 1962-63 and 1963-64, that the interest on deferred payments on account of machinery imported was allowable in view of the provisions of Section 10(15)(iv)(c) of the I.T. Act, 1961, and that the guarantee commission was allowable on the basis of certain decisions. The AAC, by his order dated June 29, 1969, for the assessment years 1962-63 and 1963-64, held that the assessee-company itself had not shown the amounts in the profit and loss accounts but debited the same to a suspense account relating to the expansion programme. During the years under appeal the progress with the construction of the factory was going on and it could not be said that the business as such relating to new zinc smelter was actually carried on. The years under appeal were only pre-operational stage in respect of the expansion programme and the expenditure claimed could be allowed only for business which was carried on. But, in the instant case, it could not be said that the business was carried on. The expenditure was, according to the AAC, only in connection with the expansion programme undertaken. He, therefore, upheld the disallowance made by the ITO for the assessment years 1962-63 and 1963-64.

8. For the assessment years 1964-65 and 1965-66, the appeals preferred by the assessee were disposed of by the AAC by two separate orders. It was urged before the AAC in those appeals that zinc refining was not a new business but part of the same business of mining and manufacturing of lead, zinc and silver. Further, there was common management and Common business organisation and it was only one business. The AAC, by his order dated March 12, 1970, for the assessment year 1964-65, held that the business of the assessee-company had to be treated as mining and manufacturing of lead, zinc and silver and thus the business had been carried on by the assessee during the year. The installation of zinc smelter was only an expansion programme in respect of the same business and any expenditure incurred in connection with the same would have to be allowed as deductions in computing the business income of the assessee unless the expenditure was in the nature of capital expenditure. After discussing the relevant contentions of the assessee, the AAC held that the expendi-ture incurred in connection with the loan could not be treated as an expenditure of capital nature and the interest on unpaid purchase price was an allowable deduction. The AAC further held that the guarantee commission and the interest on deferred payments were properly allowable as deductions in computing the business income of the assessee. Following the reasons given in the order for the assessment year 1964-65, the AACallowed the claim of the assessee for the assessment year 1965-66 by his order dated September 8, 1970.

9. The assessee preferred appeals before the Tribunal for the assessment years 1962-63 and 1963-64. The revenue filed similar appeals for the other two years. The Income-tax Appellate Tribunal discussed the relevant cases and held that there was one business carried on by the assessee as a common organisation having common profit and loss account for all purposes. Taking into account all these factors, the Tribunal was satisfied that there was a single system of financing and all the transactions had been dealt with in only one profit and loss account. The Tribunal further noted that from the organisation of the business as a whole and its management, it was clear that all the businesses were dealt with together. The assessee, according to the Tribunal, was carrying on a single business. Having regard to the facts, the Tribunal held that the expenditure was of a revenue nature. This was not a case where expenditure of a preliminary nature or expansion into a new venture was being claimed as deductions. The Tribunal was of the view that in a running business it was not proper to look into the components to see how far particular items could be related to profit or loss or to an in'cipient activity or matured activity. These items of expenditure, according to the Tribunal, did not bring into existence of any asset of a capital nature, because guarantee commission as such did not bring into existence any asset nor did the interest payment. These were related to the debts of the assessee and the Tribunal, relying on the decision of the Supreme Court in the case of India Cements Ltd. v. CIT : [1966]60ITR52(SC) , held that the allowance or commission or interest should be allowed. So far as the appeals for the assessment years 1962-63 and 1963-64 were concerned, after setting out the relevant contentions, the Tribunal allowed the claim of the assessee. Upon this, both these questions have been referred as directed by this court.

10. Before we deal with the merits of the contentions, we must first deal with one contention raised on behalf of the assessee. On behalf of the assessee, it was contended that the questions, as directed by this court, did not arise from the order of the Tribunal. It was further urged that these questions, namely, whether the expenditure was to be allowed as revenue expenditure or should not be allowed being an expenditure in the nature of capital expenditure, was not canvassed before the Tribunal. What was canvassed was, according to the learned advocate for the assessee, whether it related to the same business or to a separate business. Therefore, on behalf of the assessee, it was stressed that this question did not arise from the order of the Tribunal and this court should decline to answer the questions. It may incidentally be pointed out that before the Tribunal these questions were asked for a reference to this court and the Tribunal dec-lined to refer. Thereafter, in a reference application to this court, these questions were asked for and the court directed reference on one of these questions for these two years as prayed for in an application under Section 256(2) of the I.T. Act, 1961.

11. In the case of CIT v. Mct. AR. S. AR. Arunachalam Chettiar : [1953]23ITR180(SC) , the Supreme Court observed at p. 189 of the report as follows:

' The learned Attorney-General urged that having under Section 66(2) of the Act directed the Appellate Tribunal to state a case, the High Court could not afterwards refuse to answer the question thus referred to it. Whether the High Court was so precluded or not requires no decision on this occasion, for, even conceding but not deciding that the High Court was so precluded, this court, at any rate, can surely entertain the question of the competency of the reference.'

12. The point was further fully clarified, however, by the Supreme Court in its decision in the case of CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) . There, at p. 611 of the report, the Supreme Court observed as follows:

' The result of the above discussion may thus be summed up :

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.'

13. The Supreme Court categorically stated that when a question of law was neither raised before the Tribunal nor considered by it, it would not be a question arising out of its order notwithstanding that it might arise on the findings given by it. In the case of CIT v. Smt. Anusuya Devi : [1968]68ITR750(SC) , the Supreme Court held that even though where an order was passed by the High Court calling upon the Tribunal to state a case on a question which did not arise out of the order of the Tribunal, the High Court was not bound to advise the Tribunal on that question if the question did not arise out of the order of the Tribunal or it is a question of fact. The Supreme Court reiterated that the High Court might answer only a question referred to it by the Tribunal; the High Court was not bound to answer a question merely because it was raised and referred. It was well settled, the Supreme Court stated, that the High Court might decline to answer a question of fact or a question of law which was purelyacademic, or had no bearing on the dispute between the parties or, though referred by the Tribunal, did not arise out of its order. The Supreme Court also emphasised that the High Court might also decline to answer a question arising out of the order of the Tribunal if it was unnecessary or irrelevant or was not calculated to dispose of the real issue between the taxpayer and the revenue. If the power of the High Court to refuse to answer questions other than those which were questions of law directly related to the dispute between the taxpayer and the department, and which, when answered, would determine qua that question the dispute, be granted, the Supreme Court failed to see any ground for restricting that power when by an erroneous order the High Court had directed the Tribunal to state a case on a question which did not arise out of the order of the Tribunal. The Supreme Court was, therefore, unable to hold that at the hearing of a reference pursuant to an order calling upon the Tribunal to state a case, the High Court must proceed to answer the question without considering whether it arose out of the order of the Tribunal or whether it was a question of law or whether it was academic, unnecessary or irrelevant. In other words, even if the question had been directed under Section 256(2) of the I.T. Act, 1961, at the hearing of the reference, the court might, if the question 'did not arise out of the order of the Tribunal, decline to answer the question. In the case of Lakshmiratan Cotton Mills Co. Ltd. v. CIT : [1969]73ITR634(SC) , the Supreme Court reiterated that the correctness of an order of the High Court calling for a statement of case might be challenged at the hearing of the reference and the court might decline to answer that question referred pursuant to the direction of the High Court if it did not arise out of the order of the Tribunal or was a question of fact or was academic or could not have been raised because it was not incorporated in the application under Section 66(1). For this proposition, our attention was drawn to a decision of the Rajasthan High Court in the case of CIT v. Braham Dutt Bhargava . Therefore, if we were satisfied that the present question, that is to say, whether the expenditure should be allowed as revenue expenditure or capital expenditure was not argued or was not adverted to by the Tribunal, then, we would have been justified in declining to answer this question. But reading the controversy before the ITO, before the AAC and before the Tribunal, we are clearly of the opinion that the main question was whether the expenditure in question should be allowed as revenue expenditure or capital expenditure though it might not have been argued in the same fashion as was canvassed before us in this court. It was looked at as a question whether it formed a part of the same business or it was an expenditure connected with a different business but essentially the question was, on the controversy, whether the expenditure claimedwas allowable as revenue or capital expenditure. A different aspect of the same question under a different facet can be agitated if the point was before the Tribunal. In that view of the matter, we are unable to sustain the objection on behalf of the assessee for entering into this question, and we hold that the question, as directed by this court, did arise out of the order of the Tribunal though it was not argued in the manner and form as it was argued before us.

14. Next aspect of the matter is, whether the expenditure mentioned hereinbefore could be allowed as revenue expenditure. On behalf of the revenue, it was argued that it was manifest from the finding of the Tribunal that this was for expansion or installation of a new plant. A plant, it was emphasised, would be a capital asset of enduring advantage. Therefore, it was stressed that any cost or expenses in connection with the said plant or expansion would be the actual cost of the said plant or expansion and would, therefore, not be entitled to be deducted as revenue expenditure. In this connection, reference was made to several decisions to which we shall presently refer.

15. Our attention was drawn to a decision of the Supreme Court in the case of Assam Bengal Cement Co. Lid. v. CIT : [1955]27ITR34(SC) . There, the assessee-company had acquired from the Govt. of Assam, for the purpose of carrying on manufacturing of cement, a lease of certain limestone quarries for a period of 20 years for certain half yearly rents and royalties. In addition to the rents and royalties; the company agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and in consideration of that payment the lessor undertook not to grant any person any lease, permit or prospecting licence for limestone under a group of quarries without a condition that no limestone should be used for the manufacture of cement. The company also agreed to pay Rs. 35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was, whether, in computing the profits of the company the sums of Rs. 5,000 and Rs. 35,000 paid to the lessor by the company could be deducted under Section 10(2)(xv) of the Indian I.T. Act, 1922. The I.T. authorities, the Appellate Tribunal and the High Court, on a reference under Section 66(1), held that the amount was not an allowable deduction under Section 10(2)(xv). On appeal, the Supreme Court held that the payment of Rs. 40,000 was a capital expenditure and was, therefore, rightly disallowed as a deduction under Section 10(2)(xv) of the Act. In doing so, the Supreme Court at p. 42 of the report referred to several English and Australian authorities on this aspect arid at p. 45 of the report referred to the Full Bench decision of the Lahore High Court in the case of In re Benarsidas Jagannath .

16. The Supreme Court observed that those were the principles which had to be applied in order to determine whether in that case before the Supreme Court the expenditure incurred by the company was capital expenditure or revenue expenditure, and the consideration of Rs. 5,000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact that it was a recurring payment was immaterial because one had to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring benefit was thus of the nature of capital expenditure and was not an allowable deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922. The Supreme Court, however, emphasised that in order to determine the nature of expenditure or character of expenditure, whether it was capital expenditure or revenue expenditure, the source or the manner of payment was of no significance.

17. On behalf of the revenue, our attention was drawn to the observations of the Supreme Court in the case of Travancore-Cochin Chemicals Ltd. v. CIT : [1977]106ITR900(SC) . There, the assessee was engaged in the manufacture of chemicals, had been receiving and despatching through lorries materials received for and produced in its factory situated in an area which was not served by pucca roads. Along with three other public undertakings, the assessee-company approached the Kerala Govt. for laying different new roads in that area. The Government bore the cost of acquisition of the land and 25 per cent. of the cost of construction of the road. The total cost to be shared by the 'four concerns came to Rs. 1,04,500 of which the assessee-company's contribution came to Rs. 26,100. This amount the assessee-company sought to deduct as a business expenditure in computing its profits for the previous year ending March 31, 1964, relevant to the assessment year 1964-65. The Appellate Tribunal held that the assessee-company was entitled to deduct the amount as revenue expenditure but the High Court on a reference heldthat the assessee-company obtained an enduring advantage by the construction of the road and, therefore, the amount contributed was capitalexpenditure. On appeal, the Supreme Court held, confirming the decisionof the High Court, on ,the facts, that by having the new road constructedfor the improvement of transport facilities, the assessee-company acquiredan enduring advantage for its business and the expenditure incurred bythe assessee-company was of a capital nature. This decision was reliedupon in aid of the proposition that even if in respect of an existing business an enduring advantage had been acquired, and for acquiring an assetor expansion of the business if an expenditure was incurred, then suchexpenditure in connection therewith should also be excluded from theincome or the revenue account.

18. As we have mentioned before, it was argued that the expenses incurred, in this connection, for the plant and machinery, viz., the interest and costs and incidentals thereto, would be actual cost of the asset and development rebate or investment allowance or depreciation allowance, as the case may be, would be allowable in respect of such expenses. Therefore, these expenses, being expenses which constituted the actual cost of the asset which was of an enduring nature, being a plant, should not be treated as revenue expenditure. About the meaning as to what should be the actual cost of an asset, reliance was placed on the decisions of the Calcutta High Court in the cases of CIT v. Standard Vacuum Refining Co. of India Ltd. : [1966]61ITR799(Cal) and CIT v. Fort Gloster Industries Ltd. : [1971]79ITR48(Cal) , of the Kerala High Court in the case of CIT v. Travancore-Cochin Chemicals Ltd. : [1975]99ITR24(Ker) [FB] and of the Madras High Court in the cases of CIT v. South India Steels & Sugars Ltd. : [1977]109ITR341(Mad) and Addl. CIT v. Kwality Spinning Mills (P.) Ltd. : [1977]109ITR646(Mad) .

19. The Supreme Court in the case of Challapalli Sugars Ltd. v. CIT and CIT v. Hindustan Petroleum Corporation Ltd. : [1975]98ITR167(SC) , held that the interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the ' actual cost' of the assets to the assessee within the meaning of the expression in Section 10(5) of the Indian I.T. Act, 1922, and the assessee would be entitled to depreciation and allowances and development rebate with reference to such interest also. As the expression 'actual cost' had not' been defined, it should be construed in the sense which no commercial man would misunderstand. There, at p. 174 of the report, the Supreme Court referred to the provisions of Section 208 of the Companies Act, 1956, and to the Statement on Auditing Practices issued by the Institute of Chartered Accountants of India, where it had observed, inter alia, as follows (p. 174):

' 2.22. The question often arises as to whether interest on borrowings can be capitalised and added to the fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised. 'Interest incurred' means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. In no circumstances should imputed interest be capitalised, such as interest on equity or preference capital at a notional rate. Interest on capital during construction paid in accordance with the provisions of Section 208 of the Companies Act, 1956, may, however, be capitalised as permitted by that section. Interest on monies which, are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i, e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised......'

20. Reliance was placed on the decision of the Gujarat High Court in the case of Arvind Mills Ltd. v. CIT : [1978]112ITR64(Guj) , where the Division Bench of the Gujarat High Court was dealing with the meaning of ' actual cost' of machinery and distinguishing ' cost ' and ' price '. There at pp. 79 and 80 of the report, the Division Bench referred to the, two decisions of the Supreme Court, viz., State of Madras v. G. J. Coelho : [1964]53ITR186(SC) and India Cements Ltd. v. CIT : [1966]60ITR52(SC) . So far as the first case is concerned, the Gujarat High Court held that the Supreme Court had held, in the facts and circumstances of the case, that interest paid by the assessee on monies borrowed for the purpose of purchasing plantations was not capital expenditure as no new asset was acquired nor enduring benefit obtained is a result of the payment of interest and that it was an expenditure laid out and expended wholly and exclusively for the purpose of plantations. In the said decision itself, however, it was reiterated that outlay was deemed to be capital when it was made for the initiation of a business, for the extension of a business, or. for a substantial replacement of equipment and that expenditure might be treated as properly attributable to capital when it was made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. The Gujarat High Gourt felt that if these tests should be applied to the borrowing in the present case, it. would be apparent that the assessee having acquired with it machinery, which was an equipment of enduring benefit to its manufacturing activity, the entire outlay including interest and other incidental charges which had to be incurred would be capital in nature. The decision in the second case, according to theGujarat High Court, was not helpful to the revenue in that case, because in that case the incidental expenses in respect of which the claim was made were incurred in respect of a loan which was obtained by the assessee partly to pay off a prior debt which they had incurred in order to purchase a capital asset and partly for augmenting the working funds of the company.

21. Reliance was also placed on the decision of this court in the case of CIT v. New Central Jute Mills Co. Ltd. : [1979]118ITR1005(Cal) . There the assessee had borrowed money from the U.P, Govt. for the purpose of setting up a chemical plant. Until utilisation the amount received was kept in deposit with the bank on which the assessee earned some interest and out of which it paid the interest on loan to the U.P. Govt. It was held that the interest paid to the Govt. of U.P. on the loan for the purpose of setting up the plant was to be capitalised and added to the cost of the said plant which was being set up. That being so, the same amount could not be treated differently in the accounts of the assessee and converted into loss by deducting therefrom the interest paid to the Govt. of U.P. It was further held that if the assessee succeeded in establishing that there was some connection or nexus between the interest paid to the Govt. of U.P. and the interest earned from the bank, such nexus being that both the item of interest were either earned or paid on the said amount of loan, yet, the assessee had failed to establish that it was its purpose or one of its purposes to utilise the amount received on loan for earning interest. The assessee had not established that the expenditure was incurred solely and wholly for the purpose of earning interest from the bank. Therefore, it was held that the sum paid to the U.P. Govt. as interest on moneys borrowed from it was not allowable as a deduction against the interest income earned from the bank. The facts of that case were entirely different from the facts with which we are concerned in the instant case.

22. On behalf of the assessee, reliance was placed on the decision of the Bombay High Court in the case of Calico Dyeing and Printing Works v. CIT : [1958]34ITR265(Bom) . There the assessee-firm which carried on the business of bleaching, dyeing and printing cloth borrowed money in the year of account in order to extend its business, purchased land arid erected plant and machinery and paid interest on the borrowed capital. In the relevant assessment year the claim of the assessee to deduction of the interest so paid under Section 10(2)(iii) of the Indian I.T. Act, 1922, was rejected on the ground that the plant and machinery were not used for the business in the year of account. It was held that the assessee was entitled to the deduction claimed, even though the plant and machinery were not used in the year of account. Chief Justice Chagla held that where the assessee claimed deduction of interest paid on capital borrowed under Section 10(2)(iii) of theIndian I.T. Act, 1922, similar to Section 36 of the present Act, all that the assessee had to show was that the capital which was borrowed was used for the purpose of the business of the assessee in the relevant year of account. It did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. If the capital was used in the year of account and the use was for the purpose of the business of the asses-see, it was immaterial whether the user of the capital actually yielded profit or not and it was not open to the department to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital was unremunerative.

23. In the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [ : [1965]56ITR52(SC) , the Supreme Court observed as follows:

' The question then is whether the expenditure is of a capital nature. It is not easy ordinarily to evolve a test for ascertaining whether in a given case expenditure is capital or revenue, for the determination of the question must depend upon the facts and circumstances of each case. The court has to consider the nature and ordinary course of business and the objects for which the expenditure is incurred. The assessee-company urged that the payment of interest was revenue expenditure for the purposes of the business of the assessee-company, because in the event of failure to pay interest accruing due, the Scindias would enforce the lien, and the business of the assessee-company would come to an end and that in any event the expenditure was necessary on grounds of business expediency and incurred in order directly or indirectly to facilitate the carrying on of business. If the principal or the interest accruing due was not paid, the Scindias had undoubtedly a right to enforce their lien against the assets of the assessee-company's business, but that cannot be regarded as a ground for holding that the expenditure fell within Section 10(2)(xv). Even in respect of a liability wholly unrelated to the business; it would be open to a creditor to sequester the assets of the assessee's business and such sequestration may result in stoppage of the operation of the business. Expenditure for satisfying liability unrelated to the business even if incurred for avoiding danger, apprehended or real, to the conduct of the business cannot be said to be revenue expenditure. Nor can it be said that because a liability has some relation to the business which is carried on, expenditure incurred for satisfaction of such liability is always to be regarded as falling within Section 10(2)(xv).

Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances and by the application of principles of commercial trading. The question must be viewed in the larger context of businessnecessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. In a recent case, State of Madras v. G.J. Coelho : [1964]53ITR186(SC) , this court had to consider the permissibility of a deduction under section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955. Section 5(e), it may be observed, is in terms similar to Section 10(2)(xv) of the Income-tax Act. Section 5 permits deductions of various items of expenditure in the computation of agricultural income. Clause (e) provides for the deduction of any expenditure incurred in the previous year (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 plantation. The assessee in that case had purchased an estate consisting of tea, coffee and rubber plantations in the Nilgiris mountains for Rs. 3,10,000. He borrowed Rs. 2,90,000 on interest and claimed to deduct the interest paid out of the income of the plantations in the assessment year 1955-56. The claim was made under Clauses (e) and (k) of Section 5. The claim tinder Clause (k) was not admissible because interest was not payable on the amounts borrowed and actually spent on the plantations in the previous year, and the sole question which fell to be determined was whether it was a permissible allowance under Section 5(e). It was held that the payment of interest was not in the nature of capital expenditure in the year of account. The court held that the payment of interest even in respect of capital borrow ed for acquiring assets to carry on business must be regarded as revenue expenditure in commercial practice and should not be termed as capital expenditure. Dealing with the application of Section 5(e), it was observed : 'The assessee had bought the plantation for working it as a plantation, i. e., for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agriculcultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts...... In principle, we do not see any distinction between interestpaid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations: both are for the purposes of the plantation.'

The test laid down by this court, therefore, was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business.'

24. In the case of India Cements Ltd. v. CIT : [1966]60ITR52(SC) , the Supreme Court had to consider the question of interest and there the Supreme Court observed as follows (p. 63) :

' To summarise this part of the case, we are of the opinion that

(a) the loan obtained is not an asset or advantage of an enduring nature ;

(b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10(2)(xv).'

25. There, the assessee had obtained a loan of Rs. 40 lakhs from the IFC secured by a charge on its fixed assets. In connection therewith it had spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. It was held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained.

26. Reliance was also placed on a decision of the Andhra Pradesh High Court in the case of Addl. CIT v. Akkamba Textiles Ltd. : [1979]117ITR294(AP) . There, the question was whether a particular expenditure was revenue expenditure incurred for the purpose of the business and it was held that in the larger context of business necessity or expediency, if the outgoing expenditure was so related to the carrying on or the conduct of business, that it might be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of business, the expenditure might be regarded as revenue expenditure. The transaction of acquisition of assets could be said to be closely related to the commencement and carrying on of business by an assessee. Hence, any expenditure incurred by the assessee, which was a running concern, for ensuring the use of money for a certain period or enabling the assessee to make deferred payment of the cost of assets acquired constituted revenue expenditure, and, therefore, thesame was admissible as deduction from revenue income. Therefore, the commission paid by the assessee to the guarantor for enabling the assessee to make deferred payment of the purchase consideration, constituted revenue expenditure and not capital expenditure and, therefore, was admissible as deduction from the income, according to the Andhra Pradesh High Court.

27. In the light of the principles reiterated by the Supreme Court and in the background of the facts of the case, we have to determine the questions before us, whether a particular expenditure is a revenue expenditure, must be considered, in the facts and circumstances of the case and by the application of the principles of commercial and business expediency. If the outgoing expenditure was so related to the carrying on or the conducting of the business, it must be regarded as an integral part of the profit-earning process. The assessee had already its business for refining of the metal, which was sent to Japan. The assessee took steps for the installation of a zinc smelter factory and for this purpose had applied to the Industrial Finance Corporation of India for a loan for purchasing a zinc smelter and also for guaranteeing the deferred payments for such purchase. On the facts found by the Tribunal, it was held that this was a part of the same business even though it was acquisition of an asset of some enduring advantage so as to facilitate the carrying on of the business and really for the purpose of the acquisition, a loan, which was a liability, had been incurred and for securing or for continuing the said loan certain commission and interest had to be paid. This, in our opinion, was so integrally and so intimately connected with the profit-earning process of the assessee-company that it should legitimately be considered in accordance with the principles laid down by the Supreme Court to be an expenditure of revenue nature. From this point of view, it is not nccessa'ry for us to consider whether it was liable to be disallowed as being part of the actual cost on account of depreciation or development rebate or investment allowance under the relevant sections of the Act. In that view of the matter, we will answer both the questions in the affirmative and in favour of the assessee.

28. In the facts and circumstances of the case, there will be no order as to costs.

Sudhindra Mohan Guha, J.

29. I agree.


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