1961 (10) TMI 82 - HC - Income Tax

Loan expenditure ruled capital, not business expense under Indian Income-tax Act. Assessee to pay costs.

Commissioner of Income-Tax, Madras Versus India Cements Ltd.

Commissioner of Income-Tax, Madras Versus India Cements Ltd. - [1963] 47 ITR 438 Issues Involved:1. Whether the expenditure of Rs. 84,633 incurred by the assessee in obtaining a loan is allowable as a business expenditure under section 10(2)(xv) of the Indian Income-tax Act.2. The nature of the expenditure: capital or revenue.Issue-wise Detailed Analysis:1. Allowability of Expenditure under Section 10(2)(xv):The Indian Cements Ltd. obtained a loan of Rs. 40 lakhs from the Indian Finance Corporation, incurring an expenditure of Rs. 84,633 in connection with the loan. The assessee claimed this expenditure as a necessary business expense under section 10(2)(xv) during the assessment year 1950-51. The Income-tax Officer disallowed the claim, concluding that the expenditure was capital in nature. The Appellate Assistant Commissioner upheld this view. However, the Tribunal took a different stance, reasoning that the loan was used to augment the working capital of the company and allowed the claim. The Tribunal's decision was based on the inference drawn from the company's balance sheet, which showed that the paid-up capital was sufficient to cover the capital outlay, implying that the loan was for working funds.2. Nature of Expenditure: Capital or Revenue:The Tribunal's decision was challenged, and the High Court examined whether the expenditure was capital or revenue in nature. The department argued that any loan secured by a business should be regarded as a capital asset, and the associated expenditure should be capital expenditure. In contrast, the assessee contended that borrowings, being repayable, should be considered necessary business expenses. The High Court referred to various cases, including Western India Plywood Ltd. vs Commissioner of Income-tax, which held that raising money by debentures or mortgage affects the capital of the concern. The High Court noted that the Tribunal's inference lacked concrete evidence, particularly regarding the utilization of the Rs. 25 lakhs borrowed earlier, which was stated to have been used for capital assets.Analysis of Precedents:The High Court reviewed several English and Indian cases to determine the principles applicable to such expenditures. In cases like Anglo-Continental Guano Works vs Bell and Scottish North American Trust Ltd. vs Farmer, distinctions were made between temporary accommodations for business purposes and long-term loans. The court observed that expenses incurred for raising capital are typically capital expenditures. The judgment also referred to the Supreme Court's decision in Assam Bengal Cement Co. Ltd. vs Commissioner of Income-tax, which provided tests for distinguishing between capital and revenue expenditure.Conclusion:The High Court concluded that the expenditure of Rs. 84,633 incurred by the assessee was for the purpose of bringing into existence an asset (the loan) for the enduring benefit of the business. Despite the loan being repayable, it provided a significant advantage to the business for the duration of the loan. Therefore, the expenditure was deemed capital in nature. The question referred to the court was answered against the assessee, and the expenditure was not allowable under section 10(2)(xv). The assessee was ordered to pay the costs of the department, with counsel's fee set at Rs. 250.Judgment: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.