Borrowing costs for stock-in-trade treated as revenue expenditure where funds served trading circulation, not capital acquisition.

Expenditure incurred in executing mortgages to raise loans for completing a building held as stock-in-trade was revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The court treated the borrowing as an ordinary incident of trading: the land and building formed circulating capital in a single trading venture, no fixed capital or enduring asset was acquired, and the money was used only to finish the trading asset. The expense of raising the loan was therefore connected with the conduct of the business and deductible in computing business profits.

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Issues: Whether the expenditure incurred in executing mortgages to obtain loans for financing the construction and completion of a building held as stock-in-trade was deductible as revenue expenditure in computing business profits under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The character of expenditure incurred in borrowing depends upon the nature and purpose of the borrowing, the manner in which it is raised, and the manner in which it is used. Expenditure is capital if it is for initial outlay, extension of business, acquisition of an asset or advantage of enduring benefit, or forms part of fixed capital. It is revenue if it is incurred for carrying on the business and is an integral part of the profit-earning process. The assessee's venture was a single trading venture in which the land and building were stock-in-trade, no fixed capital or permanent asset was being acquired, and the borrowed money was used only to complete the trading asset. The borrowing was thus part of circulating capital and the expense of raising it was connected with the conduct of the business rather than with acquisition of capital assets.

Conclusion: The expenditure of Rs. 15,172 was deductible as revenue expenditure and not disallowable as capital expenditure.

Final Conclusion: The reference was answered in favour of the assessee, and the deduction was allowable in computing the business profits.

Ratio Decidendi: Expenditure incurred in obtaining borrowed funds is revenue in character where the borrowing is an ordinary incident of trading and the monies are employed as circulating capital for the business, rather than for acquiring a capital asset or enduring advantage.

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