1965 (1) TMI 75 - HC - Income Tax

Deductible Business Expenditure Ruling: High Court Reverses Tribunal Decision

The High Court held that the sum of Rs. 15,172 was a deductible revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The ... - Issues Involved:1. Whether the assessee-firm is entitled to a deduction of the sum of Rs. 15,172 in the computation of its business profits under section 10 of the Indian Income-tax Act, 1922.Issue-Wise Detailed Analysis:1. Deduction of Rs. 15,172 in Computation of Business Profits:The primary issue revolves around whether the assessee-firm can claim a deduction of Rs. 15,172 incurred as expenditure for executing mortgages to secure loans for constructing a building, which was the firm's stock-in-trade.Background:The assessee-firm, consisting of three partners, was established solely for constructing and selling a building. It acquired land in September 1946, constructed a building, let it out to the Government of India from November 1954, and eventually sold it to the Government in September 1955. The firm started with an initial capital of Rs. 60,000 but required additional funds for construction, borrowing Rs. 2,50,000 secured by mortgages. The expenditure of Rs. 15,172 was incurred in executing these mortgages.Tribunal's Decision:The Income-tax Appellate Tribunal denied the deduction, stating the expenditure was not for the building but for acquiring loans, thus not deductible under section 10(2)(iii) or section 10(2)(xv). The Tribunal held the expenditure was for raising capital, not for running the business or acquiring stock-in-trade.High Court's Analysis:The High Court disagreed with the Tribunal's decision, emphasizing that the nature and purpose of the borrowed money should determine whether the expenditure is deductible. The Court cited several precedents:- Commissioner of Income-tax v. Tata Sons Ltd. [1939] 7 I.T.R. 195: The expenditure incurred for raising finances used for business purposes was regarded as revenue expenditure.- Dharamvir Dhir v. Commissioner of Income-tax [1961] 42 I.T.R. 7: Payments made for raising funds for business were considered deductible revenue expenditure.- State of Madras v. G.J. Coelho [1964] 53 I.T.R. 186: Interest on borrowed money for purchasing plantations was deemed deductible as it was closely related to the business.Application of Tests:The Court applied the tests from Benarsidas Jagannath, In re [1947] 15 I.T.R. 185 and Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R. 34 to distinguish between capital and revenue expenditure. The tests include:- Whether the expenditure was for initiating or expanding the business or substantially replacing equipment.- Whether the expenditure brought into existence an asset or advantage of enduring benefit.- Whether the expenditure was part of the fixed or circulating capital.Conclusion:The Court concluded that the borrowed money was for circulating capital (stock-in-trade) and not fixed capital. The expenditure incurred in raising the loan was for running the business and earning profits, thus qualifying as revenue expenditure. The Tribunal's reliance on Western India Plywood Ltd. v. Commissioner of Income-tax [1960] 38 I.T.R. 533 was found inapplicable, as the facts differed significantly.Final Judgment:The High Court held that the sum of Rs. 15,172 was a deductible revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal and departmental authorities were in error for not allowing the deduction. The question was answered in the affirmative, and costs were awarded to the assessee.