Repayable loan advances made to secure enduring business advantage were held not deductible as revenue expenditure.

Interest income earned by the statutory corporation was treated as business income, but the decisive issue was whether the amounts advanced to State Governments and cooperative societies were deductible as revenue expenditure. The Court held that a repayable loan is not an irretrievable outgo of money and, on these facts, the advances were made in discharge of statutory obligations and to secure an enduring commercial advantage in the money-lending business. They were therefore not allowable as business deductions and were characterised as capital expenditure or mere application of income.

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Issues: Whether the amounts advanced by the assessee to State Governments and cooperative societies out of its interest income constituted revenue expenditure deductible in computing taxable income, or were in the nature of capital expenditure or mere application of income.

Analysis: The assessee is a statutory corporation whose funds are pooled under the National Cooperative Development Fund and are deployed in furtherance of its statutory objects. The Court held that the interest income earned by the assessee formed part of its business income and did not fall under income from other sources. However, the decisive question was the character of the disbursements. A loan does not amount to an irretrievable outgo of money, because the amount remains repayable and may return to the lender's fund. The advances were made in discharge of statutory obligations and with a view to securing an enduring advantage in the assessee's money-lending business, namely the earning of interest. On these facts, the disbursements could not be treated as revenue expenditure, and the contention that they were deductible under the provisions governing business deductions was rejected.

Conclusion: The advances/disbursements were not allowable as revenue expenditure and were instead in the nature of capital expenditure or application of income, against the assessee and in favour of the Revenue.

Ratio Decidendi: Money advanced as a repayable loan does not constitute revenue expenditure unless it is shown to be an irretrievable outflow incurred wholly on revenue account; where the advance is part of the assessee's money-lending business and is made to secure an enduring commercial advantage, it is capital in nature or a mere application of income.

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