1980 (4) TMI 21 - HC - Income Tax

High Court Upholds Deductibility of Commission and Interest Payments as Revenue Expenses

The High Court held that the commission and interest payments made by the assessee were revenue expenses, integral to the profit-earning process. The ... Business Expenditure Issues Involved:1. Whether the commission paid to the Industrial Finance Corporation of India (IFCI) and the Government of Rajasthan for standing guarantor in respect of deferred payments made by the assessee for the purchase of capital equipment and the interest paid to the non-resident firm against such deferred payments were expenses of a revenue nature for the assessment years 1962-63, 1963-64, 1964-65, and 1965-66.Issue-wise Detailed Analysis:1. Commission and Interest Payments as Revenue Expenses:The primary issue was whether the commission paid to IFCI and the Government of Rajasthan for standing guarantor and the interest paid on deferred payments for the purchase of capital equipment were to be treated as revenue expenses.Assessment Years 1962-63 and 1963-64:The assessee-company, involved in mining lead and zinc ores, sought to install a zinc smelter factory and applied for a loan from IFCI. The loan was sanctioned, and the guarantee commission and interest on deferred payments were claimed as revenue expenses. The Income Tax Officer (ITO) disallowed these claims, stating they were related to the expansion program and no tax had been deducted for payments to a non-resident. The Appellate Assistant Commissioner (AAC) upheld this view, noting the expenses were pre-operational and related to the expansion program, thus not allowable as business expenses.Assessment Years 1964-65 and 1965-66:For these years, the AAC allowed the claims, stating the business of the assessee included mining and manufacturing of lead, zinc, and silver, and the installation of a zinc smelter was an expansion of the same business. The expenses were deemed allowable as deductions in computing business income unless they were capital in nature. The AAC concluded that the expenditure was not capital but revenue in nature.Tribunal's Decision:The Tribunal found that the assessee was carrying on a single business with a common organization and profit and loss account. It held that the expenditure on guarantee commission and interest did not bring into existence any asset of a capital nature and was related to the debts of the assessee. The Tribunal relied on the Supreme Court decision in India Cements Ltd. v. CIT [1966] 60 ITR 52, concluding that the expenditure should be allowed as revenue expenses.High Court's Analysis:The High Court examined whether the questions referred arose from the Tribunal's order. It concluded that the main question was whether the expenditure was allowable as revenue or capital expenditure, which was indeed argued before the Tribunal. The Court noted that the expenditure was integrally connected with the profit-earning process of the assessee and should be considered revenue in nature, following the principles laid down by the Supreme Court in various cases.Relevant Case Law:- Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34: The Supreme Court held that recurring payments for an enduring benefit were capital expenditure.- Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900: The Supreme Court held that expenditure for acquiring an enduring advantage was capital expenditure.- India Cements Ltd. v. CIT [1966] 60 ITR 52: The Supreme Court held that expenditure for securing a loan was revenue expenditure, as the loan itself was not an asset of an enduring nature.Conclusion:The High Court concluded that the commission and interest payments were integrally connected with the profit-earning process and should be treated as revenue expenditure. The questions were answered in the affirmative and in favor of the assessee. There was no order as to costs.Separate Judgment:Sudhindra Mohan Guha J. concurred with the judgment.