TaxTMI 
TaxTMI 
1965 (12) TMI 22
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....50-51, accounting period April 1, 1949, to March 31, 1950. During the accounting year it obtained a loan of 40 lakhs of rupees from the Industrial Finance Corporation of India. This loan was secured by a charge on the fixed assets of the company. Since Mr. S. T. Desai, the learned counsel for the respondent, has disputed some facts as stated by the Appellate Tribunal, it would be convenient to give these facts in the words of the Appellate Tribunal. It is stated in the statement of the case that " the proceeds of this loan was utilised to pay off a prior debt of Rs. 25 lakhs due to Messrs. A. F. Harvey Limited and Madurai Mills Limited. It cannot be stated definitely how the balance of Rs. 15 lakhs was used but the directors, while reporting on the accounts for the year ended 31st March, 1949, on 4th October, 1949, stated that that was utilised towards working funds ". The expenditure of Rs. 84,633 in connection with this loan was made up of the following items : Stamps 60,02300 Registration fees 16,06700 Charges for certified copy of the mortgage deed 2800 Indemnity deed by Essen and Company Limited 1500 Vakil's fee for drafting deed 7,50000 Legal fees 1,00000 TOT....
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....ng capital of the company and that it could not be stated that it was used for capital purposes. In this view of the matter, we hold that the money expended in obtaining the loan is an allowable expenditure." 5. The High Court, after noticing the findings of the Income-tax Officer and the Tribunal, preferred the findings of fact made by the Income-tax Officer. It observed : "At this stage, we may point out that the conclusion reached by the Tribunal that the money was borrowed only for working expenses and not for capital investment proceeded on an inference based upon the balance-sheet. The Tribunal did not investigate how the sum of Rs. 25 lakhs earlier borrowed from A. H. Harvey and Madurai Mills Ltd. was actually utilised. Though in the order of the Income-tax Officer it is found stated that that amount was utilised on the capital assets of the company and that statement was based on the authority of the information furnished by the auditors of the assessee, the Tribunal either overlooked or ignored this circumstance. In the face of the statement so recorded by the Income-tax Officer, the Tribunal does not appear to have been justified in relying upon inferences in ascertain....
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....in India money expended in raising a loan, whether by means of a debenture or a mortgage and whether you call it a loan capital or not, is not an expenditure in the nature of capital expenditure. He further submits that the expenditure was expended wholly and exclusively for the purpose of the business of the company. 8. The learned counsel for the revenue, Mr. S. T. Desai, supports the reasoning of the High Court. He says that the High Court was right in preferring the findings of the Income-tax Officer on the ground that there was no material for the finding made by the Appellate Tribunal and the finding was based on surmises and material evidence was ignored. He says that the High Court in a reference is entitled to ignore any findings of fact made by the Appellate Tribunal if those findings are vitiated. In the alternative, he says that the question referred is wide enough to include the question whether there was any material for the finding of the Appellate Tribunal. On the merits he contends that expenditure takes the colour from the thing on which the expenditure is made. If the money is spent to obtain capital then the expenditure assumes the nature of capital expenditure....
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....ruth, money paid for the use or hire of an instrument of their trade as much as is the rent paid for their office or the hire paid for a typewriting machine. It is an outgoing by means of which the company procures the use of the thing by which it makes a profit, and like any similar outgoing should be deducted from the receipts, to ascertain the taxable profits and gains which the company earns. Were it otherwise they might be taxed on assumed profits when, in fact, they made a loss ". 10. It will be remembered that there was no section like section 10(2)(iii) of the Act in the English Income Tax Act. On the other hand, there were certain rules prohibiting the deduction in respect of " any capital withdrawn from, or any sum employed or intended to be employed as capital in such trade. . . ." or " any interest which might have been made if any such sums as aforesaid had been laid out at interest ". Lord Atkinson first held in that case that the express prohibitions did not apply to the facts of the case and then proceeded to discuss general principles. These observations show that where there is no express prohibition, an outgoing, by means of which an assessee procures the use of....
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....ocess and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure." 13. We will now briefly deal with the relevant decisions of the High Courts. The first case referred is In re Tata Iron and Steel Co. Ltd . In that case, the Tata Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to underwriters on an issue of Rs. 7 lakhs preference shares of Rs. 100 each and the company claimed to deduct this amount as expenses under section 9(2)(ix) of the Indian Income-tax Act, 1918 (VII of 1918). Macleod C.J. observed : " If then it is admitted that the cost of raising the original capital cannot be deducted from profit after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floatation of the company or thereafter Texas Land and Mortgage Company v. William Holtham. " 14. He further observed that "as long as the law allow....
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.... 18. In our opinion, if one keeps in mind the background of the English Income Tax Act, the observations reproduced above have no relevance to cases arising under the Indian Income-tax Act. In the face of rule 3, Case I, section 100 (5 and 6 Vict., Ch. 35) prohibiting the deduction of any expenditure in respect of any sum employed or intended to be employed as capital, Mathew and Cave JJ. were only concerned with the question whether the amount secured by debentures and the amount obtained by the issue of debentures and debenture stock could be called capital employed or intended to be employed within the meaning of this rule. Rightly or wrongly, the English courts have held that the amount obtained by the issue of debentures is capital employed within the meaning of the rule, but this does not give us any guidance in interpreting the words " capital expenditure " occurring in section 10(2)(xv) of the Act. In our opinion, the Bombay High Court was wrong in relying on Texas Land and Mortgage Company v. William Holtham. But we do not say that the Tata Iron and Steel Co. case was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures. 19.....
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....ale of goods was concerned. 22. The Calcutta High Court examined the question in great detail in Sri Annapurna Cotton Mills Ltd. v. Commissioner of Income-tax. Bachawat J. held that the loan of Rs.10 lakhs obtained by the company was an asset or advantage for the enduring benefit of the business of the assessee. He placed reliance on a number of cases, some of which we have already considered. But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this court in many cases. Sinha J., after referring to a number of cases, felt that the raising of capital by issue of debentures was a recognised mode of raising capital and he felt that the decided cases had laid down the proposition that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature and not to be considered as in the nature ....
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....made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv). 25. The last contention of Mr. Desai is that even if it is revenue expenditure, it was not laid out wholly and exclusively for the purpose of business. Subba Rao J. reviewed the case law in Commissioner of Income-tax v. Malayalam Plantations and observed as follows : " The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is, wide : it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business : it may comprehend many other acts incidental ....