Case: Bombay Steam Navigation Co. (1953) Private Ltd Vs. Commissioner Of Income-Tax, Bombay

liability is always to be regarded as falling within S. 10(2)(xv).16. Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expendiency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profiteering process 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. In a recent case State of Madras v. G. J. Coelho, (1964) 53 ITR (SC) 186 : (AIR 1965 SC 321 ), this Court had to consider the permissibility of a deduction under S. 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955. Section 5(e), it may be observed, is in terms similar to S. 10(2)(xv) of the Income-tax Act. S. 5 permits deductions of various items of expenditure in the computation of agricultural income. Clause (e) provides for the deduction of any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of plantation. The assessee in that case had purchased an estate consisting of tea, coffee and rubber plantations in the Nilgiris mountains for Rs. 3,10,000. He borrowed Rs. 2,90,000 on interest and claimed to deduct the interest paid out of the income of the plantations in the assessment year 1955-56. The claim was made under cls. (e) and (k) of S. 5. The claim under cl. (k) was not admissible because interest was not payable on the amounts borrowed and actually spent on the plantations in the previous year, and the sole question which fell to be determined was whether it was a permissible allowance under S. 5(e), it was held that the payment of interest was not in the nature of capital expenditure in the year of account. The Court held that payment of interest even in respect of capital borrowed for acquiring asset. to carry on business must be regarded as revenue expenditure in commercial practice and should not be termed as capital expenditure. Dealing with the application of S. 5(c) it was observed. :"The assessee had bought the plantation for working it as a plantation, i.e. for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts. In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations; both are for the purposes of the plantation."The test laid down by this Court, therefore, was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business.17. The assessee Company had undoubtedly acquired the assets by pledging its credit. The assessee Company was formed for the purpose of taking over the business which the Scindias had acquired and for carrying on that business the assets with which the business was to be carried on were required. For obtaining those assets the assessee Company rendered itself liable for a Sum of Rs. 1,56,000 and agreed to pay that sum with interest at the rate stipulated. The transaction of acquisition of the assets was closely related to the commencement and carrying on of the business. Interest paid on the amount remaining due must in the normal course be regarded as expended for the purpose of the business, which was carried on in the year of account. There is no dispute that if interest was paid for the purpose of the business, it was laid out or expended wholly and exclusively for that purpose.18. Mr. Rajagopala Sastri on behalf of the Revenue contended that as profits which arise after the business is closed are not taxable under S.10(1), expenditure the source of which is a liability incurred before the actual commencement of business cannot also be regarded as a permissible outgoing under S.10(2)(xv). It is unnecessary to examine the correctness of this argument, for it has no basis in fact. The assessee Company was formed on August 10, 1953, it had entered into an agreement on August 12, 1953, and interest was paid in the years of account ending June 30, 1954 and June 30, 1955. The source of liability cannot be said to have arisen prior to the date on which the business of the assessee Company was commenced. S. 10(2) requires that in computing the taxable profits or gains of a business which is carried on in the year of account allowances of the nature described in cls. (i) to (xv) should be made. If no business was carried on in that year, the allowances are not permissible. But interest in respect of which allowance is claimed was paid at a time when the business was carried on, and the source of liability to pay interest was also incurred within the period in which the business was carried on.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. In our judgment this is not a permissible approach in ascertaining the true nature of the transaction. The parties had agreed that assets of the value of Rs. 81,55,000 be taken over by the assessee Company from the Scindias. Out of that consideration Rs.29,99,000 were paid by the assessee Company and the balance remained unpaid. For agreeing to deferred payment of a part of the consideration, the Scindias were to be paid interest. An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources.Every creditor who is entitled to receive a debt cannot he regarded as a lender. If the requisite amount of consideration had been borrowed from a stranger and interest paid thereon for the purpose of carrying on the business would have been regarded as a permissible allowance; but that is wholly irrelevant in considering the applicability of cl. (iii) of sub-s. (2) to the problem arising in this case. The Legislature has under cl. (iii) permitted as an allowance interest paid on capital borrowed for the purposes of the business; if interest paid, but not on capital borrowed, cl. (iii) will have no application.We, therefore, agree with the High Court that the claim for deduction of the amount of interest under S.10(2)(iii) is not admissible.The assessee Company had undoubtedly acquired the assets by pledging its credit. The assessee Company was formed for the purpose of taking over the business which the Scindias had acquired and for carrying on that business the assets with which the business was to be carried on were required. For obtaining those assets the assessee Company rendered itself liable for a Sum of Rs. 1,56,000 and agreed to pay that sum with interest at the rate stipulated. The transaction of acquisition of the assets was closely related to the commencement and carrying on of the business. Interest paid on the amount remaining due must in the normal course be regarded as expended for the purpose of the business, which was carried on in the year of account. There is no dispute that if interest was paid for the purpose of the business, it was laid out or expended wholly and exclusively for thatis unnecessary to examine the correctness of this argument, for it has no basis in fact. The assessee Company was formed on August 10, 1953, it had entered into an agreement on August 12, 1953, and interest was paid in the years of account ending June 30, 1954 and June 30, 1955. The source of liability cannot be said to have arisen prior to the date on which the business of the assessee Company was commenced. S. 10(2) requires that in computing the taxable profits or gains of a business which is carried on in the year of account allowances of the nature described in cls. (i) to (xv) should be made. If no business was carried on in that year, the allowances are not permissible. But interest in respect of which allowance is claimed was paid at a time when the business was carried on, and the source of liability to pay interest was also incurred within the period in which the business was carried on.I agree with the conclusion, but I would prefer not to express my view on the construction of cl. (iii) of sub-s. (2) of S. 10 of the Indian Income-tax Act, 1922.The principle of Commr. of I.T. Madras v. S. Ramsay Unger, (1947) 15 ITR 87   : (AIR 1947 Mad 279  ), on which strong reliance was placed by Mr. Vishwanatha Sastri does not come to his aid, for in that case the Court held on the facts and circumstances that in substance the transaction which gave rise to the liability to pay interest was one of borrowing capital and, therefore, the whole of interest debited in the books of the assessee must be allowed as interest paid on such capital.But in our judgment interest paid by the assessee Company is a permissible deduction under S.10(2)(xv) which permits "any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation" as a permissible allowance in the computation of profits or gains of the business carried on in the year of account. Payment of interest is expenditure; but it is not an allowance of the nature described in cl. (iii) and there is no other clause in cls.(i) to (xiv) to which the payment of interest on unpaid balance of consideration for sale of assets may be attracted. The expenditure was incurred after the commencement of the business. The expenditure is not for any private or domestic purposes of the assessee Company. It is in the capacity, of a person carrying on business that this interest istest laid down by this Court, therefore, was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business.