Case: India Cements Ltd., Madras Vs. Commissioner Of Income-Tax, Madras

2. The facts and circumstances of the case as stated by the Tribunal in the statement of the case are as follows : The appellant, India Cements Limited. Madras hereinafter referred to as the assessee is a public limited company. The question arises in respect of the assessment year 1950-51, accounting period April 1, 1949 to March 31, 1950. During the accounting year it obtained a loan of 40 lakh, 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 25 lakhs due to Messrs. A. F. Harvev Limited and Madurai Mills Limited. It cannot be stated definitely how the balance of 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 was utilised towards working funds". The expenditure of Rs. 84.633 in connection with this loan was made up of the following items:Stamps60,023 0 0Registration Fee16,067 0 0Charges for certified copy of the mortgage deed28 0 0Indemnity deed by Essen and Company Limited15 0 0Vakils fee drafting deed7,500 0 0Legal fees1,000 0 0The assessee did not charge this expenditure in the profits and loss account for that year. It was shown in the Balance Sheet as mortgage loan expenses. It continued to be so shown till March 31, 1952. In the accounts for March 31, 1953 this was written off by appropriation against the profits of that year3. The Income-tax Officer refused to allow the deduction of Rs. 84,633. He observed :"As per the information furnished by the auditors, Rs. 25 lakhs of the loan was to be paid to Messrs A. F. Harvey Limited and Mathurai Mills Limited in discharge of the amount borrowed from them and utilised on the capital assets of the companyThough in the Companys books the amount of Rs. 84,633 was not charged to revenue but capitalised and carried forward in the Balance Sheet, for purposes of income-tax, the Companys auditors claim the same as an admissible item of revenue expenditure."He held that the expenditure was incurred in obtaining capital and should be distinguished from interest on borrowed capital which was alone admissible as a deduction under S. 10(2)(iii). According to him, S. 10(2)(xv) specifically excluded from consideration any item of capital expenditure. He further held that the case was not distinguishable from the decision in Nagpur Electric Light and Power Co. v. Commr. of Income-tax Central Provinces, (1931) 6 ITC 28 (Nag). The Appellate Assistant Commissioner agreed with the Income-tax Officer. The Appellate Tribunal distinguished the case of (1931) 6 ITC 28 (Nag) on the ground that in the Nagpur Electric Light case, (1931) 6 ITC 28 (Nag) money was expended for obtaining capital. It observed as follows :"Here we find the position to be different A study of the balance-sheets of the company as at 31st march, 1949 discloses the fact that the paid-up capital was sufficient to cover the entire capital outlay of the company and that the further borrowal of Rs. 25 lakhs was for augmenting the working funds of the company. It appears to us that even at that early stage the money was borrowed and used not for capital purposes but for augmenting the working funds of the company. We therefore, consider that the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25 lakhs and the balance for working funds and, as such, the whole of the amount was purely for the purposes of augmenting the working 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."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 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 ascertaining whether the earlier borrowal was on capital or revenue account."The High Court after reviewing various cases, observed:"If we ask for what purpose the expenditure in the present case was incurred, the only answer must be that it was incurred for the purpose of bringing into existence an asset in the shape of borrowing these Rs. 40 lakhs. The further question would then be whether this asset or advantage was not for the enduring benefit of the business and whether the expenditure incurred was one which was incurred once and for all. The answer to both questions would again be in the affirmative. It is true that the borrowed money has to be repaid and it cannot be an enduring advantage in the sense that the money becomes part of the assets of the company for all time to come. But, it certainly is an advantage which the company derives from the duration of the loan and undoubtedly it could not have been for any purpose other than an advantage to the business, that the borrowing was made. That it is not enduring in the sense that the borrowing has to be repaid after a short or long period, as it were, cannot affect the conclusion that it was nevertheless an asset or an advantage that was secured. Viewed in the light of the tests adumbrated in the above decision (Assam Bengal Cement Co. Ltd. v. Commr. of Income-tax, (1955) 27 ITR 34  ; ((S) AIR 1955 SC 89  )) it seems to us that the expenditure must be regarded as capital expenditure. As the facts of the case which we have set out earlier indicate there can be no doubt that at least to the extent of Rs. 25 lakhs that amount was expended for purposes of a capital nature clearly in order to bring into existence capital assets. We have also pointed out that though it was vaguely stated by the Tribunal that the other sum of Rs. 15 lakhs was utilised as working funds, there seems to be no material whatsoever before the Tribunal to justify its coming to that conclusion."

Reasoning: 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 face of R. 3, Case 1, S. 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 S. 10(2)(xv) of the Act.In our opinion, the Bombay High Court was wrong in relying on (1894) 3 Tax Cas 255. But we do not say that the Tata Iron and Steel Co., 1 ITC 125: (AIR 1921 Bom 391) case was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures11. In (1931) 6 ITC 28 (Nag) the Court of the Judicial Commissioner, Nagpur, held that expenses for raising debenture loan required for changing the system of supplying current from D. C. to A.C and for discharging a prior loan was not allowable as deduction of the companys assessable income. The Judicial Commissioner followed the case of (1894) 3 Tax Cas 255 and 1 ITC 125: (AIR 1921 Bom 391). After referring to these two cases, the only additional reason given was that "apart from authority it seems to us to stand to reason that money expended in obtaining capital must be treated as capital expenditure" With great respect we must hold that this case was wrongly decided12. The Kerala High Court in Western India Plywood Ltd. v. Commr. of Income-tax, Madras, (1960) 38 ITR 533  : (AIR 1960 Ker 253  ) held that the expenditure incurred by the company to raise a loan by debenture was a capital expenditure and was therefore not deductible under S. 10(2)(xv).The High Court relying onEuropean Investment Co. v. Jackson, (1938) 18 Tax Cas 1 and Ascot Gas Water Heaters v. Duff, (1943) 24 Tax Cas 171and some other cases drew a distinction between the borrowing of capital and securing merely temporary or day-to-day accommodation or banking or trading facilities. According to the High Court, the expenses for borrowing capital could not be treated as revenue expenditure. This distinction may be valid in English Law but we are unable to appreciate how the distinction is valid under the Indian Income-tax Act16. To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was 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 S. 10(2) (xv)17. 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 Commr. of Income-tax v. Malayalam Plantation Ltd., (1964) 53 ITR 140  : (AIR 1964 SC 1722  ) 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 pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business."Mr. Desai says that the act of borrowing money in this case was not incidental to the carrying on of a business. We are unable to accept this contention. In Eastern Investments Ltd. v. Commr. of Income-tax, (1951) 20 ITR 1  : (AIR 1951 SC 278  ) this Court held that the Eastern Investments Ltd., an investment company, when it borrowed money on debentures, the interest paid by it was incurred solely for the purpose of making or earning such income, profits or gains within the purview of S. 12(2) of the Indian Income-tax Act. It held on a review of the facts that the transaction was voluntarily entered into in order indirectly to facilitate the running of the business of the company and was made on the ground of commercial expediency.This case, in our opinion, directly covers the present case, although Mr. Desai suggests that the case of an investment company stands on a different footing from the case of a manufacturing company. In some respects their position may be different but in determining the question whether raising money is incidental to a business or not, we cannot discern any difference between an investment company and a manufacturing company.We may mention that in that case this Court was not considering whether the expenditure was in the nature of a capital expenditure or not, because it was agreed all through that the expenditure was not in the nature of capital expenditure, and the only question which this Court dealt with was whether the expenditure was incurred solely for the purpose of making or earning income, profits or gains18. The case of Dharamvir Dhin v. Commr. of Income-tax, (1961) 42 ITR 7  : (AIR 1961 SC 668  ) also supports the conclusion we have arrived at on this part of the case. It was held in that case that the payment of interest and a sum equivalent to 11/16th of the profits of the business of the assessee in pursuance of an agreement for obtaining loan from the lender were in a commercial sense expenditure wholly and exclusively laid out for the purpose of the assessees business and they were, therefore, deductible revenue expenditure19. Before we conclude we must deal with the point raised by Mr. Sastri that the High Court erred in law in preferring the findings of the Income-tax Officer to that of the Appellate Tribunal.It is not necessary to decide this question but it seems to us that in a reference the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under S. 66(1). If he has failed to file an application under S. 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other20. To conclude we hold that the expenditure of Rs. 84,633 was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessees business. The answer to the question referred therefore, must be in the affirmative.