V.S.DESAI, J. - (1.) THE question which the Tribunal has referred to us under S. 66(I) of the Indian INCOME TAX ACT, 1922, is: "Whether, in the computation of its business profits under S. 10, the assessee -firm is entitled to a deduction of the sum of Rs. 15,172 ?"
(2.) THE assessee -firm consists of three partners and was brought into existence solely for the purpose of constructing a building and selling the same. The firm acquired a piece of land, on which the building was to be constructed, in September, 1946. Immediately after its construction, it let it out to the Government of India w.e.f. 15th November, 1954, and, ultimately sold it to the Government in September, 1955. This business venture of the assessee -firm resulted in some profit, which came to be assessed in the asst. year 1956 -57 on the assessee in the status of an unregistered firm. Now, the assessee -firm having started with an initial capital of Rs. 60,000 had not sufficient funds for the construction of the building which it was going to construct. It, therefore, secured a loan to the extent of Rs. 2,50,000 from two persons, borrowing 2 lakhs from one of them and Rs. 50,000 from the other and secured the said loans by executing mortgages of the land and the building under construction in favour of the creditors. It incurred a total expenditure of Rs. 15,172 over the execution of the mortgages and in its assessment proceedings it claimed this amount as an admissible deduction against the profits from the construction and sale of the building. The Departmental authorities held that the amount was not deductible either under S. 10(2)(iii) or under S. 10(2)(xv) as the expenditure was incurred not on the building but for acquiring loans for financing the building. In the appeal before the Tribunal, the assessee contended that the building, for the construction of which the money was obtained, was the stock - in - trade and the amount taken by way of loan was actually expended on the construction of the building; that no capital asset was brought into existence, as the building constituted the assessee - firm's stock -in -trade and the money having been obtained for the acquisition of the stock -in -trade, the expenditure incurred in obtaining the loan was revenue expenditure and not an expenditure of a capital nature. The Tribunal negatived the assessee's contention by holding that the expenditure was incurred solely for the purpose of raising capital and not for the purpose of running of the assessee's business or for acquiring the stock -in - trade. It observed : "It was not an expense incurred for the purpose of the assessee's business but for the purpose of enabling it to obtain capital with which the business was to be run. Whether the capital so raised was spent over the stock -in -trade of the assessee or over its capital assets is not at all material for determining the admissibility of this expense, the expense having been incurred solely for the purpose of raising capital and not for the purpose of the running of the assessee's business or for acquiring the stock -in -trade." In other words, the view taken by the Tribunal was that the expenditure incurred in raising the loan was not a part of the activity of the assessee in running the business, though the loan itself was used for the purpose of the business, the expenditure incurred for raising the loan, therefore, could not be regarded as expenditure for the running of the business and for the purposes of obtaining profits and gains, and could not, therefore, be regarded as a deductible expenditure under S. 10(2)(xv). The Tribunal was of the opinion that the view that it was taking was supported by a decision of the Kerala High Court in Western India Plywood Ltd. vs. CIT (1960) 38 ITR 533.
(3.) IN our opinion the view taken by the Tribunal is not correct. In CIT vs. Tata Sons Ltd (1939) 7 ITR 195, the assessee who were the managing agents obtained finances for the managed companies by entering into an agreement with a stranger, who agreed to lend a crore of rupees to the managed company on condition that the assessees gave and assigned to him a share of six annals in the rupee in the commission and other remuneration which the assessees might be entitled to recover from the managed company. The share of the commission, which was paid to the stranger under the said arrangement, was claimed to be deducted in computing the profits and gains of the assessees on two grounds; firstly, that the agreement operated as an assignment of the portion of the commission to the stranger and in that view the share assigned has ceased to be income of the assessees, and secondly, that the share of the commission given to the stranger was an expenditure incurred by the assessees solely for the purpose of earning profits and gains in the conduct of their business and was, therefore, an expenditure of a revenue nature. Both the contentions of the assesses were accepted in that case. Now the commission, which was agreed to be paid to the stranger, was clearly for the purpose of obtaining finances to the managed company. The finances, however, were used for the purposes of earning profits and gains in business and the expenditure, which was incurred for raising the said finances, was regarded as expenditure for the purpose of earning profits and gains in the course of the business. It would, therefore, appear that in order to determine whether the expenditure incurred in borrowing the loans would be a part of the expenditure for running the business would depend upon the nature and purpose of the borrowed money. In Dharamvir Dhir vs. CIT (1961) 42 ITR 7 the assessees, not having requisite funds for its business, entered into an agreement with a public charitable trust for the advance to him of funds up to 1 1/2 lakhs of rupees on payment of interest at 6 per cent. per annum and 11/16th of the profits of the business. The share of the profits paid under this agreement was claimed as a revenue expenditure and the claim was allowed by the Supreme Court which held that in the commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the assessee's business and they were, therefore, deductible revenue expenditure. Here again, the agreement to give 11/16th of the profits was an expenditure incurred for the purposes of raising the moneys. But, since the purpose of raising the moneys was wholly for the running of the business of the assessees, the expenditure incurred in raising the moneys was also regarded as an expenditure of the business and not an expenditure, which was unconnected with it, but solely related to the transaction of borrowing.;