SIKRI, J.: - (1.) THE following Judgement of the court was delivered by
(2.) THIS appeal by special leave is directed against the judgment of the High court of Judicature at Madras answering the following question of law in favour of the respondent : 'Whether on the facts and in the circumstances of the case, the tribunal was right in law in holding that the sum of rupees 84,633.00 expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ?' 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, 194 9/03/1950. 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 Appellant 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. Harvey 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 31/3/1949 on 4/10/1949 stated that that was utilised towards working funds.' The expenditure of Rs. 84,633.00 in connection with this loan was made up of thefollowing items: JUDGEMENT_1053_AIR(SC)_1966Html1.htm The 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 31/03/1952. In the accounts for 31/03/1953 this was written off by appropriation against the profits of that year. The Income Tax Officer refused to allow the deduction of Rs. 84,633.00. He observed 'As per the information furnished by the auditors, Rs. 25.00 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 company. Though in the Company's books the amount of Rs. 84,633.00 was not charged to revenue but capitalised and carried forward in the Balance Sheet, for purposes of income tax, the Company's 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) (xi) specifically excludes from consideration any item of capital expenditure. He further held that the case was not distinguishable from the decision in The Nagpur Electric Light and Power Co. v. Commissioner of Income-tax, central Provinces(1). The Appellate Assistant Commissioner agreed with the Income Tax Officer. The Appellate tribunal distinguished the case of Nagpur Electric Light and Power Co. v. Commissioner of Income Tax(1) on the ground that in the Nagpur Electric Light(1) case 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 31/3/1949 discloses the fact that the paidup 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 Incometax 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 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. 40.00 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. Commissioner of Income Tax(1) 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.' The learned counsel for the assessee company, Mr. A, V. Viswanatha Sastri, urges that the expenditure is admissible as a deduction under s. 10(2) (xv) of the Act. He says that the High court erred in holding that the expenditure was made to acquire any asset or advantage of an enduring nature within the test laid down by Viscount Cave and approved by this court in Assam, Bengal Cement Co. Ltd. v. Commissioner of Income-Tax(1). He further says that what was secured by the expenditure was a loan and 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. 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, but if the money is spent to obtain raw-materials then the expenditure takes the colour of revenue expenditure. He further says that the borrowed money is an enduring asset and any expenditure made to obtain this money falls within the test laid down by Viscount Cave and approved by this court.
(3.) A number of cases have been referred to during the hearing of the case by both the counsel but we do not propose to refer to all of them. We must start first with the cases decided by this court and see what principles have been laid down for distinguishing revenue expenditure from expenditure in the nature of capital expenditure, and especially those cases which dealt with similar problems. We will first consider State of Madras V. G. J. Ceolho(1). This was not a case arising under the Indian Income Tax Act but under the Madras Plantations Agricultural Income Tax Act, 1955, in which a section exactly similar to s. 10 (2) (xv) existed. In brief, the facts in that case were that the assessee had borrowed money for the purpose of purchasing the plantations and he claimed that in computing his agricultural income from these plantations the entire interest paid by him on moneys borrowed for the purpose of purchasing the plantation should be deducted as expenditure, under s. 5(e) of the Act. In the Madras Act there was no provision similar to S. 10(2) (iii) of the Act and thus interest was not expressly deductible as an allowance. This court applied the test formulated by Viscount ,Cave, L. C., in Atherton v. British Insulated and Helsby Cables Ltd.(1) and approved by the court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax(1), and held that the payment of interest was a revenue expenditure. It observed that 'no new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commercial practice payment of interest would not be termed as capital expenditure.' This court further held that the expenditure was for the purpose of business. Mr. Desai tried to distinguish that case on the ground that what was at issue was interest on loan and not expenditure incurred for ,obtaining the loan. In our opinion, there is no justification for drawing this distinction in India. As observed by Lord Atkinson in Scottish North American Trust v. Farmer(1) 'the interest is, in truth, 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 procured 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.' It will be remembered that there was no section like s. 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 a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income. On the facts of this case, the money secured by the loan was the thing for the use of which this expenditure was made. In principle, apart from any statutory provisions, we see no distinction between interest in respect of a loan and an expenditure incurred for obtaining the loan. Mr. Desai urges that these observations of Lord Atkinson should be limited to a case where temporary borrowings are made. It is true that the House of Lords. was dealing with the case of a company and the moneys that were borrowed were of a temporary character. But this fact was only relied on to hold that the moneys secured were not 'capital' within rule 3 of First Case, section 100 (5 and 6 Vic. Ch. 35) of the Income Tax Act, 1842, for Lord Atkinson observed at p. 706; '. . . it appears to me, simply, amounts to this that the word 'capital' must, in this rule, be held to bear a wholly artificial meaning differing altogether from the ordinary signification, though there be no context in the clause requiring that there should be given to it a meaning different from that which it bears in ordinary commercial transactions.' He then referred to the decision in Bryon v. The Metropolitan Saloon Omnibus Company(1) to show that the borrowing by a joint-stock company of money by the issue of debentures does not amount to an increasing of the capital of the company. In Bombay Steam Navigation Co. Ltd. v. Commissioner of Income Tax(2), this court again examined the question of distinguishing between capital expenditure and revenue expenditure. This court first held that on the facts of the case, cl. (iii) of s. 10(2) did not apply, because the assessee in that case had agreed to pay the balance of consideration due by the purchaser and this did not, in truth, give rise to a loan. Then Shah, J., observed : '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 expediency. 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 profit-earing 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:' ;