D.N.SINHA,J - (1.) THIS is preference under s. 66(1) of the IT Act. The facts are as follows : The assessee, Sri Annapurna Cotton Ltd., is a company with a limited liability. The assessment year is 1952-53 corresponding to the accounting year, being the calendar year 1951-52. The assessee company raised a loan of Rs. 10,00,000 by issuing debentures. A debenture trust deed, dated 26th January, 1950, was executed by and between the company and Kumar Promotha Nath Roy and others as trustees. A copy of the said deed has been annexed to the statement of case and appears at pages 8-37 of the proper-book. According to the trust deed, the debenture was redeemable by ten annual instalments of rupees one lakh each, commencing from 31st December, 1954, and ending on the 31st December, 1963, bearing interstat the rate of 7per cent per annum payable half-yearly. The company secured payment of principal and interest by charging the properties described in the first schedule to the indeture of trust. The first schedule consists of the landed properties, machinery, building, and stock-in-trade belonging to the company. On the same date, another agreement was entered into between company and one Jogendra Lal Nandi and Anil Krishna Pal. A copy of this agreement is annexed to the statement of case and appears at pages 5-7 of the paper-book. In this agreement, there is a recital that the company required a loan to the extent of rupees ten lakhs for erecting its mills and purchasing its plant and machinery and stock-in-trade and for running the mill. The agreement shows that Jogendra Lal Nandi and Anil Krishan Pal as brokers obtained the loan for the company, in consideration of a commission of 1per cent to be paid in perpetuity on the gross sale of the products of the mill of the company. Such payment was to be made immediately after expiry of each year, and the first of such payments was to be made immediately after 31st December, 1950. This commission was to be received by the said Jogendra Lal Nandi and Anil Krishna Pal and their respective heirs, executors, administrators, representatives and assignees in perpetuity. The said Jogendra Lal Nandi died on the 7th June, 1950. He was succeeded by his three sons, Sukumar Nandi, Kusum Kumar Nandi and Sudhir Kumar Nandi, and his widow, Sm. Rohini Nandi. They, together with Anil Krishna Pal, transferred or assigned their right to receive the commission in perpetuity to two other persons, namely, Sunil Kumar Pal and Amar Krishna Poddar, by a registered deed of assignment dated 10th December, 1951. In pursuance of the agreement with the company, it paid a sum of Rs. 21,798 during the assessment year to the said Sunil Kumar Pal and Amar Krishna Poddar. The company claimed the payment to be revenue expenditure, being a liability of the company incurred for the purpose of carrying out its business. The Tribunal held that the loan was certainly a liability, in the sense that it had to be repaid. But being a long term loan, it became a part of the assets of the company and being an asset of an enduring character, it must be considered as a capital asset. An expenditure incurred for securing capital of the nature mentioned above is to be regarded in law as an expenditure of a capital nature. Therefore, the Tribunal held that the amount paid was to be regarded as a capital expenditure and, consequently, not allowable under s. 10(2)(xv) of the Indian IT Act. Thereupon, a dispute has been raised and the following question has been referred to us under s. 66(1) of the IT Act : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 21,798 was a capital expenditure and as such not allowable as a deduction under s. 10(2)(xv) of the Indian IT Act ?"
(2.) THE point for determination, therefore, is as to whether the payment of commission to brokers in the circumstances mentioned above is capital expenditure or a revenue expenditure allowable under s. 10(2)(xv) of the IT Act. Before proceeding to decide the question, I should like to set out the following summary of Mr. Meyer's argument on behalf of the respondent : "1. Whether a commission to paid brokers for raising a loan is of a capital nature or revenue expenditure, depends on the nature of the loan. 2. Where a debenture loan is raised upon a security of properties belonging to the company, it is always of a capital nature, except in the case of a short term loan which becomes a part of the assessee's profit making structure. 3. The raising of a debenture even for the purpose of day-to-day carrying out of a business of the assessee would be a capital nature, inasmuch as it is indistinguishable from the raising of share capital. 4. In the present case, the commission payable is in respect of a long-term loan and regard being had to the purpose for which it has been raised and the manner of raising it, the loan itself must be taken to have formed a part of the capital assets of the company and the commission paid in connection therewith is expenditure of a capital nature and not allowable as revenue expenditure under s. 10(2)(xv) of the IT Act. In order to support these propositions, a number of cases have been cited, some of which, I shall now proceed to consider. The first case, which upon the facts comes very near to the present one is a decision of the Queen's Bench of England, Texas Land and Mortgage Co. vs. Holtham (1894) 3 Tax Cases 255. In that case, the company was registered in England and the memorandum of association authorised the raising of money, inter alia, by the issue of bonds, mortgages and debentures. During the three financial years commencing from 5th April, 1890, the company issued certain debentures and debenture stock. The expenses of the issue and placing of such debentures and debentures stock, inter alia, consisted of an item of commission and fees paid to brokers to the extent of ï¿ 1/2 5,055 4s. 10d. There were other items like stamps on debenture and incidental charges. The question arose whether such cost including the commission was expenditure of a capital nature or an allowable expense chargeable against the profits and gains of the company. The IRC were of the opinion that any cost incurred in the process of raising debentures and debenture stock was expenditure of a capital nature and was not an expense chargeable to revenue. Thereupon, the assessee asked for the question to be referred to Court and it was so referred. It was argued that the fees paid to the brokers upon the issue of debentures formed part of the expenses in carrying on the business of the company, because, before they could lend money, they had to raise a capital. Viscount Cave, whose decisions relating to income-tax law is always authoritative, indicated his opinion that the commissioner for raising a debenture loan was "only so much capital. A man wants to raise ï¿ 1/2 100,000 of capital, and in order to do that he has to pay ï¿ 1/2 4,000. That makes the capital ï¿ 1/2 96,000. That is all." "Learned counsel however argued that the capital of the company, properly so called, was the share capital and nothing else. Viscount Cave expressed his opinion that to the extent that the company borrowed money, it increased its capital. The judgment was delivered by Mathew J., which was a very short one and must be set out. "There is no doubt that in this case this company raised money by shares with the intention of lending money on mortgage. To increase its capital it raised money on debentures. The argument is that the cost of capital raising the money ought to be deducted from the profits in a particular year. We are clearly of opinion that cannot be done. The amount paid in order to raise the money on debentures, comes off the amount advanced upon the debentures, and, therefore, is so much paid for the cost getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation. This appears to me to be entirely concluded by the decision of yesterday (Anglo Continental Guano Works vs. Bell (1894) 3 Tax Cases 239)."
(3.) IN the case cited by Mathew. J. the facts were as follows : The assessee company was a foreign firm carrying on business, inter alia, in England in Guano, imported from South America into England and sold there. Short loans were obtained from tome to time from bankers to enable the company to pay more advantageously its purchase of cargoes of Guano. The question was whether interest paid on such loans could be considered, under the circumstances of the case, as revenue expenditure chargeable against profits, or whether it was expenditure of a capital nature. Viscount Cave said as follows : It is contended by Mr. Finlay that in order to ascertain the balance of profits or gains of such trade you must take into consideration the question whether the trader is trading with borrowed money, or with the capital of his own. It seems to me that that is not so--that the gains of the trade are quite independent of the question of how the capital money is found, that the gains of the trade are those which are made by legitimate trading after paying the necessary expenses which you have necessarily to incur in order to get the profits; and that you cannot for that purpose take into consideration the fact that the firm or trader has to borrow some portion of the money which is employed in the business." ;