INDIA CEMENTS LIMITED Vs. COMMISSIONER OF INCOME TAX MADRAS

JUDGEMENT

(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 ?'

(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.'