1964 (8) TMI 88 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure incurred for securing a loan under an overdraft account is to be treated as revenue or capital expenditure.

Issue-Wise Detailed Analysis:

1. Nature of Expenditure: Revenue or Capital
Facts and Background:
The assessee incurred an expenditure of Rs. 35,800 for securing a financial overdraft from a bank, which included payments for brokerage, asset valuation, and stamp duty for the deed of hypothecation. The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal all treated this expenditure as capital in nature, rejecting the assessee's claim for deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Assessee's Arguments:
- Short-term Nature of Overdraft: The assessee argued that overdraft facilities are short-term loans repayable on demand and incidental to the running of the company, thus not providing an enduring advantage.
- Business Operations: The overdraft facilities were used for regular business operations and did not result in acquiring any asset or advantage of an enduring character.
- Evolving Legal Tests: The principles for determining capital or revenue expenditure have evolved, and the periodicity of expenditure and tenure are no longer decisive factors. The assessee cited several cases to support this view, including Commissioner of Income-tax v. Finlay Mills Ltd. and Commissioner of Income-tax v. Century Spinning Weaving and Manufacturing Co. Ltd.

Department's Arguments:
- Enduring Benefit: The department contended that the overdraft facility provided an enduring benefit to the assessee, as it allowed the company to borrow money as needed, creating a substantial advantage.
- Capital Asset: The expenditure was made once and for all to secure a capital asset, thus qualifying as capital expenditure.

Court's Analysis:
- Broad Principles: The court referred to the principles laid down by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which included tests such as whether the expenditure brings into existence an asset or advantage of enduring benefit.
- Nature of Overdraft Facility: The court emphasized that the overdraft facility provided a general right to borrow money from the bank, which is a significant advantage for the company. This facility is not equivalent to a specific loan but rather a general arrangement that provides an enduring benefit.
- Mixed Question of Law and Fact: The court noted that determining whether an expenditure provides an enduring benefit is a mixed question of law and fact. In this case, the overdraft facility created a security and confidence for the company, thus constituting an enduring benefit.

Conclusion:
The court concluded that the overdraft facility provided an enduring benefit to the assessee and, therefore, the expenditure incurred to secure this facility was of a capital nature. The Tribunal was justified in holding that the sum of Rs. 35,800 was not allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Final Judgment:
The court answered the question in the affirmative, stating that the Tribunal was justified in holding that the expenditure incurred by the assessee for securing overdraft facilities was of a capital nature. The assessee was ordered to bear the costs of the reference.