1963 (3) TMI 76 - HC - Income Tax

Summary

Issues Involved:
1. Whether the commission paid to brokers for raising a loan is a capital expenditure or revenue expenditure.
2. Whether the payment of Rs. 21,798 is allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Nature of Commission Paid to Brokers:
The primary issue is whether the commission paid to brokers for raising a loan is classified as capital expenditure or revenue expenditure. The Tribunal held that the loan raised by issuing debentures was a long-term liability and became part of the assets of the company, thus being of an enduring character. Consequently, the commission paid for securing such a loan was regarded as a capital expenditure, not allowable under section 10(2)(xv) of the Indian Income-tax Act.

Supporting Arguments and Case Law:
Several cases were cited to support this position, including:
- Texas Land & Mortgage Co. v. Holtham: The commission paid to brokers for raising debentures was considered capital expenditure.
- Bennett & White Construction Co. Ltd. v. Minister of National Revenue: Payments for guarantees on loans were regarded as capital expenditure.
- Tata Hydro Electric Agencies Ltd. v. Commissioner of Income-tax: Payments made in consideration of acquiring the right to conduct business were not for the purpose of producing profits and were thus capital expenditures.

Contrary Arguments and Case Law:
However, dissenting opinions and other cases suggested that the nature of the expenditure should be considered independently of the origin of the capital:
- Commissioners of Inland Revenue v. 36/49 Holdings Ltd.: Perpetual payments related to turnover were considered revenue expenditure.
- Commissioner of Income-tax v. Kolhia Hirdagarh Co. Ltd.: Payments related to turnover and not to a specific sum fixed as part of the purchase price were considered revenue payments.

2. Allowability of Deduction under Section 10(2)(xv):
The second issue is whether the payment of Rs. 21,798 is allowable as a deduction under section 10(2)(xv). This section permits deductions for any expenditure not being in the nature of capital expenditure or personal expenses, laid out wholly and exclusively for the purpose of the business.

Supporting Arguments and Case Law:
The Tribunal and majority opinion held that since the expenditure was for securing a capital asset (the loan), it was of a capital nature and not allowable as a deduction. This was supported by:
- In re Tata Iron & Steel Co. Ltd.: Expenses for raising capital were considered capital expenditure.
- Nagpur Electric Light & Power Co. Ltd. v. Commissioner of Income-tax: Brokerage and other expenses for raising a debenture loan were capital expenditures.

Contrary Arguments and Case Law:
The dissenting opinion argued that the commission paid should be considered as revenue expenditure because it did not translate into any capital goods or intangible assets:
- Dharamvir Dhir v. Commissioner of Income-tax: Payments made for the purpose of earning profits were considered revenue expenditure.
- Commissioner of Income-tax v. Tata Sons Ltd.: Payments made for securing finance were considered revenue expenditure.

Conclusion:
The majority opinion concluded that the commission paid for raising the loan was a capital expenditure and not allowable as a deduction under section 10(2)(xv). The dissenting opinion argued that the commission should be considered a revenue expenditure and thus deductible. The final decision was to refer the matter to the Chief Justice for the constitution of an appropriate Bench for final orders.