1978 (1) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of interest payments as revenue expenditure.
2. Classification of expenditure as capital or revenue.
3. Impact of board resolution on the legitimacy of the interest payments.
4. Relationship between the expenditure and the conduct of business.

Issue-wise Detailed Analysis:

1. Deductibility of Interest Payments as Revenue Expenditure:
The primary issue was whether the interest payments of Rs. 51,435 and Rs. 54,575 made by the assessee-company to the share-brokers in the assessment years 1957-58 and 1958-59, respectively, could be considered allowable as revenue expenditure against the business income earned during those years. The Tribunal concluded that these payments were made to ensure the supply of stock-in-trade at advantageous prices and were necessary to avoid damages for non-fulfillment of the contract. Hence, the Tribunal allowed the assessee's claim, stating that the payments represented expenditure incurred for the purpose of the business.

2. Classification of Expenditure as Capital or Revenue:
The judgment delved into the principles distinguishing capital expenditure from revenue expenditure. It was emphasized that if the expenditure was incurred to ensure the source of stock-in-trade, it would be capital expenditure. Conversely, if the payments were made to obtain stock-in-trade under an arranged source, they would be revenue expenditure. The court referred to the Supreme Court's observation in the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT, which stated that expenditure related to the conduct of business and integral to the profit-earning process is revenue in nature. Applying this principle, the court found that the interest payments were made to obtain the stock-in-trade (shares) and were thus revenue expenditure.

3. Impact of Board Resolution on the Legitimacy of the Interest Payments:
The ITO initially disallowed the interest payments partly because there was no resolution from the board of directors authorizing the payment. However, the Tribunal found that the board of directors had ratified the arrangements with the share-brokers on 18th May, 1957. This ratification supported the legitimacy of the interest payments as business expenditures. The court upheld this finding, reinforcing that the payments were authorized and necessary for the business.

4. Relationship Between the Expenditure and the Conduct of Business:
The court examined whether the expenditure was related to the conduct of the business or the acquisition of a capital asset. It was noted that the payments were made to defer the delivery of shares due to a lack of funds, ensuring the company could obtain the shares at a previously agreed advantageous price. The court concluded that the payments were part of the profit-earning process and did not result in acquiring an asset of a permanent character. Therefore, the expenditure was related to the conduct of the business and was allowable as revenue expenditure.

Conclusion:
The court answered the referred question in the affirmative, holding that the sums of Rs. 51,435 and Rs. 54,575 were allowable as revenue expenditure. The judgment emphasized that the expenditure was incurred for the purpose of the business, ensuring the supply of stock-in-trade at advantageous prices, and did not result in acquiring a capital asset. Consequently, the Tribunal's decision to allow the assessee's claim was upheld, and the question was resolved in favor of the assessee. There was no order as to costs.