1965 (12) TMI 22 - SC - Income Tax

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 expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure ? Held that - The expenditure of ₹ 84,633 was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business. The answer to the question referred, therefore, must be in the affirmative. The appeal is allowed, the judgment of the High Court set aside and the question referred answered in the affirmative.

Issues Involved:
1. Whether the sum of Rs. 84,633 expended by the assessee in obtaining the loan is an allowable expenditure.
2. Whether the expenditure was capital or revenue in nature.
3. Whether the expenditure was incurred wholly and exclusively for the purpose of the assessee's business.
4. Whether the High Court erred in preferring the findings of the Income-tax Officer over those of the Appellate Tribunal.

Detailed Analysis:

1. Allowable Expenditure:
The primary issue was whether the sum of Rs. 84,633 expended by the assessee in obtaining a loan was an allowable expenditure under section 10(2)(xv) of the Income-tax Act. The Tribunal held that the expenditure was allowable, but the High Court disagreed, preferring the findings of the Income-tax Officer.

2. Capital vs. Revenue Expenditure:
The High Court held that the expenditure was capital in nature, reasoning that it was incurred to bring into existence an asset or advantage of enduring benefit to the business. The High Court observed, "If we ask for what purpose the expenditure in the present case was incurred, the only answer must be that it was incurred for the purpose of bringing into existence an asset in the shape of borrowing these Rs. 40 lakhs." The Supreme Court, however, disagreed, stating that "a loan is a liability and has to be repaid," and thus cannot be considered an asset or an advantage of enduring benefit. The Court concluded that the expenditure was revenue in nature, stating, "the loan obtained is not an asset or advantage of an enduring nature."

3. Expenditure for Business Purposes:
The High Court questioned whether the expenditure was laid out wholly and exclusively for the purpose of the assessee's business. The Supreme Court clarified that the expenditure was indeed for the purpose of business, citing the case of Eastern Investments Ltd. v. Commissioner of Income-tax. The Court noted, "the transaction was voluntarily entered into in order indirectly to facilitate the running of the business of the company and was made on the ground of commercial expediency."

4. Preference of Findings:
The High Court preferred the findings of the Income-tax Officer over those of the Appellate Tribunal. The Supreme Court noted that in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal unless challenged by an application under section 66(1). The Court stated, "it seems to us that, in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal."

Conclusion:
The Supreme Court concluded that the expenditure of Rs. 84,633 was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business. The answer to the question referred was in the affirmative. The appeal was allowed, the judgment of the High Court was set aside, and the question referred was answered in the affirmative. The appellant was awarded costs incurred in both the Supreme Court and the High Court.

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