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TMI Blog1961 (10) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... tten off by appropriation against the profits of that year. During the assessment proceedings for the assessment year 1950-51, the claim was made by the assessee before the Income-tax Officer that this expenditure should be allowed as an item of necessary expenses coming within the scope of section 10(2) (xv). The Income-tax Officer found that, even according to the information furnished by the auditors, ₹ 25 lakhs out of the amount borrowed was paid in discharge of a loan taken earlier from Messrs. Harvey Ltd., which amount had been borrowed and "utilised on the capital assets" of the assessee company. It was not, however, clear how the balance of ₹ 15 lakhs was death with the Income-tax Officer took the view that section 10(2) (xv) specifically excluded any item of capital expenditure and that since money had been obtained only for capital purposes, the expenditure incurred in relation thereto should also be treated as capital expenditure. The deduction claimed was disallowed. The appeal to the Appellate Assistant Commissioner shared the same fate, the appellate to authority agreeing with the Income-tax Officer that the circumstances indicated the capital na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceeded on an inference based upon the balance-sheet. The Tribunal did not investigate how the sum of ₹ 25 lakhs earlier borrowed from A. H. Harvey and Madurai Mills Ltd. was actually utilised. Though in the order of there Income-tax Officer, it is found stated, that that amount was utilised on the capital assets of the company and that statement was based on the authority of the information furnished by the auditors of the assesses, the Tribunal either overlooked or ignored this circumstance. In the face of the statement so recorded by the Income-tax Officer, the Tribunal does not appear to had been justified in relying upon inference in ascertaining whether the earlier borrowal was on capital or revenue account. The arguments on either side present two extreme points of view. Mr. Ranganathan , for the department, contends that any loan secured by a business must be regarded as a capital asset and any expenditure incurred of the acquisition of such loan must also be an expenditure of a capital nature. In any event, it is argued that a loan of the kind in question, viz., secured by the mortgage of the fixed assets of the company, can only be regarded as a conversion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge of trade debts. While pursuing this line of reasoning, the learned counsel had necessarily to agree that there is no evidence as to the nature of the 'handloans on suspense account', in discharge of which a sum of over ₹ 82,000 was paid and, also, that the deposit of ₹ 51,500 for the payment of dividend could not in any view be debited to revenue; he, therefore, maintained that at least the balance of the amount borrowed, which may be taken to had been applied towards the purchase of stock-in-trade, may be treated as not capital and the proportionate part of the expenditure, out of ₹ 12,924, allowed to be deducted. It was not disputed by him that in submitting the return of income, and in the computation of the profits of the business, the cost price of raw materials or stock-in-trade was brought into account. The argument thus concedes a dual character to the borrowing, and involves a notional splitting of the borrowed amount and the expenses, for which we see no rational basis, which is also contrary to the prescription in section 10(2) (xv), implicit in the expression 'laid out or expended wholly or exclusively', but the argument is usefu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The London branch of a foreign company obtained advanced from its herd office outside England and also raised loans from bankers paying interest thereon. It was conceded the interest on advances made by the central office was not a permissible deduction. Loans were taken from the local bankers only for the purpose of paying for purchases of guano, a commodity in which the assessee dealt. The claim to deduction was dealt with on the terms of the relevant provisions of the statute, it being taken for granted that it was really in the nature of borrowed capital. The correctness of this decision, however, was considered in Scottish North American Trust Ltd. vs Farmer (1911) 5 Tax Cas. 693 . Lord Atkinson observed : "What was decided in the case was that the sum paid for interest on these loans would not be deducted under rule 3, on the ground that the money borrowed was employed as capital, and that this interest was a sum deducted 'for' this capital; but the case was treated as if it were a case between partners engaged in a partnership business, one of all of whom is or are trading with borrowed capital." The House of Lords accordingly distinguished that cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cter, whether the capital is raised at the flotation of the company or thereafter... and if these ₹ 28 lakhs could not be treated as wholly laid out for the purpose of the trade of the petitioners, they could not be treated as incurred solely for the purpose of earning the profits of the petitioner's trade... As long as the law allows preliminary expenses and good will to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery." In European Investment Trust Co. Ltd. vs Jackson (1932) 18 Tax Cas. 1 , the assessee company obtained its finances from the American Finance Corporation. The company's business was advancing the money for the purchase of motor-cars under the hire-purchase system. The company itself bought the car in the first instance and finally sold it to the hire-purchaser. As the company's capital was the sum of (pounds) 1,000, it had need for a considerable amount of capital in order to enable it to purchase the motorcars, which it sold on the hire-purchase system. For this purpose, it obtained finances from the American ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land, held that the moneys so borrowed were not sums employed as capital in the trade... In the point of fact, the money which was held not to be capital - although it was capital, as I say, in the sense that it was not income - was, really, what is frequently referred to as circulating capital. But, again, it is impossible, I think, to treat the decision of the House of Lords as laying down that capital, which is used as circulating capital, is not capital within the meaning of sub-rule (f). To start with, they did not, in terms, draw any distinction between circulating capital and fixed capital and, in the next place, they did not overrule, although they commented upon, the decision in the Anglo Continental Guano Works vs Bell (1894) 3 Tax Cas. 239 , where money that, so far as I can see, was borrowed an used as a circulating capital, was treated as capital within the meaning of sub-rule (f)." It would be seen from the above that the Scottish North American Trust Ltd. vs Farmer (1911) 5 Tax Cas. 693 , apparently marked a departure from the line of cases that went before. A distinction was drawn between cases where the company borrowed funds for the purpose of utilising it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benture capital (which cannot, in my opinion, be in any sense regarded as within the sort of temporary accommodation of which Finally J, spoke)...." Dealing with the first guarantee, he said : "Having regard to the fact that the commission was payable in respect of a sum of money which was raised in respect of the guarantee of the amount of an existing trade debt, and in fact that that trade debt was very largely reduced in the two years after guarantee had been given, and the fact that the parties were, according to the evidence, anxious that this loan should be repaid as quickly as possible, I feel unable to say that there was no evidence upon which the commissioners might come to the conclusion of fact which they did." It would be obvious from the above that notwithstanding that the particular provisions of the English statute placed restrictions upon such allowances and there is in fact no allowance of the kind contemplated under section 10(2) (iii) of the Indian Act, decisions have made a distinction between cases where temporary accommodations for the purpose for carrying on the business are obtained an long term loans, for whatever purpose such loans mig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real or even apparent connection which the business in which that sum of money was subsequently invested. How that particular expenditure incurred even before the amount so borrowed was put into the business could be treated as having been expended purely and exclusively for the purpose of that business is difficult to follow. It may be that the partner was anxious to increase his share of the investment in that business. That he had to incur some expenditure in securing the money to be invested in the firm does not seem to result in the conclusion that that expenditure was for the purpose of that business. For instance, if a person sold certain securities of his own and had to pay brokerage or commission in that connection, it is difficult to see how such brokerage or ommission could be deemed to have been money expended for the purpose of the business in which the money so raised was later invested. Obviously, the partner had capital in his own hands in one form. That he had to expend the moneys to convert it into another form, such conversion being necessary before the money could be invested in the firm, is hardly sufficient to establish the connection between the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated." 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 ₹ 40 lakhs. The further question would then be whether this asset or advantage was not for the enduring benefit of the business and whether the expenditure incurred was one which was incurred once and for all. The answer to both questions would again be in the affirmative. It is true that the borrowed money was to be repaid and it cannot be an enduring advantage in the sense that the money becomes part of the assets of the company f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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