9911796707
TMI Blog1963 (3) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... roperties described in the first schedule to the indenture of trust. The first schedule consists of the landed properties, machinery, building and stock-in-trade belonging to the company. On the same date, another agreement was entered into between the company and one Jogendra Lal Nandi and Anil Krishna Pal. A copy of this agreement is annexed to the statement of case and appears at pages 5-7 of the paper-book. In this agreement, there is a recital that the company required a loan to the extent of rupees ten lakhs for erecting its mills and purchasing its plant and machinery and stock-in-trade and for running the mill. The agreement shows that Jogendra Lal Nandi and Anil Krishna Pal as brokers obtained the loan for the company, in consideration of a commission of 1% to be paid in perpetuity on the gross sale of the products of the mill of the company. Such payment was to be made immediately after the expiry of each year, and the first of such payments was to be made immediately after 31st December, 1950. This commission was to be received by the said Jogendra Lal Nandi and Anil Krishna Pal and their respective heirs, executors, administrators, representatives and assignees in perpe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's profit-making structure. 3.The raising of a debenture, even for the purpose of day-to-day carrying out of a business of the assessee would be of a capital nature, inasmuch as it is indistinguishable from the raising of share capital. 4.In the present case, the commission payable is in respect of a long-term loan and regard being had to the purpose for which it has been raised and the manner of raising it, the loan itself must be taken to have formed a part of the capital assets of the company and the commission paid in connection therewith is expenditure of a capital nature and not allowable as revenue expenditure under section 10(2)(xv) of the Income-tax Act. In order to support these propositions, a number of cases have been cited, some of which, I shall now proceed to consider. The first case, which upon the facts comes very near to the present one, is a decision of the Queen's Bench of England, Texas Land Mortgage Co. v. Holtham [1894] 3 Tax Cas. 255, 260. In that case, the company was registered in England and the memorandum of association authorised the raising of money, inter alia, by the issue of bonds, mortgages and debentures. During th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appears to me to be entirely concluded by the decision of yesterday (Anglo Continental Guano Works v. Bell [1894] 3 Tax Cas. 239, 245). In the case cited by Mathew J. the facts were as follows: The assessee company was a foreign firm carrying on business, inter alia, in England in Guano, imported from South America into England and sold there. Short loans were obtained from time to time from bankers to enable the company to pay more advantageously its purchase of cargoes of Guano. The question was whether interest paid on such loans could be considered, under the circumstances of the case, as revenue expenditure chargeable against profits, or whether it was expenditure of a capital nature. Viscount Cave said as follows: It is contended by Mr. Finlay that in order to ascertain the balance of profits or gains of such trade you must take into consideration the question whether the trader is trading with borrowed money, or with the capital of his own. It seems to me that that is not so-that the gains of the trade are quite independent of the question of how the capital money is found, that the gains of the trade are those which are made by legitimate trading after paying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank, and it must have been either on the footing that the day-to-day use of the funds was embraced within the business that produced the profit, or that the interest was within section 5, paragraph (b). But setting up that credit right or providing the banking facilities is quite another thing from paying interest; it is preparatory to earning the income and is no more part of the business carried on than would be the work involved in a bond issue Within the meaning of the Act, the premiums create part of the capital structure and are a capital payment: Watney v. Musgrave [1880] LR 5 Ex. D. 241. They furnish a credit apparatus to enable the business to be carried on, and although they affect the distributable earnings of the company, they do not affect the net return from the business. (p. 7). Estey J. said as follows: This was not a borrowing of money on a temporary or short-term basis such as is necessary and incidental to the ordinary and usual transactions in the course of the appellant's business. In effect, this line of credit made available to the appellant for an indefinite period the ability to borrow funds for the purpose of accepting contracts beyond th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the payments in question were not expenditure so incurred by the appellants. They were certainly not made in the process of earning their profits; they were not payments to creditors for goods supplied or services rendered to the appellants in their business: they did not arise out of any transactions in the conduct of their business. That they had to make those payments no doubt affected the ultimate yield in money to them from their business, but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch expenses could not be allowed. It was argued that these were expenses not in raising the original capital but in re-arranging the loan capital in a manner more satisfactory to the company. It was held that nevertheless this was a capital expenditure and not an allowable deduction. In Ascot Gas Water Heaters Ltd. v. Duff [1942] 24 Tax Cas. 171 the appellant company raised a first mortgage debenture stock for extension of its business. For this purpose a Dutch company gave a guarantee and charged from the appellant, a commission. It was held that the commission was not an allowable expenditure. Lawrence J. pointed out that if the sums in respect of which deduction was claimed were temporary in their nature and might be regarded as an ordinary expenditure of carrying on the business of the company, they could be allowed, but expenditure for raising mortgage debenture capital could not be considered as a temporary accommodation. It may be noted that in this case it does not appear that there was any limit to time for repayment of the debt and also there was no limit as to the time for which the guarantee was given and the commission paid thereon. In the case of Western India Plywoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, or for improving the capital position. The above distinction was pointed out by Finlay J. in European Investment Trust Co. Ltd. v. Jackson [1932] 18 Tax Cas. 1 and was affirmed by Lawrence J. in Ascot Gas Water Heaters Ltd. v. Duff [1942] 24 Tax Cas. 171, who considered a temporary accommodation to be an ordinary incident in carrying on the business. In a commercial sense, no one would speak of his banking facilities as part of his capital assets. In Ward v. Anglo American Oil Co. Ltd. [1934] 19 Tax Cas. 94 Singleton J. quoted as follows, from the judgment of the Court of Sessions in Scottish North American Trust v. Farmer [1911] 5 Tax Cas. 693, 698: 'It may well be said that if money is borrowed on a permanent footing, as from year to year, the capital of the concern is in a commercial sense enlarged thereby, and the business extended . . .' The category of short loans which may be contracted in carrying on a business, also comes within the scope of temporary accommodation or of ordinary trading facilities. But the raising of money by debentures or mortgage cannot be regarded as an ordinary incident in carrying on the business, or be treated as on a par with trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e help and guidance. Before adverting to them, it has to be borne in mind, that under the English statutes too, from 5 and 6 Vict. c. 35 down to 15 and 16 Geo. 6 and 1 Eliz. 2 c. 10 (being the Income Tax Act, 1952), questions do arise as to the nature of the receipt, whether capital or revenue, as no deduction is permissible in respect of any capital withdrawn from or any sum employed or intended to be employed as capital in a trade, profession or vocation. (p. 542). It has also been strenuously contended before us that a payment, like a percentage on the gross receipts for an indefinite period cannot be in the nature of capital. Reference may be made to National Cement Mines Industries Ltd. v. Commissioner of Income-tax [1956] 29 ITR 629. There, the assessee company acquired certain rights and concessions pertaining to limestone and other mineral substances necessarily for manufacturing cement, and transferred the same to another company which, inter alia, agreed to pay a sum of 13 as. for every ton of cement sold by it. There was no limitation as to period. The question was whether such a payment was a capital or revenue expenditure. Chakravartti C.J. said as follows: ... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures or debenture stock or mortgages or bonds, and these are its loan capital . It appears, therefore, that the raising of capital by the issue of debentures is a recognised mode. Mr. Meyer has rightly pointed out that all the decided cases have laid down the proposition that borrowing money by the issue of debentures is an acquisition of capital assets and that any commission or expenditure incurred in respect thereof is of a capital nature and not to be considered as in the nature of revenue. There is significantly not a single case to the contrary. Mr. Mitter appearing on behalf of the assessee has not seriously argued that the issue of debentures is not an usual method of acquiring capital. He argues, however, that, on the facts and circumstances of the present case, a payment of commission to a broker for raising a loan, a payment which was going to be made irrespective of profit and made for perpetuity, should not be considered as an expenditure of a capital nature. Doubtlessly, as pointed out by Chakravartti C.J., the determination of whether a particular expenditure is of a capital nature or revenue nature depends on the facts of each case. The mere fact, however, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee club had founded and was running a school for the purpose of safeguarding its business interests and the expenditure was only a year's portion of the recurring expenditure that was being incurred year after year for the maintenance of the school. It was not as if the assessee had spent a single and definite sum either in a lump or in instalments for the purpose of securing an asset or an advantage, even assuming that an asset or an advantage was intended to be secured. The expenditure being only the running expense of keeping the school, was of the nature of expenditure which is incurred for meeting a continuous demand in connection with one's business. Even judged by the first part of Viscount Cave's test, it appears to me, the expenditure with which we are concerned cannot be said to have been a capital expenditure. The test of a single expenditure is however only one of the tests and cannot be of universal application. Another case relied on by Mr. Mitter is a decision of the Supreme Court-Dharamvir Dhir v. Commissioner of Income-tax [1961] 42 ITR 7 . In that case, the assessee was an employee of a firm earning a salary of ₹ 10,572 and &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in urgent need of money and the assessee company found a financier, a Mr. Dinshaw, and an agreement was entered into with the managed company and Mr. Dinshaw by which the latter agreed to lend a crore of rupees on the condition that the assessee company assigned to him a share in the commission which the assessee company might receive from the managed company. That was held to be an agreement on the part of the assessee company to share their commission with Mr. Dinshaw and it was a part of the arrangement on which the assessee company obtained finance and, therefore, the payment to Mr. Dinshaw was an expenditure solely for the purpose of earning profits or gains and it was not of a capital nature. Beaumont C.J. said that the question whether the payment of a part of the commission to a third person should be regarded as expenditure incurred solely for the purpose of earning that commission was a question which must be answered on the facts of each case and upon a commercial basis. I must confess that the cases on this aspect of the question are not always reconcilable. It is however clear that the commission paid on the issue of debentures upon the security of the company's a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort-term one being redeemable in instalments by the end of December, 1963. The Tribunal was of the opinion that the loan of ₹ 10,00,000 raised by the company conferred on it the benefit of enduring character and it was, therefore, a capital asset in the hands of the company. An expenditure incurred for securing capital must be regarded as an expenditure of a capital nature. The Tribunal was of the opinion that the amount of ₹ 21,798 which was paid by the company was of the nature of capital expenditure and, consequently, no deduction could be allowed under section 10(2)(xv). Thereafter the Tribunal referred the following question of law to the High Court: Whether, on the facts and in the circumstances of the case, the sum of ₹ 21,798 was a capital expenditure and, as such, not allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act. ? The provisions of section 10(1) are as follows: The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. The relevant provision of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure was laid out or expended wholly and exclusively for the purpose of such business. There can be another approach to the same problem. It may be determined first whether the expenditure was laid out or expended wholly and exclusively for the purpose of such business. If it was so, then to investigate the next clause whether it was in the nature of a capital expenditure. If it be found that the expenditure was not laid out or expended wholly and exclusively for the purpose of such business, it would be unnecessary to find out whether the expenses were in the nature of a capital expenditure. In my view having regard to the limited nature of the question, the first way of approach to the problem would be more convenient in this case. In other words, we will first consider whether the sum of ₹ 21,798 was in the nature of a capital expenditure and then consider if the expense was not in the nature of a capital expenditure, whether the said expenditure was laid out or expended wholly or exclusively for the purpose of the business, profession or vocation. Capital has different meanings. Capital comprises ordinarily, from a commercial man's point of v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which can reproduce wealth or be the instrument or medium of earning profit but is spent and gone. Hence commission paid cannot be a capital expenditure and must be a revenue expenditure. It is now necessary to turn to some of the authoritative pronouncements on the point of expenditure or expenditure in the nature of capital expenditure. Lord Dunedin in Vallambrosa Rubber Company v. Farmer [1910] 5 Tax Cas. 529 laid out a test in these words: Capital expenditure is a thing that is going to be spent once and for all. An income expenditure is a thing which is going to recur every year. Lord Atkinson suggested that in British Insulated Helsby Cables Ltd. v. Atherton [1926] AC 205; 10 Tax Cas. 155 the word asset ought not to be confined to something material, for it may be an advantage of an impalpable or incalculable nature or it has been said it may be an expenditure which increases the value of the capital asset. In the facts of British Insulated Helsby Cables Ltd. v. Atherton [1926] AC 205; 10 Tax Cas. 155 the test laid down by Lord Dunedin could not be applied. Viscount Cave L.C. in the course of his speech in British Insulated Helsby Cables Ltd. ' s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a deduction in estimating the assessable profits of the company. The Lord President discussed the matter as follows: The question before the court is whether the Arizona Copper Company, the borrowers, are entitled to deduct this bonus in returning their profits under the Income Tax Acts. There cannot be said to be any complexity or ambiguity in the application of the money or in the source from which it was paid. It was paid in a lump payment as one of the considerations stipulated for a loan of capital employed in the completion of the works, the other consideration being interest at 10 per cent. per annum; and it is in terms admitted in the case to have been paid out of the profits of the company. Now at this stage of the development of the law of the Income Tax, it is not to the purpose to consider whether such a payment is a proper deduction, from the point of view of a business concern, making up its own balance sheet for its own purposes. The question is whether such a payment out of profits is an authorised deduction in estimating the balance chargeable under Schedule D. It appears to me, as a sum paid in return for a loan of capital, to be entirely heterogeneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation . The scheme of the English Act is different from the scheme of the Indian Income-tax Act. Moreover, in the English Act there is clear provision in sub-clause (f) regarding payment of money out of the capital whether it be share capital or loan capital. There is no similar provision in our statute. Hence the principle deduced from the English Act cannot be applicable without close scrutiny of the Indian Income-tax Act. The Texas case (supra) was likewise founded on sub-clause (f) of rule 3 for it is stated in the judgment that the amount paid in order to raise the money on debentures comes off the amount advanced upon the debentures. In India the test is not whether it is the expenditure by way of commission that falls within sub-clause (f) of rule 3 but the test is, as we have seen earlier, whether it is a capital expenditure or not and if it is not capital expenditure, whether it was laid out exclusively for the purpose of the business. In my opinion, the decisions in 3 Tax Cases are well-founded on the basis of the English Act. They have however no application whatsoever in India where both the schemes and the words are different. Hence, in my opinion, the reasoning men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to them under the agreement, the defendants deducted income-tax in respect of the amount due under the agreement. In these circumstances, the court held that the income-tax was rightly deducted. This case again can be distinguished from the Texas case (supra) on the ground that it was not withdrawn from the capital or was not tied to a specific fund. In India Chief Justice Chagla and Mr. Justice Tendolkar in Commissioner of Income-tax v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545 held that a payment of an annual dividend of four annas for every ton of coal from the colliery of the assessee company was a payment made for an indefinite period. The payment made in relation to the turnover of the company and not in relation to its profits and as the profits had no bearing to any specific sum fixed as part of the sum for the purchase of the undertaking, it was in the nature of a revenue payment and not a capital payment. Therefore, in my opinion, even the principle of the Texas case [1894] 3 Tax Cas. 255 founded on sub-clause (f) of rule 3 of Schedule D of the English Act could not have and has no application in a case where the commission is payable in perpetuity. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether the sum of ₹ 21,798 was laid out or expended wholly and exclusively for the purpose of business was often treated as implicit in the questions before us and the same was agitated by both parties at considerable length, it is preferable to deal with this aspect of the matter and record my opinion thereon. The words laid out or expended wholly and exclusively for the purpose of such business, profession or vocation and/or similar phrases have been the subject-matter of several decisions both in England and in India. The case of Pondicherry Railway Co. v. Commissioner of Income-tax [1931] LR 58 IA 239, may be referred to in this connection. There the assessee company obtained a licence for constructing a railway in Pondicherry and in consideration thereof the assessee company undertook to pay half of its net profits to the French Government. The assessee company contended that half of its net profits payable to the French Government was an allowable deduction under the provisions corresponding to section 10(2)(xv). Lord Macmillan repelled the contention of the assessee company for the reasons which are given in his own words: A payment out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee undertook to pay a quarter per cent. of the commission earned by it from Tata Power Co. independent of whether the assessee made any profit or not. There Lord Macmillan observed that the rule laid down in Pondicherry Railway Co. 's case ( supra) did not apply. In the course of the judgment Lord Macmillan observed as follows: In short the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. (p. 209). In Commissioner of Income-tax v. Tata Sons Ltd. [1939] 7 ITR 195 a similar problem came for decision. In that case where the managed company was in real need of money and the assessee company found a financier, a Mr. Dinshaw, and an agreement was entered into between the assessee company, the managed company and Mr. Dinshaw by which the latter agreed to lend a crore of rupees on condition that the assessee company assigned to him a share in the commission which the assessee company might receive from the managed company. In that case it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business . In that case an employee of Messrs. Karamchand Thapper Brothers carried on business on his own account. He entered into a trade with the Bengal Nagpur Coal Co. Ltd. for raising coal for one of its mines. He did not have the necessary funds. So he entered into an agreement with Mohini Thapper Charitable Trust to obtain the necessary finance. The trust agreed to advance ₹ 1 lakhs in consideration of the assessee paying interest at the rate of six per cent. per annum on the amount from time to time owing to the trust and in addition agreed to pay a sum equal to 11/16th of the net profits of the business of the assessee. It was found as a fact that on the average the trust estate advanced a sum of ₹ 18,100. In some years the average ranged from ₹ 1,97,000 to ₹ 17,000 and the assessee paid ₹ 72,963 as 11/16th part of the profits. In that case his Lordship discussed the cases of Pondicherry Railway Co. v. Commissioner of Income-tax [1931] LR 58 IA 239, Union Cold Storage Co. Ltd. v. Adamson [1931] 16 Tax Cas. 293 , Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax [1937] 5 ITR 202 (PC), Robert Addie Sons' Collier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a capital expenditure but a revenue expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act. By the Court: Let this case be sent to the learned Chief Justice to constitute such Bench as he may consider fit. Bachawat, This case raises the question whether a certain payment by the assessee is of a capital or of a revenue nature. The assessee is a limited company. The assessee raised a loan of rupees ten lakhs by issuing debentures. By the debenture trust deed dated January 26, 1950, the assessee agreed that the loan would be redeemed in ten annual instalments of rupees one lakh each commencing from December 31, 1954. The debentures were issued at par and carried interest at the rate of 7 per cent. per annum payable half-yearly. The loan was secured by mortgage of the movable and immovable properties of the assessee. The assessee had applied for and obtained the sanction of the Central Government to the proposed issue of debentures, as the issue of capital without such sanction was prohibited by section 3(2)(a) of the Capital Issues (Continuance of Control) Act, 1947, and as the issue and creation of the debentures and mortgage was an issue of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure was not an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. On the application of the assessee the Tribunal referred the following question of law to the High Court: Whether, on the facts and in the circumstances of the case, the sum of ₹ 21,798 was a capital expenditure and, as such, not allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act. The reference was heard by a Division Bench consisting of Sinha and Datta JJ. Sinha J. was of the opinion that the payment was in the nature of a capital expenditure and was not an allowable deduction under section 10(2)(xv) and that the question should be answered in the affirmative, whereas Datta J. was of the opinion that the payment was an allowable revenue expenditure. In view of this difference of opinion the matter has been placed before me for hearing. Mr. Mitra appearing for the assessee contended that a loan is not a capital asset nor an advantage of an enduring character, that the loan is offset by the liability to repay it and that any expenditure incurred in connection with the raising of the loan must be held to be a revenue expenditure. Now in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substance a revenue or a capital expenditure .... But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. In that case Viscount Cave held that a lump sum amount paid by the assessee out of current profits to the trustees of a pension fund with a view to create the nucleus of a pension fund for the benefit of the assessee's employees was in the nature of a capital expenditure, and was not an admissible deduction, even though the amount was expended wholly and exclusively for the purposes of the trade and even though the deduction of the amount from the profits was not expressly prohibited by the English Income Tax Act, 1842. Our Supreme Court has approved of the test laid down by Viscount Cave. In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 , 45; [1955] 1 SCR 972 Bhagwati J. observed: If the expenditure is made for acquiring or brin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a debenture loan of ₹ 6,00,000 required by an electric light and power company were expenses of a capital nature and the purposes for which the loan was required were treated as immaterial. In Western India Plywood Ltd. v. Commissioner of Income-tax [1960] 38 ITR 533 the Kerala High Court held that the amount of underwriting commission, stamp, registration, and legal expenses paid in connection with the raising of a working capital of ₹ 3,00,000 by the issue of first mortgage debentures redeemable in three successive equal annual instalments was an expense of a capital nature and that the character of the expenditure was not to be judged by the subsequent use of the loan. In Vizagapatnam Sugars and Refinery Ltd. v. Commissioner of Income-tax [1963] 47 ITR 139 , the Andhra Pradesh High Court held that the payment of a recurring commission to persons negotiating a mortgage debenture loan of ₹ 2,50,000 was an expense of raising a loan capital and was not an allowable deduction. In Commissioner of Income-tax v. India Cements Ltd. [1963] 47 ITR 438 the Madras High Court held that the stamp, registration and legal and other charges incurred for raising a mortgage lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inction has been drawn between loans which, although capital, were temporary in their nature and might be regarded as an ordinary incident of carrying on the business of the borrower and other loans, and deductions have been allowed for sums spent in respect of loans of the former kind, e.g., (a) interest on a short-term and fluctuating overdraft taken from bankers by an investment company, the daily borrowing and lending of money being part of the borrower's business: see Farmer's case (supra) , and (b) commission paid for a guarantee in respect of an existing trade debt of the assessee company to be repaid as quickly as possible: see Ascot Gas Water Heaters Ltd.'s case (supra) . The decisions of the English courts in so far as they are based upon the aforesaid express statutory prohibition cannot be applied in this country in the absence of a similar statutory prohibition. Furthermore, section 10(2)(iii) of the Indian Income-tax Act, 1922, expressly permits deduction of the interest paid in respect of capital borrowed for the purposes of the business and it makes no difference that the interest paid is in respect of debentures issued in lieu of the purchase price of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge to secure a loan raised for the acquisition of managing agency rights was regarded as part of the expenses of acquisition of the capital asset and not an admissible deduction. In the case of In re Tata Iron Steel Co. Ltd. [1921] ILR 45 Bom. 1306 it was held that a payment of commission for underwriting the issue of new shares was part of the expense of raising new capital and was in the nature of a capital expenditure and not an allowable deduction under section 10(2)(xv). The subsequent decisions in this country proceed on the footing that there is no substantial distinction between the raising of share capital and the raising of a loan capital of a more or less permanent nature by the issue of debentures or upon the security of a mortgage. The case of Dharamvir Dhir v. Commissioner of Income-tax [1961] 42 ITR 7 , relied upon by Mr. Mitra, is distinguishable. In that case the assessee had secured a loan for his business upon the term that he would pay to the lender a sum equivalent to 11/16th of the net profits of his business, in addition to interest at six per cent per annum, and it was held that the amount paid on account of the 11/16th share of the profits was an expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he category of capital a perpetual payment, (b) that the payments being related to turnover, i.e., to a trading activity of R. Ltd. was not dissimilar from royalties on patents, (c) that the sums payable were not related in any way to any special sum, and that (d) the payment which might continue in perpetuity could not be regarded as a payment by instalments of a capital sum. This case was concerned with the question whether a certain receipt was capital or income in the hands of the recipient and not within the question whether a payment was in the nature of capital or revenue expenditure. Mr. Mitra, however, strongly relied upon the decision of the Bombay High Court in Commissioner of Income-tax v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545. The facts of that case were somewhat complicated, but to put the matter briefly the assessee had acquired the business of the colliery as a going concern together with its goodwill, mining lease and licences. The purchase price was fixed at rupees one lakh which was to be discharged by the payment of a sum of ₹ 75,000 in cash and the allotment of fully paid shares of the face value of ₹ 25,000 to the vendor. The Tribunal fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a recipient and not concerning the nature of a payment in relation to the person making the payment. This point was brought out forcibly by Chakravartti C.J. in National Cement Mines Industries Ltd. v. Commissioner of Income-tax [1956] 29 ITR 629, 653-54 . Thirdly, I think that the principles which determine the nature of a receipt in the hands of the recipient are not relevant in determining the character of the payment in relation to the person making the payment. The case of 36/49 Holdings Ltd. (supra) guides us in determining whether a periodic receipt is capital or income in the hands of the recipient. If a seller agrees to accept a series of payments in lieu of the price, the recurring receipt is income in his hands, if it is truly the produce or return of an investment of capital. The case of 36/49 Holdings Ltd. (supra ) shows that if the receipt is perpetual, is related to the turnover of a trade and is not related to any agreed capital sum, the case for holding that the receipt is income is to that extent stronger. So also is the case of National Cement Mines Industries Ltd. v. Commissioner of Income-tax [1961] 42 ITR 69 affirming [1956] 29 ITR 629, where the receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of payment is dependent on the trading activities of the assessee and is neither ascertained nor ascertainable or because (c) the amount is payable out of a portion of receipts of the assessee's business irrespective of his earning profits from the business as a whole or because (d) the payment is made not to the vendor of the capital asset but to a third party. Thus in Bean v. Doncaster Amalgamated Collieries Ltd. [1946] 27 ITR Tax Cas. 296, 305, 309 the payment of the expense of a general drainage improvement scheme in sixty half-yearly instalments was regarded as capital expenditure, though the coal measures benefited by the scheme worked out in some six or seven years: see the judgment of Uthwatt J. at page 309. In Vizagapatnam Sugars Refinery Ltd. v. Commissioner of Income-tax [1963] 47 ITR 139 the payment of a recurring commission of four annas per Bengal maund of sugar sold by the assessee for twenty years was found to be an expense of a capital nature. In Delage v. Nuggett Polish Company Limited [1905] 92 LT 682, by virtue of an agreement the defendants had the exclusive right of selling and manufacturing articles by a secret process and were to pay to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. Subsequently, the appellants entered into direct agreements with the Tata Power Co. Ltd. and with the lenders on terms identical with those of their agreements with Tata Sons Ltd. The Privy Council held that the amount of the 25 per cent. commission payable to the two lenders was not an expenditure incurred solely for the purpose of earning the profits of the appellant's business and was not an admissible deduction as those payments had been undertaken by the appellants in consideration of the purchase of the managing agency rights. It did not matter that the undertaking was to pay not to the vendor but to a third party nor did it matter that a fluctuating and uncertain sum was payable out of a particular receipt of the appellant's business irrespective of their earning any profits from the business as a whole. On principle I see no reason why a perpetual payment of fluctuating annual sums dependent on the turnover of the assessee's business cannot be an expense of a capital nature. The assessee may have submitted to a hard bargain, but if he undertakes to make the recurring payment with a view to acquire a capital asset, the payment is a capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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