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TMI Blog1976 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany agreed to pay guarantee commission to the guarantors and, in the relevant year of account, the assessee paid a sum of Rs. 10,242 as guarantee commission and claimed this amount as business expenditure in the year in question. The ITO disallowed it on the ground that the expenditure was of a capital nature. On appeal by the assessee the AAC allowed this item as revenue expenditure, following the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52. Thereafter the revenue took the matter in appeal to the Tribunal and the Tribunal upheld the decision of the AAC and dismissed the appeal. The Tribunal came to the conclusion that the expenditure that was claimed in this case can come only under s. 37 of the I.T. Act, 1961, as there is no specific provision for allowing such expenditure except under the omnibus provision contained in s. 37. Thereafter, at the instance of the revenue, the question set out hereinabove has been referred for our opinion. We find that there are four decisions of the Supreme Court which require to be considered in the instant case. The first in point of time is State of Madras v. G. J. Coelho [1964]53 ITR 186. The Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and ferry services carried on by one of the former companies. On August 12, 1953, the assessee-company took over assets, which were finally valued at Rs. 81,55,000 and agreed that the price was to be satisfied partly by allotment of Rs. 29,990 fully paid up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining from time to time was to carry simple interest at 6%. By a supplemental agreement the original agreement was modified to the effect that the balance shall be paid by the assessee-company and, until it was paid in full, the assessee-company shall pay simple interest at 6% per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all the movable properties of the assessee-company. During the relevant accounting years, the assessee paid interest on the balance outstanding and the question was whether the interest paid was allowable as a deduction under s. 10(2)(iii) or s. 10(2)(xv) of the Indian I.T. Act, 1922, in computing its profits. It was held that the interest paid by the assessee was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of the business, it was laid out or expended wholly and exclusively for that purpose." Shah J. specifically pointed out that the source of liability could not be said to have arisen prior to the date on which the business of the assessee-company was commenced. In India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), the entire case law on this branch of law was considered by the Supreme Court and the decision in State of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC) was relied upon. In that particular case, the assessee had obtained a loan of Rs. 40,00,000 from the Industrial Finance Corporation secured by a charge on the fixed assets of the assessee. In connection with that loan the assessee spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. It was held by the Supreme Court that the amount spent 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 and is, therefore, allowable as a deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922; the Act of borrowing money was incidental to the carrying on of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the three decisions in State of Madras v. G. J. Coelho [ 1 964] 53 ITR 186 (SC), Bombay Steam Navigation's case [1965] 56 ITR 52 (SC) and India Cements' case [1966] 60 ITR 52 (SC), the principle which clearly emerges is that irrespective of the object for which the loan was raised, if interest is paid on a loan by a company and the loan is for the purpose of the business of the company, payment of interest will be treated as a revenue expenditure and not as capital expenditure. In Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the Supreme Court held that interest paid before the commencement of the production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the actual cost of the assets to the assessee within the meaning of the expression in s. 10(5) of the Indian I.T. Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. In that particular case, on behalf of the revenue, the decision in India Cements' case [1966] 60 ITR 52 (SC) was relied upon for the purpose of urging that payment of interest should not be taken into consideration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That decision of the Calcutta High Court on the face of it seems to help the revenue. In that case, the assessee had placed an order with a British concern for the purchase of machinery worth rupees 48 lakhs. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for the sum of rupees 48 lakhs for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. On these facts, the Calcutta High Court held that the amount of Rs. 36,000 should be treated as part of the actual cost to the assessee of the new machinery acquired by it for the purpose of allowance of development rebate in terms of s. 10(2)(vib) of the Indian I.T. Act, 1922. The learned judges of the Calcutta High Court relied upon the earlier decision of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799. Against the decision of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799, an appeal was preferred to the Supreme Court. The Supreme Court heard that appeal along with the appeal from the decision of the Andhra Pradesh High Court in Challapalli Sugars Ltd. v. CIT [197 ..... 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