India Cements Ltd., Madras Vs.
Commissioner of Income-Tax, Madras  INSC 282 (8 December 1965)
08/12/1965 SIKRI, S.M.
CITATION: 1966 AIR 1053 1966 SCR (2) 944
F 1967 SC 819 (5) R 1969 SC 840 (11) R 1969
SC 946 (5) E 1969 SC1160 (5) D 1975 SC 97 (20) R 1976 SC 772 (6) R 1986 SC1483
Indian Income-tax Act, 1922, s.
10(2)(xv)-Loan obtained by company-Stamp duty and other expenditure incurred in
obtaining the loan-Whether capital or revenue expenditureWhether laid out for
purpose of business.
During the accounting period relevant for the
assessment year 1950-51 the appellant company obtained a loan of 40 lakhs of
rupees from the Industrial Finance Corporation of India. The loan was secured
by a charge on the fixed assets of the company. A sum of Rs. 84,633 was shown
in the Balance Sheet for the said accounting year as mortgage loan expenses;
the sum was not charged as expenditure in the profit and loss account. In the
accounts for the accounting year ending March 31, 1953, this sum was written
off by appropriation against profits of that year. The Income-tax Officer
disallowed the deduction; he held that the expenditure was incurred in
obtaining capital and should be distinguished from interest on borrowed capital
which alone was admissible as a deduction under s. 10(2)(iii). In his view the
expenditure was of a capital nature and therefore not admissible under s.
10(2)(xv) either. After intermediate proceedings the High Court in reference
gave a finding upholding the view of the Income-tax Officer. The appellant by
special leave, came to this Court.
It was contended on behalf of the appellant
that : (1) the expenditure in question was not incurred to acquire any asset or
advantage of an enduring nature; (2) it was applied wholly and exclusively for
the purposes of the business; and (3) was admissible as a deduction under S. 10
HELD : In the circumstances of the case the
expenditure in question was revenue expenditure within s. 10(2)(xv).
(i)When there is no express prohibition, an
outgoing, by means of which an assessee procures the use of a thing by which it
makes a profit, is deductible from the receipts of the business to ascertain
taxable income. On the facts of the instant case, the money secured by the loan
was the thing for the use of which this expenditure was made. In principle,
apart from any statutory provisions, there is no distinction, as drawn by the
Income-tax Officer, between interest in respect of a loan and an expenditure
incurred for obtaining the loan. [950 G-H] (ii)A loan obtained cannot be
treated as an asset or advantage for the enduring benefit of the business of
the assessee. A loan is a liability and has to be repaid and it is erroneous to
consider a liability as an asset or an advantage. [955 C] (iii)The nature of
the expenditure incurred in raising a loan cannot be made to depend on the
nature and purpose of the loan. A loan may be intended to be used for the
purchase of raw material when it is negotiated but the company may after
raising the lo-an change its mind and spend it on securing capital assets, [955
11-956 B] 945 (iv)The loan was voluntarily entered into in order to facilitate
the running of the business of the company and it could not be said that it was
not laid out wholly and exclusively for the purpose of the business. [958 B]
Case law considered.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1106 of 1964.
Appeal by special leave from the judgment and
order dated the October 31, 1961 of the Madras High Court in Tax Case No. 67 of
A. V. Viswanatha Sastri, R. Venkataraman and
R. Gopalakrishnan, for the appellant.
S. T. Desai, Gopal Singh, B. R. G. K. Achar
and R. N.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This appeal by special leave is directed against the judgment of the
High Court of Judicature at Madras answering the following question of law in
favour of the respondent :
"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 ?" The facts and circumstances of the
case as stated by the Tribunal in the statement of the case are as follows :
The appellant, India Cements Limited, Madras, hereinafter referred to as the
assessee, is a public limited company.
The question arises in respect of the
assessment year 195051, accounting period April 1, 1949 to March 31, 1950.
During the accounting year it obtained a loan
of 40 lakhs of rupees from the Industrial Finance Corporation of India.
This loan was secured by a charge on the
fixed assets of the company. Since Mr. S. T. Desai, the learned counsel for the
respondent, has disputed some facts as stated by the Appellant Tribunal, it
would be convenient to give these facts in the words of the Appellate Tribunal.
It is stated in the statement of the case that "the proceeds of this loan
was utilised to pay off a prior debt of 25 lakhs due to Messrs A. F. Harvey
Limited and Madurai Mills, Limited. It cannot be stated definitely how the
balance of 15 lakhs was used but the directors, while reporting on the accounts
for the year ended 946 31-3-1949 on 4-10-1949 stated that that was utilised
towards working funds." The expenditure of Rs. 84,633/in connection with
this loan was made up of thefollowing items :
Stamps 60,02300 Registration Fee 16,,06700
Charges for certified copy of the mortgage deed 2800 Indemnity deed by Essen
and Company, Limited 1500 Vakil's fee for drafting deed 7,50000 Legal fees
1,00000 Total Rs. 84,633 0 0 The assessee did not charge this expenditure in
the profits and loss account for that year. It was shown in the Balance Sheet
as mortgage loan expenses. It continued to be so shown till March 31, 1952. In
the accounts for March 31, 1953 this was written off by appropriation against
the profits of that year.
The Income Tax Officer refused to allow the
deduction of Rs.
84,633/-. He observed "As per the
information furnished by the auditors, Rs. 25 lakhs of the loan was to be paid
to Messrs A. F. Harvey, Limited, and Mathurai Mills, Limited in, discharge of
the amount borrowed from them and utilised on the capital assets of the
Though in the Company's books the amount of
Rs. 84,633 was not charged to revenue but capitalised and carried forward in
the Balance Sheet, for purposes of income tax, the Company's auditors claim the
same as an admissible item of revenue expenditure." He held that the expenditure
was incurred in obtaining capital and should be distinguished from interest on
borrowed capital which was alone admissible as a deduction under S. 10 (2)
(iii). According to him, s. 10 (2) (xi) specifically excludes from
consideration any item of capital expenditure. He further held that the case
was not distinguishable from the decision in The Nagpur Electric Light and
Power Co. v. Commissioner of Income-tax, Central Provinces(1). The Appellate
Assistant Commissioner agreed with the Income Tax Officer. The Appellate
Tribunal distinguished the case of Nagpur Electric Light and Power Co.
(1) 6 I.T.C. 28.
947 v. Commissioner of Income Tax(1) on the
ground that in the Nagpur Electric Light(1) case money was expended for
obtaining capital. It observed as follows "Here we find the position to be
different. A study of the balance-sheets of the company as at 31-3-1949
discloses the fact that the paidup capital was sufficient to cover the entire
capital outlay of the company and that the further borrowal of Rs. 25 lakhs was
for augmenting the working. funds of the company. It appears to us that even at
that early stage the money was borrowed and used not for capital purposes but
for augmenting the working funds of the company. We, therefore, consider that
the whole of the mortgage loan was used firstly to discharge the loan of Rs. 25
lakhs and the balance for working funds and, as such, the whole of the amount
was purely for the purposes of augmenting the working capital of the company
and that it could not be stated that it was used for capital purposes. In this
view of the matter, we hold that the money expended in obtaining the loan is an
allowable expenditure." The High Court, after noticing the findings of the
Income Tax Officer and the Tribunal preferred the findings of fact made by the
Income Tax Officer. It observed "At this stage, we may point out that the
conclusion reached by the Tribunal that the money was borrowed only for working
expenses and not for capital investment proceeded on an inference based upon
the balance-sheet. The Tribunal did not investigate how the sum of Rs. 25 lakhs
earlier borrowed from A. H.
Harvey and Madurai Mills Ltd. was actually
utilised. Though in the order of the Incometax 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 assessee, 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 have been justified in relying upon
inferences in ascertaining whether the earlier borrowal was on capital or
revenue account." (1)6 I.T.C. 28.
948 The High Court after reviewing various
cases, 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 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 has to be
repaid and it cannot be an enduring advantage in the sense that the money
becomes part of the assets of the company for all time to come. But, it
certainly is an advantage which the company derives from the duration of the
loan and undoubtedly it could not have been for any purpose other than an
advantage to the business that the borrowing was made. That it is not enduring
in the sense that the borrowing has to be repaid after a short or long period,
as it were, cannot affect the conclusion that it was nevertheless an asset or
an advantage that was secured. Viewed in the light of the tests adumbrated in
the above decision Assam Bengal Cement Co. Ltd. v. Commissioner of Income
Tax(1) it seems to us that the expenditure must be regarded as capital
expenditure. As the facts of the case which we have set out earlier indicate,
there can be no doubt that at least to the extent of Rs. 25 lakhs that amount
was expended for purposes of a capital nature, clearly in order to bring into
existence capital assets. We have also pointed out that though it was vaguely
stated by the Tribunal that the other sum of Rs. 15 lakhs was utilised as
working funds, there seems to be no material whatsoever before the Tribunal to
justify its coming to that conclusion." The learned counsel for the
assessee company, Mr. A, V. Viswanatha Sastri, urges that the expenditure is
admissible as a deduction under s. 10(2) (xv) of the Act. He says that the High
Court erred in holding that the expenditure was made to acquire any asset or
advantage of an enduring nature within the test laid down by Viscount Cave and
approved by this Court in Assam, Bengal Cement Co. Ltd. v. Commissioner of
Income-Tax(1). He (1) 27 I.T.R. 34.
949 further says that what was secured by the
expenditure was a loan and in India money expended in raising a loan, whether
by means of a debenture or a mortgage and whether you call it a loan capital or
not, is not an expenditure in the nature of capital expenditure. He further
submits that the expenditure was expended wholly and exclusively for the
purpose of the business of the company.
The learned counsel for the revenue, Mr. S.
T. Desai, supports the reasoning of the High Court. He says that the High Court
was right in preferring the findings of the Income Tax Officer on the ground
that there was no material for the finding made by the Appellate Tribunal and
the finding was based on surmises and material evidence was ignored. He says
that the High Court in a reference is entitled to ignore any findings of fact
made by the Appellate Tribunal if those findings are vitiated. In the
alternative, he says that the question referred is wide enough to include the
question whether there was any material for the finding of the Appellate
Tribunal. On the merits he contends that expenditure takes the colour from the
thing on which the expenditure is made. If the money is spent to obtain capital
then the expenditure assumes the nature of capital expenditure, but if the
money is spent to obtain raw-materials then the expenditure takes the colour of
revenue expenditure. He further says that the borrowed money is an enduring
asset and any expenditure made to obtain this money falls within the test laid
down by Viscount Cave and approved by this Court.
A number of cases have been referred to
during the hearing of the case by both the counsel but we do not propose to
refer to all of them. We must start first with the cases decided by this Court
and see what principles have been laid down for distinguishing revenue
expenditure from expenditure in the nature of capital expenditure, and
especially those cases which dealt with similar problems. We will first
consider State of Madras V. G. J. Ceolho(1). This was not a case arising under
the Indian Income Tax Act but under the Madras Plantations Agricultural Income
Tax Act, 1955, in which a section exactly similar to s. 10 (2) (xv) existed.
In brief, the facts in that case were that
the assessee had borrowed money for the purpose of purchasing the plantations
and he claimed that in computing his agricultural income from these plantations
the entire interest paid by him on moneys borrowed for the purpose of
purchasing the plantation should be deducted as expenditure, under s. 5(e) of
In (1) 8 S.C.R. 60 1 53 I.T.R. 186.
950 the Madras Act there was no provision
similar to S. 10(2) (iii) of the Act and thus interest was not expressly
deductible as an allowance. This Court applied the test formulated by Viscount
,Cave, L. C., in Atherton v. British Insulated and Helsby Cables Ltd.(1) and
approved by the Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income
Tax(1), and held that the payment of interest was a revenue expenditure. It
observed that "no new asset is acquired with it; no enduring benefit is
Expenditure incurred was part of circulating
or floating capital of the assessee. In ordinary commercial practice payment of
interest would not be termed as capital expenditure." This Court further
held that the expenditure was for the purpose of business. Mr. Desai tried to
distinguish that case on the ground that what was at issue was interest on loan
and not expenditure incurred for ,obtaining the loan. In our opinion, there is
no justification for drawing this distinction in India. As observed by Lord
Atkinson in Scottish North American Trust v. Farmer(1) "the interest is,
in truth, money paid for the use or hire of an instrument of their trade as
much as is the rent paid for their office or the hire paid for a typewriting
machine. It is an outgoing by means of which the Company procured the use of
the thing by which it makes a profit, and like any similar outgoing should be
deducted from the receipts, to ascertain the taxable profits and gains which
the Company earns. Were it otherwise they might be taxed on assumed profits
when, in fact, they made a loss." It will be remembered that there was no
section like s. 10(2) (iii) of the Act in the English Income Tax Act. On the
other hand, there were certain rules prohibiting the deduction in respect of
"any capital withdrawn from, or any sum employed or intended to be
employed as capital in such trade. " or "any interest which might
have been made if any such sums as aforesaid had been laid out at
interest." Lord Atkinson first held in that case that the express
prohibitions did not apply to the facts of the case and then proceeded to
discuss general principles. These observations show that where there is no
express prohibition, an outgoing, by means of which an assessee procures the
use of a thing by which it makes a profit, is deductible from the receipts of
the business to ascertain taxable income. On the facts of this case, the money
secured by the loan was the thing for the use of which this expenditure was
In principle, apart from any statutory
provisions, we see no distinction between interest in respect of a loan and an
expenditure incurred for obtaining the loan.
(1) 10 T.C. 155. (2) 1 S.C.R. 972 :
27 I.T.R. 34.
(3)5 T.C. 693 at 707.
951 Mr. Desai urges that these observations
of Lord Atkinson should be limited to a case where temporary borrowings are
made. It is true that the House of Lords. was dealing with the case of a
company and the moneys that were borrowed were of a temporary character. But
this fact was only relied on to hold that the moneys secured were not 'capital'
within rule 3 of First Case, section 100 (5 and 6 Vic. Ch. 35) of the Income
Tax Act, 1842, for Lord Atkinson observed at p.
". . . it appears to me, simply, amounts
to this that the word "capital" must, in this rule, be held to bear a
wholly artificial meaning differing altogether from the ordinary signification,
though there be no context in the clause requiring that there should be given
to it a meaning different from that which it bears in ordinary commercial
transactions." He then referred to the decision in Bryon v. The
Metropolitan Saloon Omnibus Company(1) to show that the borrowing by a
joint-stock company of money by the issue of debentures does not amount to an
increasing of the capital of the company.
In Bombay Steam Navigation Co. Ltd. v.
Commissioner of Income Tax(2), this Court again examined the question of
distinguishing between capital expenditure and revenue expenditure.
This Court first held that on the facts of
the case, cl. (iii) of s. 10(2) did not apply, because the assessee in that
case had agreed to pay the balance of consideration due by the purchaser and
this did not, in truth, give rise to a loan. Then Shah, J., observed :
"Whether a particular expenditure is
revenue expenditure incurred for the purpose of business must be determined on
a consideration of all the facts and circumstances, and by the application of
principles of commercial trading. The question must 'be viewed in the larger
context of business necessity or expediency. If the outgoing or expenditure is
so related to the carrying on or conduct of the business, that it may be
regarded as an integral part of the profit-earring process and not for
acquisition of an asset or a right of a permanent character, the possession of
which is a condition of the carrying on of the business, the expenditure may be
regarded as revenue expenditure:' (1) 3 D.G. and J. 123. (2)  1 S.C.R.
56 I.T.R. 52 L8Sup. Cl/63-14 952 We will now
briefly deal with relevant decisions of the High Courts. The first case
referred is In re Tata Iron and Steel Company Ltd.(1) In that case, the Tata
Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as
underwriting commission paid to underwriters on an issue of 7 lakhs preference
shares of Rs. 100/each and the company claimed to deduct this amount as
expenses under S. 9 (2) (ix) of the Indian Income Tax Act (VII of 1918).
Macleod, C.J., observed:
"If it is admitted that the cost of
raising the original capital cannot be deducted from profit after the first
year, it is dffficult to see how the cost of raising additional capital can be
treated in a different way.
Expenses incurred in raising capital are
expenses of exactly the same character whether the capital is raised at the
flotation of the company or thereafter : The Texas Land and Mortgage Company v.
William Holtham (2)".
He further observed that "as long as the
law allows preliminary expenses and goodwill 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." The Chief Justice accordingly held that Rs. 28 lakhs could not
be treated as expenditure (not in the nature of capital expenditure) solely
incurred for the purpose of earning the profits of the company's business.
Shah, J., also came to the same conclusion, and he thought that the ratio
decidendi in Texas Land and Mortgage Company v. William Holtham (2 ) and the
principles underlying the decision in Royal Insurance Company v. Watson(1) lent
support to this conclusion.
At this stage it would be convenient to
consider the Case of Texas Land and Mortgage Company v. William Holtham (2)
relied on in this decision. We have already mentioned that the statute law in
England is different from the law in India and the observations of the learned
Judges in the English cases must be appreciated in the light of the background
of the English Income Tax Act. In this case a mortgage company had raised money
by the issue of debentures and debenture stock and incurred expenses for the
issue of mortgage and placing of such debentures and debenture-stock.
The Company claimed to deduct these expenses
but the High Court held that the expenses could not be deducted under Schedule
D of the English Income Tax Act as trading ex(1) 1 I.T.C. 125.
(3)  A.C. 1 (2) 3 T.C. 2S5.
953 penses. Mathew, J., gave the following
reasons for disallowing the claim:
"The amount paid in order to raise the
money on debentures, comes off the 'amount advanced upon the debentures, and,
therefore, is so much paid for the cost of getting it, but there cannot be one
law for a company having sufficient money to carry on all its operations and
another which is content to pay for the accommodation. This appears to me to be
entirely concluded by the decision of yesterday. (Anglo-Continental Guano Works
In the course of arguments, Cave J., had
remarked "It is only so much capital. A man wants to raise pound 1 00,000
of capital, and in order to do that he has to pay pound-4,000. That makes the
capital pound 96,000. That is all." In reply to the argument of Finlay,
Q.C., that "the capital of the, company, properly-so-called, is the share
capital" Cave, J. remarked :
"To the extent that you borrow you
increase the capital of the company." In our opinion, if one keeps in mind
the background of the English Income Tax Act, the observations reproduced above
have no relevance to cases arising under the Indian Income Tax Act. In face of
rule 3, Case 1, S. 100 (5 & 6 Vict.
Ch. 35) prohibiting the deduction of any
expenditure in respect of any sum employed or intended to be employed as
capital, Mathew and Cave, JJ. were only concerned with the question whether the
amount secured by debentures and the amount obtained by the issue of debentures
and debenture stock could be called capital employed or intended to be employed
within the meaning of this rule. Rightly or wrongly, the English Courts have
held that the amount obtained by the issue of debentures is capital employed
within the meaning of the rule, but this does not give us any guidance in
interpreting the words 'capital expenditure' occurring in s. 10 (2) (xv) of the
Act. In our opinion, the Bombay High Court was wrong in relying on Texas Land
and Mortgage Company v. William Holtham(2). But we do not say that the Tata
Iron and Steel (1) 3 T.C. 239. (2) 3 T.C. 255.
954 Co. (1) case was wrongly decided.
Obtaining capital by issue of shares is different from obtaining loan by
In Nagpur Electric & Light Co. v.
Commissioner of Income Tax(1), the Court of the Judicial Commissioner, Nagpur,
held that expenses for raising debenture loan required for changing the system
of supplying current from D.C. to A.C.
and for discharging a prior loan was not
allowable as deduction of the company's assessable income. The Judicial
Commissioner followed the case of Texas Land and Mortgage Company v. William
Holtham(3) and In re Tata Iron and Steel Company Ltd.(1). After referring to
these two cases, the only additional reason given was that "apart from
authority it seems to us to stand to reason that money expended in obtaining
capital must be treated as capital expenditure." With great respect we
must hold that this case was wrongly decided.
The Kerala High Court in Western India
Plywood Ltd. v.Commissioner of Income Tax, Madras(4)held that the expenditure
incurred by the company a capital expenditure and was 10(2)(xv). The High Court
Trust Company v. Jackson(5) Du#(1) and some other cases Madras(4) held that the
expenditure raise a loan by debenture was therefore not deductible under s.
relying on European investment and Ascot Gas Water Heaters v. drew a
distinction between the borrowing of capital and securing merely temporary or
day-to-day accommodation or banking or trading facilities.
According to the High Court, the expenses for
borrowing capital could not be treated as revenue expenditure. This distinction
may be valid in English Law but we are unable to appreciate how the distinction
is valid under the Indian Income Tax Act. As the decision is mainly based on
this distinction and relies inter alia on In re Tata Iron and Steel Co.
Ltd.(") and Nagpur Electric and Light Co. v.
Commissioner of Income Tax (2 we must with
respect hold that the case was wrongly decided.
In Vizagapatnam Sugars and Refinery Ltd. v.
Commissioner of Income Tax(") the Andhra Pradesh High Court relying on
Texas Land and Mortgage Company V. William Holtham(3) and the decision in
Western India Plywood Ltd. v. C.I.T., Madras(4) held that on the facts and
circumstances of that case, brokerage and commission of four annas on every
maund of sugar paid by (2) 6 I.T.C. 28. (3) 3 T.C. 255.
(1) 1 I.T.C. 125. (4) 38 I.T.R. 533.
(5) 18 T.C. 1. (6) 24 T.C. 171.
(7) 47 I.T.R. 139.
955 the assessee company was not revenue
expenditure but capital expenditure. In our opinion, the derision, as far as
the brokerage was concerned, was wrong, but we do not say anything in this case
with respect to the decision as far as the commission on sale of goods was
The Calcutta High Court examined the question
in great detail in Sri Annapurna Cotton Mills Ltd. v. Commissioner of Income
Tax(1), Bachawat, J., held that the loan of Rs. 10 lakhs obtained by the
company was an asset or advantage for the enduring benefit of the business of
the assessee. He placed reliance on a number of cases,some of which we have
already considered. But we are unable to agree that a loan obtained can be
treated as an asset or advantage for the enduring benefit of the business of
the assessee. A loan is a liability and has to be repaid and, in our opinion,
it is erroneous to consider a liability as an asset or an advantage within the
test laid down by Viscount Cave and approved and applied by this Court in many
cases. Sinha, J., after referring to a number of cases, felt that the raising
of capital by issue of debentures was a recognised mode of raising capital and
he felt that the decided cases had laid down the proposition that borrowing
money by the issue of debentures was an acquisition of capital asset and that
any commission or expenditure incurred in respect thereof was of a capital
nature and not to be considered as in the nature of revenue. He was impressed
by the fact that not a single case to the contrary was brought to his notice.
But we have to decide the case on principle,
and with respect it seems to us that he erred in treating the loan as
equivalent to capital for the purpose of s. 10(2) (xv) of the Act.
In S. F. Engineer v. Commissioner of income
Tax (2) the Bombay High Court held that the expenditure incurred for raising
loan for the carrying on of a business cannot in all cases be regarded as an
expenditure of a capital nature.
On the facts of the case they held that as
construction and sale of the building was the sole business of the firm and the
building was its stock-intrade, and the loan was raised and used wholly for the
purpose of acquiring this stock-intrade and not for obtaining any fixed assets
or raising any initial capital or for expansion of the assessee's business, the
expenditure incurred for the raising of loan was not an expenditure of capital
nature but revenue expenditure.
Although the conclusion of the High Court was
correct, we are not able to agree with the principle that the nature of the
expenditure incurred in raising a loan would depend upon the nature and purpose
of (1) 54 I.T.R. 592. (2) 57 I.T.R. 455.
956 the loan. A loan may be intended to be
used for the purchase of raw-material when it is negotiated, but the company
may after raising the loan change its mind and spend it on securing capital
assets. Is the purpose at the time the loan is negotiated to be taken into
consideration or the purpose for which it is actually used ? Further suppose
that in the accounting year the purpose is to borrow and buy rawmaterial but in
the assessment year the company finds it unnecessary to buy raw-material and
spends it on capital assets. Will the income tax officer decide the case with
reference to what happened in the accounting year or what happened in the
assessment year ? In our opinion, it was rightly held by the Nagpur Judicial
Commissioner in Nagpur Electric Light and Power Co. v. Commissioner of Income
Tax(1) that the purpose for which the new loan was required was irrelevant to
the consideration of the question whether the expenditure for obtaining the
loan was revenue expenditure or capital expenditure.
To summarise this part of the case, we are of
the opinion that (a) the loan obtained is not an asset or advantage of an
enduring nature; (b) that the expenditure was made for securing the use of
money for a certain period-, and (c) that it is irrelevant to consider the
object with which the loan was obtained. Consequently, in the circumstances of
the case, the expenditure was revenue expenditure within S.
The last contention of Mr. Desai is that even
if it is revenue expenditure, it was not laid out wholly and exclusively for
the purpose of business. Subba Rao, J., reviewed the case law in Commissioner
of Income Tax v.
Malayalam Plantation(1) and observed as
"The expression "for the purpose of
the business" is wider in scope than the expression "for the purpose
of earning profits." Its range is wide : it may take in not only the day
to day running of a business but also the rationalisation of its administration
and modernization of its machinery; it may include measures for the
preservation of the business and for the protection of its assets and property
from expropriation, coercive process or assertion of hostile tide; it may also
comprehend payment of statutory dues and taxes imposed as a precondition to
commence or for carrying on of a business; it may comprehend many other acts
incidental to the carrying on of a business." (1) 6 I.T.C. 28. (2) 
7 S.C.R. 693: 53 I.T.R. 140.
957 Mr. Desai says that the act of borrowing
money in this case was not 'incidental to the carrying on of a business. We are
unable to accept this contention. In Eastern Investments Ltd. v. Commissioner
of Income Tax(") this Court held that the Eastern Investments Ltd., an
investment company, when it borrowed money on debentures, the interest paid by
it was incurred solely for the purpose of making or earning such income,
profits or gains within the purview of S. 12(2) of the Indian Income Tax Act.
It held on a review of the facts that 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. This case, in our
opinion, directly covers the present case, although Mr. Desai suggests that the
case of an investment company stands on a different footing from the case of a
manufacturing company. In some respects, their position may be different but in
determining the question whether raising money is incidental to a business or
not, we cannot discern any difference between an investment company and a
manufacturing company. We may mention that in that case this Court was not
considering whether the expenditure was in the nature of a capital expenditure
or not, because it was agreed all through that the expenditure was not in the
nature of capital expenditure, and the only question which this Court dealt
with was whether the expenditure was incurred solely for the purpose of making
or earning income, profits or gains.
The case of Dharamvir Dhir v. Commissioner of
Income Tax(1) also supports the conclusion we have arrived at on this part of
the case. It was held in that case that the payment of interest and a sum
equivalent to 11/16th of the profits of the business of the assessee in
pursuance of an agreement for obtaining loan from the lender were in a
commercial sense expenditure wholly and exclusively laid out for the purpose of
the assessees business and they were, therefore, deductible revenue
Before we conclude we must deal with the
point raised by Mr. Sastri that the High Court erred in law in preferring the
findings of the Income Tax Officer to that of the Appellate Tribunal. It is not
necessary to decide this question but it seems to us that in a reference the
High Court must accept the findings of fact made by the Appellate Tribunal and
it is for the person who has applied for a reference to challenge those
findings first by an application under s. 66(1). If he has. failed to file an
application under (1) 20 I.T.R. 1. (2)  3 S.C.R. 359 : 42 I.T.R. 7.
958 S.66(1) expressly raising the question
about the validity of the findings of fact, he is not entitled to urge before
the High Court that the findings are vitiated for one reason or the other.
To conclude we hold 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, 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. The appellant will have its costs
incurred here and in the High Court.