Expenditure incurred in obtaining a loan is revenue expenditure and not capital expenditure.

Judgement

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 Rs. 84,633 expended by the assessee in obtaining the loan or any part thereof is an allowable expenditure?"

2. 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 1950-51, accounting period April 1, 1949 to March 31, 1950. During the accounting year it obtained a loan of 40 lakh, 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 Appellate 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. Harvev 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 31st March, 1949 on 4th October. 1949 stated that was utilised towards working funds". The expenditure of Rs. 84.633 in connection with this loan was made up of the following items :

Stamps 60,023 0 0

Registration Fee 16,067 0 0

Charges for certified copy of the mortgage deed 28 0 0

Indemnity deed by Essen and Company Limited 15 0 0

Vakil s fee drafting deed 7,500 0 0

Legal fees 1,000 0 0

Total 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.

3. 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 company.

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)(xv) specifically excluded from consideration any item of capital expenditure. He further held that the case was not distinguishable from the decision in Nagpur Electric Light and Power Co. v. Commr. of Income-tax Central Provinces, (1931) 6 ITC 28 (Nag). The Appellate Assistant Commissioner agreed with the Income-tax Officer. The Appellate Tribunal distinguished the case of (1931) 6 ITC 28 (Nag) on the ground that in the Nagpur Electric Light case, (1931) 6 ITC 28 (Nag) 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 31st march, 1949 discloses the fact that the paid-up 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 th