Home › Income-Tax Act › India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC)

India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC)

S. 37(1): Business expenditure — Capital or revenue – Loan taken on mortgage of fixed assets — Amount spent towards stamps, registration fees, lawyer’s fees, etc. for availing loan – Loan neither an asset nor any business advantage nor any enduring benefit to the assessee – Nature of expenditure incurred in raising a loan not dependent upon nature and purpose of loan – Allowable business expenditure. [Indian Income-tax Act, 1922, 10(2)(xv) ]

Facts

The appellant obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith it  spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer’s fees, etc., and claimed this amount as business expenditure. The ITO 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. The Commissioner (Appeals) confirmed the order of the ITO. The Tribunal  was  of the view 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. Accordingly, the claim was allowed.

On reference, the High Court restored the ITO’s order. It held that the borrowings were an advantage which the company derived for the duration of the loan and thus, capital in nature.

 

Issue

Whether the amounts expended by the assessee in obtaining the loan in the nature of stamp duty, registration fees, lawyer’s fees, etc., were allowable as a deduction under section 37(1)?

 

View

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 the taxable income. Further, obtaining capital by issue of shares is different from obtaining loan by debentures. A loan obtained cannot be treated as an asset or advantage for the enduring benefit of     the business of the assessee.

 

 

Held

On appeal reversing the High Court judgement, the Supreme Court held 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 was, therefore, allowable as a deduction under section 37(1). The act of borrowing money was incidental to the carrying on of  business, the  loan  obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider   the object with which the loan was obtained. (AY. 1950-51) (CA No. 1106 of 1964  dt. 8-12-1965

Editorial: Followed in Jeevanlal v. CIT (1969) 74 ITR 753 (SC) and Madras Industrial Investment Corp. v. CIT (1997) 225 ITR 802 (SC)

“The future depends on what you do today.”

– Mahatma Gandhi