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Petitioner: JEEWANLAL (1929) LTD. VS Respondent: COMMISSIONER OF INCOME-TAXHonorable Justice MASUDS. R. Banerjee,D. Pal
1966 P T D 1
1966 P T D 1
[Calcutta (India)]
Before S. P. Mitra and S. A. Masud, JJ
JEEWANLAL (1929) LTD.
versus
COMMISSIONER OF INCOME‑TAX
Income‑tax Reference No. 110 of 1961, decided on 18th August 1964.
Business expenditure‑Expenditure incurred by company for obtaining overdraft facilities from bank‑Whether business expendi ture‑Tests for distinguishing business expenditure from capital expenditure.
Expenditure incurred by a business concern for obtaining overdraft facilities from a bank (e.g., brokerage, costs of valuation of assets given as security, stamp duty on hypothecation deed) cannot be allowed as business expenditure in all cases. Whether the overdraft facility acquired by the assessee creates security and confidence and opens a source for obtaining loans in general and to meet its liabilities in adverse situations, it connotes a substantial asset or advantage to the assessee and the benefit which the assessee obtains is of an enduring nature and in the absence of other circumstances which point to an opposite conclusion the expenditure incurred for obtaining such facilities will be capital expenditure.
But it is quite possible that the overdraft facility in a particular case may involve a temporary short term loan or accommodation covering a small sum in which case it may be possible to come to the conclusion that the overdraft facility has not yielded an asset or an advantage of an enduring character.
For securing overdraft facilities from a bank, the assessee, a limited company incorporated in 1929, incurred an expenditure of Rs. 12,500 by way of brokerage, Rs. 11,500 by way of costs for valuation of the movables to be hypothecated as security and Rs. 11,800 for stamp paper for the deed of hypothecation and claimed the total amount of Rs. 35,800 as business expenditure in the assessment year 1952‑53. The loan raised was secured on movables and was also repayable on demand.
Held, that, on the facts of the case, the expenditure was for acquiring an enduring benefit and was of a capital nature.
Held also, that as the amount was claimed by the assessee as an allowance, the burden was on it to prove circumstances to show that the expenditure was not of a capital nature.
Abdul Kayoom v. Commissioner of Income‑tax (1962) 44 I T R 689 (S C) and Annapurna Cotton Mills Ltd. v. Commissioner of Income‑tax (1964) 54 I T R 592 ref.
STATEMENT‑ OF CASE
By this application presented on 3rd February 1961, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law which are said to arise out of the order of the Tribunal dated 30th November 1960, in I. T. A. No. 12281 of 1958‑59. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up an agreed statement of the case and refer it to the hon'ble Court under section 66 (1) of the Indian Income‑tax Act.
2. The relevant year of assessment is the year 1952‑53 and the corresponding previous year ended on 31st December 1951.
3. The applicant had incurred an expenditure of Rs. 35,800 for securing a financial overdraft from a bank. The said amount consists of Rs. 12,500 paid to one Manilal Kothari as brokerage or commission for services rendered by him in connection with the negotiations carried on with the bank for the overdraft, Rs. 11,500 being fees paid to Messrs MacKenzie Lyal: & Company and Messrs P. P. Shah for services rendered by them in connection with the valuation made of the assets of the assessee to be hypothecated with the bank for such overdraft facilities and Rs. 11,800 represented the cost of stamps purchased for the deed of hypothecation, The Income‑tax Officer refused to allow the expenditure of Rs. 35,8(,0 on the ground that it was capital in nature and the ‑Appellate Assistant Commissioner maintained such disallowance. The orders of the Income‑tax Officer and the Appellate Assistant Commissioner are respectively marked as Annexure "A" and "B" hereto forming part of the statement.
4. The assessee then preferred a second appeal before the Tribunal pleading, inter alia, that the expenditure was of a revenue nature and should be allowed under section 10 (2) (xv) The Tribunal held that the financial overdraft negotiated with the bank was definitely an advantage of an enduring character and it was, therefore, . in the nature of capital asset with the applicant‑company. Hence, the Tribunal held that the sum of Rs. 35,800 which was incurred by the assessee to secure such capital asset should be regarded as a capital expenditure incurred once and for all. The Tribunal, therefore, concurred with the view taken by the departmental officers and dismissed the appeal. The order of the Tribunal is Annexure C" hereto forming a part of the statement.
5. On the facts and in the circumstances set out above, the following question of law arises and is referred to the hon'ble Court for opinion:
"Whether, on the facts and in the Tribunal was justified in holding incurred by the assessee for the purpose of raising or securing overdraft facilities from the bank was an expenditure of a capital nature not allowable under section 10 (2) (xv) ?"
6. The other questions raised by the applicant are essentially questions of fact found by the Tribunal not referable under section 66 (1) of the Act.
S. R. Banerjee with T. K. Ghose, S. K. Mukerjee for the Assessee.
D. Pal with B. Gupta for the Commissioner.
JUDGMENT
MASUD, J.‑In this reference under section 66(1) of the Income‑tax Act, 1922, the short point to be decided is whether the expenditure incurred for securing loan under overdraft account is to be treated as revenue or capital expenditure.
The assessee had incurred an expenditure of Rs. 35,800 for securing financial overdraft from a bank. The said amount comprised the following heads of expenditure:
paid to Manilal Kothari as brokerage or commission for successfully negotiating with the bank for overdraft
12,500
paid to M/s. MacKenzie Lyall & Co. and M/s. P. P. Shah as costs of valuation of the assets of the assessee to be hypothecated with the bank for overdraft
11,500
cost of stamp purchased for deed of hypothecation
11,800
35,800
The relevant year of assessment is the year 1952‑53 and the corresponding previous year ended on December 31, 1951. The Income‑tax Officer refused to allow the said expenditure of Rs. 35,800 on the ground that it was capital in nature and, on appeal, the Appellate Assistant Commissioner confirmed the order of the Income‑tax Officer. On second appeal the Appellate Tribunal held that the financial overdraft negotiated with the bank was definitely an advantage of an enduring character and, as such, it was capital in nature. The Tribunal, therefore, concluded that the said sum of Rs. 35,800 was incurred by the assessee to secure a capital asset and must, therefore, be regarded as the capital expenditure incurred once and for all. Thus the assessee's claim for deduction or allowance under section 10(2)(xv) was rejected. On the facts and circumstances set out above the following question of law has been referred to this hon'ble Court for opinion
"Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 35,800 incurred by the assessee for the purpose of raising or securing overdraft facilities from the bank was an expenditure of a capital nature not allowable under section 10 (2) (xv) ?"
Mr. S. R. Banerjee, learned counsel for the assessee, has submitted before us that the said expenditure of Rs. 35,800 has not been incurred for acquiring any asset or advantage of an enduring character and, as such, should have been allowed as deduction under ‑section 10 (2) (xv). He has urged the following grounds to substantiate his contention:
(a) The true nature of overdraft facilities reveals that they comprise a short‑term loan repayable on demand, and they are incidental to the. running of the company, and do not result in an advantage of an enduring character. He has relied upon a passage from Tannan's Banking Law and Practice (9th edition) at page 259, to emphasise the fact that unlike cash credits which are long‑term loans, the overdraft facilities represent only short‑term loans repayable on demand. He has also referred us to Halsbury (Hailsham edition), Vol. 1, Articles 1388 and 1400, to show us that the intrinsic character of overdraft facilities secured by a deed of hypothecation is repugnant to the concept of such loan being an asset or advantage of an enduring character. He has added that the true nature of such transaction has not been fully comprehended by the Income‑tax Authorities inasmuch as the Income‑tax Officer has described the transaction as "financial overdraft .arrangement", the Appellate Assistant Commissioner as "bank overdraft representing capital loan" and the Tribunal as "advantage of an enduring character".
(b) There are four primary facts which may be set out as follows:
(i) The assessee is a joint stock public company carrying on industrial and manufacturing activities.
(ii) The assessee has been incorporated in 1929.
(iii) In 1950 the company has taken recourse to overdraft facilities.
(iv) The loan has been secured as repayable on demand and on the basis of a deed of hypothecation.
On these four basic facts the Income‑tax Authorities should not have found that the overdraft has secured an advantage of enduring character. The facts that the costs are not incurred as initial expenses in the year of incorporation of the company and that the loan under overdraft is based upon hypothecation of movables and repayable on demand reveal that the assessee cannot be said to have derived any advantage of an enduring character.
(c) The test for determining an expenditure as capital or revenue has undergone a substantial metamorphosis and the Supreme Court in its latest pronouncement, according to Mr. Banerjee, has sufficiently indicated that the dictum of Lord Cave in Atherton v. British Insulated and Helsby Cables Co. Ltd. ((1925) 10 T C 155), can no longer be considered as the last word on the point. He has traced the evolution of this branch of Jaw from the earliest period and has made a painstaking endeavour to convince us that the principle for determining an expenditure as revenue or capital is not limited to the test adumbrated in Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax ((1955) 27 I T R 34). According to him, the periodicity of expenditure and tenure or duration of any asset or advantage are no longer essential. Mr. Banerjee has submitted that on the facts of the instant case, the principles to determine the nature of expenditure could be derived from the following factors, namely, (a) the nature of the business; (b) the nature of the expenditure; (c) the nature of the right acquired, and (d) their relations inter se as set out in Abdul Kayoom v. Commissioner of Income‑tax ((1962) 44 I T R 689 (S C)).
(d) In any event, assuming that the ‑test applied in Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax is the settled law on the subject, it has no application to the instant case inasmuch as the overdraft facilities being repayable on demand and, being covered under a deed of hypothecation do not endure to the assessee‑company any asset or advantage. Further, there are no materials to show any tenure or terminal points which have resulted in the purported asset or advantage of an enduring character.
Reference has been made to a large number of cases by Mr, Banerjee to support his contention that for the purpose of determining an expenditure as capital or revenue, there can be no test or principle which is of universal application. According to him different tests or considerations are relevant on the facts of each case. We may now refer to them in the order they have been cited.
In Commissioner of Income‑tax v. Finlay Mills Ltd. ((1951) 20 I T R 475), the expenditure incurred by a company carrying on the business of manufacturing and selling textile goods in registering for the first time the trade marks which were not previously in use was held to be revenue expenditure and an allowable deduction under section 10 (2) (xv) of the Income‑tax Act, 1922. Kama, C. J. followed the principle laid down by Viscount Cave, L. C. in Atherton v. British Insulated and Helsby Cables Ltd. But in applying the principle to the facts of that particular case he came to the conclusion that in his opinion, registration of a trade mark was neither an asset nor an advantage so as to make payment for its registration a capital expenditure.
Similarly, in Commissioner of Income‑tax v. Century Spinning, Weaving and Manufacturing Co. Ltd. ((1947) 15 I T R 105) the assessee‑company which carried on a business of manufacture and sale of textile goods incurred an expenditure in fees consequent upon making application for its first registration under the Trade Marks Act, 1940, of the trade marks which had been continuously in use. Stone C. J., while endorsing the views of Viscount Cave, held that the expenditure was attributable to revenue inasmuch as it was recurring and it did not bring into existence an asset or advantage for the enduring benefit of the trade. One of the reasons for arriving at the sai51 conclusion was set out by him at page 116.
"In my opinion the registration fees paid were not paid for the purpose of acquiring a right of transmissibility, which did not previously exist ; the enhanced status of registered mark is only incidental to the registration of an existing asset. But even if it could be regarded as a new right, it is not enduring since in order to keep it up, periodic payments are necessary."
The next case to which our attention has been drawn was Mohanlal Hargovind v. Commissioner of Income‑tax ((1949) 17 1 T R 473 (P C)). In that case the assessees carried on business at several places as manufacturers and vendors of country‑made cigarettes known as Bidis. These cigarettes were composed of tobacco rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short‑term contracts with the Government and other owners of forest. Under the contracts, in consideration of certain sum payable by instalments, the assessees were granted exclusive or monopoly right to pick and carry away the tendu leaves from the forest area described. It was held that the contracts were entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, that they granted no interest in land, or in the trees or plants, that under them it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to the land for the purpose were merely ancillary to the real purpose of the contracts and, if not expressed, would be implied by. law in the sale of a growing crop, and that, therefore, the expenditure incurred in acquiring the raw material was in a business sense an expenditure on revenue account and not on capital account, just as much as if the tendu leaves had been bought in a shop. Their Lordships, in the Judicial Committee, after analysing the terms and conditions of the short‑term contracts, came to the conclusion at page 476.
"They are merely examples of many similar contracts entered into by the appellants wholly and exclusively for the purpose of their business, that purpose being to supply themselves with one of the raw materials of that business. The contracts grant no interest in land and no interest in the trees or plants themselves. They are simply and solely contracts giving to the grantees the right to pick and carry away leaves, which, of course, implies the right to appropriate them as their own property."
Accordingly, they held that the expenditure incurred for entering into those contracts are of a revenue nature inasmuch as they made no distinction between the facts of that case and the case where the tendu leaves had been stored in a merchant's godown and they had bought the right to go and fetch them and so reduce them into their possession and ownership.
The next case referred to was Jagat Bus Service, Saharanpur v. Commissioner of Income‑tax ((1950) 18 I T R 13), where the assessee carrying on the business of running motor buses and lorries on hire entered into an agreement with the State authorities under which, in consideration of a sum of Rs. 20,000 payable annually as nazrana the assessee was given, on monopoly, a right of plying ‑motor vehicles on hire on a certain road for carrying passengers and goods for a period of five years. Under the said agreement, the assessee was entitled to a reduction on the annual payment if the road remained impassable for a certain number of days in any one year. Before entering into the agreement motor vehicles could be run on the road only on payment of a tax of Rs. 10 per trip per motor vehicle. During the relevant year the assessee had to pay only a sum of Rs. 5,000 to the State, the road being not in a motorable condition for several months. The Allahabad High Court held that the sum of Rs. 5,000 paid under the agree ment was a revenue expenditure. In that case the assessee by these contracts has derived no additional advantage; the expenditures have been incurred for the maintenance of status quo and to earn profit year to year. The tests mentioned in the said case, it may be urged, are no longer good law after Assam Bengal Co. Ltd. v. Commissioner of Income‑tax. Whatever may be the position, Malik, C. J. himself has cautioned at page 22 that the decision of the question whether an item of expenditure is revenue expenditure or capital expenditure depends upon a variety of circumstances. The test laid down by him can only be construed as illustrative and not exhaustive. In fact, he has made it clear that "it is impossible to lay down any test which would meet all cases".
Our attention was then drawn to another type of case, namely, determination of the nature of expenditure incurred in acquiring quota rights, for instance, M. S. Kandappa Mudaliar v. Commissioner of Income‑tax ((1957) 32 I T R 313) the facts of which may be stated as follows:
Four persons entered into partnership for trading in cotton yarn and piece‑goods, and when the trading was subjected to control, the firm obtained the prescribed quotas from time to time to carry on its export trade. One of the partners retired from the firm and the firm was reconstituted under the same trade name with the other three partners. The new firm entered into an agreement with the retiring partner that until he could obtain a separate quota, the firm was to buy the entire quota goods and use it for their business and as recompense for the same, pay him in accordance with the prevailing conditions. In accordance with this agreement the firm paid to the retiring partner Rs 13,500 and Rs. 10,000 during the accounting years 1944‑45 and 1946‑47 and claimed that this amount should be deducted from their taxable profits. The claim was disallowed on the ground that the payments were of a capital nature. The Madras High Court held that under the agreement with the retiring partner nothing was laid out by the assessee‑firm on the acquisition of any asset of an enduring nature with the aid of which the firm could earn its profits. It was not even a case of acquisition of any fresh quota rights, as the assessee‑firm had been enjoying quota rights and was taking advantage of the existing quota till the authorities allocated its quota between the assessee and the retiring partner ; what the assessee agreed to pay was for the use of the quota with which the assessee could obtain its stock‑in‑trade in export till the retiring partner was allocated his separate quota, and the amounts paid to him under the agreement were, therefore, not of a capital nature and were allowable under section 10 (2) (xv) of the Income‑tax Act. It is true that the quota rights do give to the new firm, in a broad sense, an advantage under which the right to export goods is permissible. But on the facts and circumstances of this case, it is clear that it was really a case of payment for the use of the quota issued to another. The quota right which was being enjoyed by a firm consisting of four persons has subsequently been used by a new firm consisting of three persons. No additional advantage was obtained by the new firm which the previous firm did not enjoy or was not enjoying. The new firm by the temporary arrangement has been continuing the advantage which the predecessor firm was enjoying and the assessee was only maintaining the status quo. Further, the expenditures incurred were not made once and for all. It was agreed that until the outgoing partner would get a separate quota right the assessee would continue to incur the said expenditure every year. In any event, Rajagopalan, J. has come to the finding: "It was not capital expenditure. Nothing was laid out by the assessee firm on the acquisition of any capital asset, any asset of an enduring nature, with the aid of which the assessee‑firm could earn profits. It was not even a case of acquisition of any fresh quota rights, whether or not quota rights could be viewed as capital assets. The assessee‑firm had its quota rights, and it was bound to get its quota till the authorities complied with its request to order an allocation of quotas between the assessee‑firm and the retiring partner. What the assessee agreed to pay him was for the use of the quota with which the assessee could acquire its stock‑in‑trade, cloth, for export to Ceylon till he was allowed his separate quota." Attention was then drawn to In re: Hindustan Commercial Bank Ltd. ((1952) 21 I T R 353) the facts of which may be stated as follows:
The assessee, a bank, incurred during the relevant accounting year certain expenses in opening forty‑six new branches, sub -branches and pay offices, a sum of Rs. 24,675 as charges for advertisement, entertainment, etc., and another sum of Rs. 89,870 representing salary, dearness and other allowances; rent, telephone, lighting, etc., incurred for the' said purpose. The Allahabad High Court held that assuming the said sums of Rs. 24,675 and Rs. 89,870 being expenses incurred wholly and exclusively for the purpose of business they were in the nature of revenue expenditures. The facts of this case show that the expenses incurred are not for the commencement of the new business but for opening new branches for the purpose of extending the existing business. This is not a case where the assessee acquires a new business or new premises or has purchased new assets which could be included as an asset in the profit and loss account. Banking business in this case has been carried on from before and the expenditures are incurred for facilitating the existing business of the bank and for carrying it on more profitably by opening branches, Malik, C. J., it may be added, following the principles in Atherton v. British Insulated and Helsby Cables Ltd., on the' facts of the' case came to the following conclusion:
"In the case before us all that has happened is that by reason of opening of new branches the out‑turn of the business may have increased on which the assessee is liable to pay tax. It cannot be said in this case that there has been any such acquisition of an asset which would amount to all the expenses being classed as capital expenditure."
Mr: Banerjee, has also retied. on In re : Imperial Chemical Industries (India) Ltd. ((1935) 3 I T R 21), where one B.M. & Co. had entered into an agreement of commission agency with P. & Co., which provided that either party, by notice to the other might terminate the agreement and that six months after the receipt of such notice the agency would cease. The business of B. M. & Co. was taken over by the assessees. The assessees, decided to conduct their own business in India and notice was given to P. & Co. terminating their agency. The assessees agreed to pay a sum of Rs. 500 per month for a period of five years or Rs. 30,000 in lump as compensation to a certain extent for the losses of the agency provided P. & Co. agreed to assist the assessees' employees in getting a thorough insight into the. working of the business and further agreed not to enter into competition with the assessees for five years. A sum of Rs. 10,000‑ was thus paid to P..& Co. in the year of account. The Calcutta High Court held that the expenditure was not of a capital nature inasmuch as the assessees were not nurturing or protecting a new business or purchasing anything in the nature of goodwill but only securing advantages for their undertaking and facilities for future operations and inasmuch as the payment was made out of circulating capital and did not result in any new asset or addition to the fined. capital of the…
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