Kalpesh Classes

[1966] 060 ITR 0052A  India Cements Ltd. v/s. CIT (S C) [GENERAL CONCEPT FOR THE EXPENDITURE IN RAISING​​ FINANCE]​​ 

The act of borrowing money is incidental to the carrying on of business, the loan obtained is not an asset or an advantage of enduring nature, the expenditure 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. 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 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.​​ 

In principle, apart from any statutory provisions, there is no distinction between interest in respect of a loan and an expenditure incurred for obtaining the loan. The nature of the expenditure incurred in raising a loan would not depend upon the nature and purpose of the loan. The purpose for which the loan was required is irrelevant to the consideration of the question whether the expenditure for obtaining the loan is revenue expenditure or capital expenditure​​ 

[1997] 227 ITR 0464-  Commissioner of Income-tax vs. Akkamba Textiles Ltd. (SC) [A LAND MARK CASE]​​ 

The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of​​ business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of business, the expenditure may be regarded as revenue expenditure. The transaction of acquisition of assets can be said to be closely related to the commencement and carrying on of business by an assessee. Hence, any expenditure incurred by the assessee, which is a running concern, for ensuring use of money for a certain period or enabling the assessee to make deferred payment of cost of assets acquired,constitutes revenue expenditure​​ and, therefore, the same is admissible as deduction from revenue income.​​ Therefore, the commission paid by the assessee to the guarantor for enabling it (the assessee) to make deferred payment of the purchase consideration, constitutes revenue expenditure​​ and not capital expenditure and, therefore, is admissible as deduction from the income.​​ 

[1997] 227 ITR 0465  Commissioner of Income-tax vs. Sivakami Mills Ltd. (SC)​​ 
[TO BE FOLLOWED]​​ 

FACTS OF THE CASE :​​ 

The assessee-company purchased from abroad for​​ the purpose of its business some items of machinery on deferred payment terms under which an immediate payment had to be made and the balance was to be paid in instalments. For assuring the due payment of the instalments, the assessee obtained a guarantee​​ executed by a bank in favour of the sellers of the machinery and the bank charged a commission at a percentage of the amount guaranteed. The commission calculated at one per cent. on the outstanding balance and also of the commission guaranteed on the additional liability consequent on the devaluation of the Indian rupee.​​ 

CLAIM OF DEPARTMENT​​ 

The assessee's claim for deduction of this amount was negatived by the Income-tax Officer on the ground that it was capital in nature. The Appellate Assistant Commissioner allowed the claim on the ground that though the expenditure for the purchase of the assets was undoubtedly capital, the expenditure for discharging the liability in instalments could not be regarded as capital expenditure.​​ 

VIEW OF TRIBUNAL​​ 

The Tribunal, however, held that the disallowance made by the Income-tax Officer was correct in the view that the payment of guarantee commission was concerned with an expenditure incurred by the assessee in connection with the purchase of the machinery and it went to increase the actual cost to the assessee of the machinery and hence was capital in nature.​​ 

VIEWS OF HIGH COURT​​ 

That the payment of guarantee commission was unrelated to the working out of the cost of acquisition of any depreciable machinery, plant or other asset but was an expenditure which was incurred in the course of carrying on the business and not prior to the commencement of the business. The payment was so closely related to the business that it could be viewed as an integral part of the conduct of the business and would be a revenue expenditure. It did not bring into existence any asset of an enduring nature nor did it bring in any other advantage of an enduring benefit. The acquisition of the machinery in instalment terms was only a business exigency. The very nature of the expenditure and the time at which it had been incurred would justify the claim of the expenditure as revenue expenditure.​​ ​​ 

DECISION OF SUPREME COURT​​ 

Affirming the decision of the High Court, that the​​ guarantee commission paid to the bank was revenue expenditure and hence was an allowable deduction in computing the total income of the assessee.​​ 

Conclusion

Guarantee commission is like a finance charge. Thus it is in nature of revenue expense.​​ The deduction does not depend on whether it is in relation to asset or working capital. Thus it must be allowed as deduction.