1966 PLP 233 (PTD)

Business expenditure‑Expenditure incurred for raising loans to finance business‑Whether capital expenditure or business expenditure Guiding principles Indian Income‑tax Act, 1922, S. 10 (2) (xv). Three persons constituted themselves into a firm (the assessee) for the sole business of constructing a building and selling it. The firm acquired a piece of land in 1946, constructed a building in 1954 and sold it in 1955 at a profit and this profit was assessed as profits from business. As the assessee was in need of funds for the construction of the building, the assessee had borrowed a sum of Rs. 2 lakhs executing two mortgages by way of security for the loan, and the borrowed money was wholly used for the construction of the building. In, connection with the execution of the mortgages the assessee had to incur an expenditure of Rs. 15,172 on account of stamp duty, registration charges, brokerage, legal charges, etc., and the assessee claimed to deduct this sum from the profits earned in this business. The Tribunal, agreeing with the Income‑tax Officer and the Appellate Assistant Commissioner, held that the expenditure was incurred for raising capital for the business and as such it was of a capital nature, and disallowed the claim: Held, that expenditure incurred for raising loans for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature. Whether such expenditure is of a capital nature or a revenue expenditure would depend on the nature of the loan, the purpose for which the loan was raised, and the manner in which it was used. As the construction and sale of the building was the sole business of the firm and the building was its stock‑in‑trade, and the loan was raised and used wholly for the purpose of acquiring this stock‑in‑trade and not for obtaining any fixed asset or raising any initial capital or for expansion of the assessee's business, the sum of Rs. 15,172 incurred for raising the loan was not expenditure of a capital nature but revenue expenditure and was deductible from the profits under section 10 (2) (xv). Dictum.

"Every time money is borrowed for the purpose of business it undoubtedly helps or facilitates the business and thus allows it to continue to run, which, but for the help of finance, would ultimately cripple and stop. That, however, would not necessarily give the borrowed money the status of capital of the assessee." [Tests for distinguishing capital expenditure and revenue expenditure and case law thereon discussed.] Western India Plywood Ltd. v. Commissioner of Income‑tax (1960) 38 1 T R 533; Commissioner of Income‑tax v. India Cements Ltd. (1963) 47 I T R 438 and Annapurna Cotton Mills Ltd. v. Commissioner of Income‑tax (1964) 54 I T R 593 distinguished. [Cases referred to.] By this application, Messrs S. F. Engineer, B. E. Doctor and J. P. Vazifdar, the assessee‑firm, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of its order under section 33 (4) made on February 7, 1961, in

1. T. A. No. 12400 of 1959‑

60. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up an agreed statement of the case and refer it to the High Court of Judioature at Bombay under section 66 (1) of the Indian Income‑tax Act, 1922.

2. This reference application arises out of the assessment made upon the assessee in the status of a registered firm for the assessment year, 1956‑57, the account year for which is the financial year ended March 31, 1956. The three persons, Engineer, Doctor and Vazifdar, joined together in partnership to carry out a single business venture of constructing a building and selling it. The said building subsequently came to be known as "Telephone Bhavan". For this purpose, the said firm acquired some land in September 1946. Construction of building thereon was undertaken in due course and it was completed on November 15, 1954. Immediately after the said completion, it was let out to the Government of India for a monthly rent of Rs. 10,674 and later it was actually sold to it in September 1955, for a sum of Rs. 6,25,

000. It is common ground between the assessee‑and the department that this venture gave rise to some taxable profit in the "business" of constructing and selling a building and it is this profit that is being computed for this assessment year. In the computation of the profits of the said business, the assessee claimed to deduct a sum of Rs. 15,172 the nature of which is this

3. The three partners of the assessee‑firm had only a small capital of their own, about Rs. 60,

000. It needed funds for the purpose of construction of the building. Hence, even while the construction work was in progress, it obtained ‑a loan of Rs. 2 lakhs from the Industrial and Prudential Assurance Co. Ltd. and a loan of Rs. 50,000 from one Sethna. By way of security for the said loans, the assessee‑firm executed two mortgages, one in favour of the said assurance company and the other in favour of the said Sethna. In connection with the execution of the said mortgages, the assessee‑firm incurred an expenditure of Rs. 15,172 on account of stamp duty, registration charges, brokerage and legal charges, etc. The said amount as such is not in dispute. The assessee, as already said, claimed to deduct the said sum of Rs. 15,172 in the computation of its taxable business income.

4. The Income‑tax Officer rejected the claim for deduction on the ground that the said expenditure was "for raising capital for business" as distinguished from expenditure incurred for carrying on the business after it had come into existence. In other words, he took the view that this was an expenditure of the nature of "preliminary expenses" and as such capital in nature.

5. Being aggrieved by the said rejection of the claim for deduction, the assessee took its contention in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the disallowance made by the Income‑tax Officer by observing as follows "But section 10 (2) (iii) of the Act lays down that on capital borrowed for the purpose of business, profession or vocation the amount of interest paid can be deducted. This shows that the only expenditure that is allowable in respect of a loan is the amount of interest and not any other expenditure. The analogy of brokerage paid on loans secured from Multan is cannot be applied in this case because the mortgage expenditure cannot be regarded as brokerage by any stretch of imagination. The building being the stock‑in‑trade cannot also help the appellant because the expenditure was incurred not on the building but for acquiring loans for financing the business. It has been held by the Punjab High Court in Associated Hotels of India Ltd. v. Commissioner of Income‑tax, that even bonus paid to debenture? holders cannot be regarded as a proper deduction under section 10(2)(xv) and it cannot also be brought under the provisions of section 10(2)(iii). Moreover, for purpose of claiming allowance under section 10(2)(iii), the use to which the loan has been put is not material so long as the loan was obtained for the business. Therefore, the mere fact that the loans had been utilised for putting up the building cannot by itself make the mortgage expenses which were incurred solely for securing the loans‑an allowable deduction. The disallow?ance made by the Income‑tax Officer is therefore in order and is upheld."

6. Hence, the matter was brought in appeal to‑ the Tribunal and it was claimed before it that the said amount of Rs. 15,172 should be allowed as a revenue expenditure on the following grounds (i) that the building for the construction of which the said lands were taken was the assessee‑firm's stock‑in‑trade and the amount taken by way of loan was actually expended on the construction of the building ; and (ii) that no capital asset was brought into existence as the said building constituted the assessee‑firm's stock‑in trade and hence the sum of Rs. 15,172 was not an expenditure of capital nature. The Tribunal rejected both these contentions for reasons given in its order of February 7, 1961, a copy of which is marked 'Annexure "A" and forms part of the case and held that the said expenditure was incurred " solely for the purpose of raising capital and not for purpose of the running of the assessee's business or for acquiring the stock‑in‑trade".

7. On these facts, the‑assessee now requires the Tribunal to refer to the High Court the following question of law "Whether the applicants are entitled to claim a deduction in respect of the sum of Rs. 15,172 in determining the business income of the appellants?" In our opinion, on the facts of the present case, the following question of law arises "Whether in the computation of its business profits under section 10, the assessee‑firm is entitled to a deduction of the sum of Rs. 15,172?" We refer the above question accordingly to the High Court. N. A. Palkhivala with F. N. Kaka for the Assessee. G. 1V. Joshi with R. J. Joshi for the Commissioner. V. S. DESAI, J.‑The question which the Income‑tax Appellate Tribunal has referred to us, under section 66 (1) of the Indian Income‑tax Act, 1922, is: "Whether, in the computation of its business profits under section 10, the assessee‑firm is entitled to a deduction of the sum of Rs. 15,172?" The assessee‑firm consists of three partners and was brought into existence solely for the purpose of constructing a building and selling the same. The firm acquired a piece of land, on which the building was to be constructed, in September 1946. Immediately after its construction, it let it out to the Government of India with effect from 15th November 1954, and ultimately sold it to the Government in September 1955. This business venture of the assessee‑firm resulted in some profit, which came to be assessed in the assessment year 1956‑57 on the assessee in the status, of an unregistered firm. Now, the assessee‑firm having started with an initial capital of Rs. 60,000 had not sufficient funds for the construction of the building which it was going to construct. It, therefore, secured a loan to the extent of Rs. 2,50,000 from two persons, borrowing 2 lakhs from one of them and Rs. 50,000 from the other and secured the said loans by executing mortgages of the land and the building under construction in favour of the creditors. It incurred a total expenditure of Rs. 15,172 over the execution of the mortgages and in its assessment proceedings it claimed this amount as an admissible deduction against the profits from the construction and sale of the building. The departmental authorities held that the amount was not deductible either under section 10 (2) (iii) or under section 10 (2) (xv) as the expenditure was incurred not on the building but for acquiring loans for financing the building. In the appeal before the Income‑tax Appellate Tribunal, the assessee contended that the building, for the construction of which the money was obtained, was the stock‑in‑trade and the amount taken by way of loan was actually expended on the construction of building; that no capital asset was brought into existence, as the building constituted the assessee‑firm's stock‑in‑trade and the money having been obtained for the acquisition of the stock‑in?-trade, the expenditure incurred in obtaining the loan was revenue expenditure and not an expenditure of a capital nature. The Tribunal negatived the assessee's contention by holding that the expenditure was incurred solely for the purpose of raising capital and not for the purpose of running of the assessee's business or for acquiring the stock‑in‑trade. It observed: "It was not an expense incurred for the purpose of the assessee's business but for the purpose of enabling it to obtain capital with which the business was to be run. Whether the capital so raised was spent over the stock‑in‑trade of the assessee or over its capital assets is not at all material for determining the admissibility of this expense, the expense having been incurred solely for the purpose of raising capital and not for the purpose of the running of the assessee's business or for acquiring the stock‑in‑trade." In other words, the view taken by the Tribunal was that the expenditure incurred in raising the loan was not a part of the activity of the assessee in running the business, though the loans itself was used for the purposes of the business, the expenditure incurred for raising the loan, therefore, could not be regarded as expenditure for the running of the business and for the purpose of obtaining profits and gains, and could not, therefore, be regarded as a deductible expenditure under section 10 (2) (xv). The Tribunal was of the opinion that the view that it was taking was supported by a decision of the Kerala High Court in Western India Plywood Ltd. v. Commissioner of Income‑tax ((1960) 38 I T R 533). In our opinion the view taken by the Tribunal is not correct. In Commissioner of Income‑tax v. Tata Sons Ltd. ((1939) 7 I T R 195), the assessees who were the managing agents obtained finances for the managed companies by entering into an agreement with a stranger, who agreed to lend a crore of rupees to the managed company on condition that the assessees gave and assigned to him a share of six annas in the rupee in the commission and other remuneration which the assessees might be entitled to recover from the managed company. The share of the commission, which was paid to the stranger under the said arrangement, was claimed to be deducted in, computing the profits and gains of the assessees on two grounds: firstly, that the agreement operated as an assignment of the portion of the commission to the stranger and in that view the share assigned had ceased to be income of the assessees, and, secondly, that the share of the commission given to the stranger was an expenditure incurred by the assessees solely for the purpose of earning profits and gains in the conduct of their business and was, therefore, an expenditure of a revenue nature. Both the contentions of .the assessees were accepted in that case. Now the commission, which was agreed to be paid to the stranger, was clearly for the purpose of obtaining finances to the managed company. The. finances; however, were used for the purposes of earning profits and gains in business and the expenditure, which was incurred for raising the said finances, was regarded as an expenditure for the purpose of earning profits and gains in the course of the business. It would, therefore, appear that in order to determine whether the expenditure incurred in borrowing the loans would be a part of the expenditure for running the business would depend upon the nature and purpose of the borrowed money. In Dharamvir Dhir v. Commissioner of Income‑tax ((1939) 7 I T R 195), the assessee, not having requisite funds for its business, entered into an agreement with a public charitable trust for the advance to him of funds up to 1?? lakhs of rupees on payment of interest at 6 per cent. per annum and 11/16ths of the profits of the business. The share of the profits paid under this agreement was claimed as a revenue expenditure and‑ the claim was allowed by the Supreme Court, which held that in the commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the assessee's business and they were, therefore, deductible revenue expenditure. Here again, the agreement to give 11/16ths of the profits was an expenditure incurred for the purpose of raising the monies. But since the purpose of raising the monies was wholly for the running of the business of the assessee, the expenditure incurred in raising the monies was also regarded as an expenditure of the business and not an expenditure, which was unconnected with it, but solely related to the transaction of borrowing. Under the English Income‑tax Act, there are prohibitions against allowing interest or other expenditure connected with capital employed or intended to be employed in the business of the assessee. There are, however, provisions which allow the deduction of revenue expenditure wholly laid out for the purpose of the assessee's business. In several cases of loans borrowed, the interest paid or the other expenditure incurred for obtaining the loans has been claimed on the basis of permissible revenue expenditure on the ground that the loans obtained were of short duration or in the nature of temporary or day to day accommo?dation by way of banking or overdraft facilities, which could not be regarded as capital employed or intended to be employed in the business of the assessee and the expenditure incurred for raising such loans would, therefore, be deductible as revenue expenditure incurred wholly for the purpose of earning profits or gains of the business. The decisions in these cases have turned upon the question as to whether the loans borrowed constituted capital employed or intended to be employed in the business of the assessee and in cases where it was held that it could not be so regarded, the interest paid or the other expenditure incurred in raising the loans has been allowed on the ground that it is an expenditure of a. revenue nature. Thus in Taxes Land and Mortgage Company v. Holtham ((1890) 3 T C 255), the assessee‑company increased its capital by raising money on debentures and claimed the commission paid to the brokers and the other expenses incurred in raising the money as deductible revenue expenditure. The claim was considered on the footing as to whether the raised money was capital of the company and having held that it was the capital of the company, the claim was disallowed. It may be pointed out that the disallowance of the claim was not on the ground that the expenditure incurred was solely connected with the raising of the capital and not for the purposes of running the business. In Scottish North American Trust Ltd. v. Farmer ((1903) 5 T C 693), the assessees, who were a company and whose main business was to buy and sell investments, having found that the value of their purchases of investments abroad exceeded the amounts of their available cash, pledged certain of their securities with their bankers in New York to obtain a fluctuating overdraft, on which interest was charged at current rates from day to day. Subsequently in addition to the overdraft, the bank granted the company a loan with a fixed maximum for six months at 6 per cent. which was renewed for a further six months and then terminated. A question arose as to whether the interest that was paid to the bankers in New York was deductible as an outgoing for the purpose of the business in computing the liability of the company for assessment. It may be remembered that if the borrowings constituted capital employed or intended to be employed in the business of the assessee, the interest would not be deductible in view of the prohibitions contained in the English Income‑tax Act. If, however, the borrowings did not constitute capital employed or intended to be employed in the business of the company, the interest paid on the borrowings could be regarded as an expenditure incurred for the purpose of obtaining the borrowed money for the purpose of the business and could be claimed as a revenue deduction. Lord Atkinson observed, after having considered several authorities, as follows (1903) 5 T C 693: "These authorities show that money borrowed by such a company as the appellant‑company in this case in the fluctuating temporary manner in which it has been borrowed by them ?the daily borrowing and lending of money being part of their trade and business‑is not to be treated under the Joint Stock Companies Act as `capital'. There is nothing to show that that word should bear a different meaning in the Income‑tax Acts when applied to the proceedings of joint stock companies. 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 procures 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:" In a recent case of the Supreme Court, State of Madras v. G. J. Coelho (1964 53 I T R 186), under the Madras Plantations Agricultural Income‑tax Act, 1955, the assessee claimed in computing his agricultural income from his plantations, the entire interest paid by him on monies borrowed for the purpose of purchasing the plantations as expenditure laid out wholly and exclusively for the purpose of the plantations under section 5 (e) of the said Act. It may be pointed out that in the Madras Plantations Agricultural Income‑tax Act there was no provision corresponding to section 10 (2) (iii) of the Indian Income‑tax Act, which allowed the deduction of interest on borrowed capital. The provision of section 5 (e) of the said Act was identical with the provisions of section 10 (2) (xv) of the Indian Income‑tax Act. It was held that the payment of interest on the amount borrowed for the purchase and the working of the plantations viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. In view of these authorities, in our opinion, the short work which the Tribunal has made of the question which was before it by holding that the expenditure was solely for the purpose of raising capital and not for the purpose of running the assessees' business or acquiring the stock‑in‑trade will not be permissible, and it will have to be further seen, having regard to the nature and the purpose of the loan, the manner in which it was raised and the manner in which it was used, whether the expenditure incurred in raising the loan was an expenditure not in the nature of a capital expenditure or personal expenses and wholly laid out for the purpose of the assessees' business within the meaning of section 10 (2) (xv) of the Act. Now, "capital expenditure" has not been defined in the Act and it has often been said that it is difficult to lay down a general test, which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases: Rowlatt, J. in Countess Warwick Steamship Co. Ltd. v. Ogg ((1924) 2 K B 292). In Benarsidas Jagannath, In re ((1947) 15 I T R 185) Justice Mahajan of the Lahore High Court, as he then was observed "In order to distinguish between a revenue expenditure, . . which is deductible in assessing income‑tax and a capital expenditure which is not so deductible, one must carefully consider the nature of the concern, the ordinary course of business usually adopted by‑ a manufacturer in that concern and the object with which an expense is incurred by him and then decide the category under which it falls." The learned Judge also observed: He then formulated three tests, which will be helpful in determining whether a given item of expenditure was a capital or a revenue expenditure. These three tests are as follows (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment ; . . . . (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, ‑but with a view to bringing into existence an asset or an advantage` for the enduring benefit of a trade ; . . . . and (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters: Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." These tests were approved of and accepted by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax ((1955) 27 I T R 34). Bhagwati, J., after having enumerated the said tests, observed: "This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial Whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expen?diture incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10 (2) (xv) of the Indian Income‑tax Act." "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 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‑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 the business, the expenditure may be regarded as revenue expenditure." What will have to be seen, therefore, is whether on the applica?tion of these tests the expenditure in the present case is an expendi?ture in the nature of a capital expenditure or in the nature of a revenue expenditure. As we have already pointed out earlier, the nature of the expenditure incurred in raising a loan will depend upon the nature and purpose of the loan. In the present case, the assessee had embarked upon a single venture, which was for obtain?ing a land and construction of a 'building on it and selling the same after construction and make profit in the transaction. It is undisputed that the land and the building constructed on it wag the stock‑in‑trade of the assessee, and the entire venture consisted of acquiring the stock‑in‑trade and disposing it of. The assessee had no‑ fixed assets and did not require any fixed assets for its business. Its asset was the only trading, asset or the stock‑in?trade, which it proposed to acquire and dispose of. It had commenced its venture in the year 1946‑ with the funds of Rs. 60,000, which it possessed. In the course of acquiring the stock‑in‑trade, viz., the building to be constructed,. it required monies, which were to be spent solely for the purpose of the construction of the building. The whole purpose of the loans, which it borrowed, was for completing the acquisition of the stock‑in‑trade and it is not contended that the amount has not been utilised solely for that purpose. Applying the tests, we find that the amount of Rs. 2,50,000, which was borrowed by the assessee, did not form its initial outlay because it was obtained not at the initiation of the business but during the course of it. It was not for the expansion of the business or for the replacement of any equipment. The business of the assessee was the single venture of the assessee of constructing only one building and selling it off after its completion. This business was never expanded by the assessee. No equipments in the nature of fixed assets were also required by the assessee and no part of the loan borrowed was utilised for any such purpose. Applying the second test, the expenditure incurred did not bring into existence any fixed asset or advantage of the nature of an enduring benefit to trade. The amount obtained was wholly spent on the construction of the building, which was the stock‑in‑trade itself. It was contended that the expenditure was incurred for obtaining a facility of money, which endured for the entire duration of the venture by providing money for the business of the assessee. It was, therefore, argued that the expenditure incurred was for the purpose of obtaining something more than mere finances for the acquisition of the stock‑in‑trade, viz., a right or facility to carry on or continue the business. In our opinion, this argument cannot be accepted. Every time money is borrowed for the purpose of business it undoubtedly helps or facilitates the business and thus allows it to continue to run, which, but for the help of finance, would ultimately cripple and stop. That, however, would not necessarily give the borrowed money the status of capital of the assessee. As observed by Lord Atkinson in Scottish North American Trust Ltd. v. Farmer ((1903) 5 T C 693) already referred to, the borrowed monies may be as well an instrument of the trade, and the expense of borrowing, the hire for the instrument as much as is the rent paid for the office or the hire paid for a typewriting machine. There is no doubt in the present case that building was the circulating capital or the stock‑in‑trade of the assessee. ? The monies, which were borrowed went towards the circulating capital and did not form any part of the fixed capital of the assessee, which, as‑ we have already pointed out, was not there altogether. The three tests, therefore, which were laid down by the Full Bench of the Lahore High Court and subsequently adopted by the Supreme Court, when applied to the present case, would show that the monies borrowed by the assessee in the present case were for the purpose of being employed as circulating capital to earn profits and gains and cou Id not be regarded as on account of capital and consequently the expenditure incurred in connection with the borrowing could not be regarded as an expenditure of a capital nature. The tests given by the Supreme Court in the last decision referred to, viz., the decision in Bombay Steam Navigation Co. Ltd. v. Commissioner of Income‑tax ((1964) 54 I T R 21 (Sh. N)), would also, when applied to the borrowings in the present case, show that it was a borrowing on account of revenue. Viewed in the larger context of business necessity or expediency of the assessee's business, the borrowing in the present case was so related to the carrying on or conduct of the business that it could be regarded as the integral part of the profit‑earning process and not for the acquisition of an asset or a right of permanent character, the possession of which was a condition to the carrying on of the business. The expenditure, therefore, incurred in obtaining the borrowed money must be regarded as a revenue expenditure. In State of Madras v. G. J. Coelho ((1964) 53 I T R 186), which we have already referred to above, the assessee purchased an estate of tea, coffee and rubber plantations for a sum of Rs. 3,10,000 and for the purpose of the said purchase borrowed a sum of Rs. 2,90,000 at interest varying from 7 to 8 per cent. per annum. The annual interest paid by the assessee to the creditors was sought ‑to be deducted by the assessee from the profits and gains of his business for the year under a provision of the Madras Plantations Agricultural Income‑tax Act, which was identical with the provision of section 10 (2) (xv) of the Indian Income‑tax Act. After having applied the tests, the Supreme Court held that the payment of interest was a revenue expenditure because no new asset was acquired with it, no enduring benefit was obtained and the expenditure incurred was a part of the circulating or floating capital of the assessee. In our opinion, therefore, the expenditure incurred by the assessee for executing the mortgages in favour of the mortgagee creditors for obtaining monies for construction and completion of the building was an expenditure not of a capital nature but wholly laid out in the business of the assessee for obtaining profits and gains therefrom. The Income‑tax Appellate Tribunal, for the view that it has taken, has relied on Western India Plywood Ltd. v. Commissioner of Income‑tax ((1960) 38 I T R 533). In that case the assessee was a company carrying on business of manufacture of plywood and plywood articles. It raised a loan of Rs. 3 lakhs by way of first mortgage debentures redeemable in three successive years at Rs. 1 lakh a year to be utilised towards the working capital of the company. A major part of the borrowed amount was paid for the purchase of raw materials. Some part was expended for discharging loans on suspense account and a part was deposited in a separate account for the payment of dividends. The assessee had incurred an expenditure of Rs. 12,924 in issuing the debentures by way of expenses towards the purchase of stamp paper for the trust deed underwriting commission and registration and lawyer's fees. The question was whether the sum of Rs. 12,924 was a business expenditure and allowable under section 10 (2) (xv) of the Indian Income‑tax Act as a deduction. On the facts of the case, the Court held that the raising of money by debentures or mortgages by the company could not be regarded as an ordinary incident in carrying on the business, or be treated as on a par with trading or banking facilities, but must, prima facie, and in the absence of other indications, be considered to affect the capital of the concern and its profit‑making structure. The learned Judges proceeded to consider the question before them by finding out whether the money raised by debentures could be regarded as having been received by the assessee as a capital receipt and took the view that the manner in which the money had been raised by the company, viz., by issuing mortgage debentures showed that it was not raising money as by way of temporary or day to day accommodation as an ordinary incident in carrying on the business but that it was raising it with a view to affect its capital and profit‑making structure. According to them, the monies having been borrowed with this object and purpose, the subsequent utilisation of that part of the money borrowed for the stock‑in?trade did not affect the character of the borrowing, which was of a capital nature. They pointed out that the company in the resolution of its board of directors had referred to the loan that they were raising as "the working capital" of the company and the expenses incurred in raising the said capital, therefore, was an expenditure of a capital nature. It was argued before the Court that the borrowing was for the purpose of augmenting the circulating capital of the company, if not wholly, at least to the extent of a major part of it and to the extent to which the borrowed money was used as a circulating capital or for the acquisition of the raw material for the business, the expenditure pro tanto should be considered as a revenue expenditure. The argument, however, was not accepted. The learned Judges held that the money was borrowed for the purpose of enlarging or extending the business, if it was paying its way, or was by way of establishing its business, if it was not; in either of which case the borrowed money must be taken to have been obtained on capital account. As to the utilisation of part of the money for the stock‑in?-trade, they observed that in the first place the nature of the receipt of borrowing, whether capital or revenue, was not to be judged solely by the use, which the assessee had found for it subsequently and, secondly, the argument that a part of the borrowed money was utilised for purchasing the stock‑in‑trade conceded a dual character to the borrowing and involved a notional splitting of the borrowed amount and the expenses, for which there was no rational basis and besides it was also contrary to the prescription in section 10 (2) (xv), which was implicit in the expression "laid out or expended wholly and exclusively." In our opinion, this decision cannot be said to be an authority for the view which has been taken by the Tribunal that the expenses incurred for raising capital can never be regarded as expenses for the running of the business. The view taken' in this case was that on the facts and in the circumstances of the case the borrowing by the company was for the purposes of enlarging and extending its business and the borrowed money affected the capital of the company and entered the capital structure of the company. It was for that reason that the Court held that the expenses incurred for raising the loan,‑ which was on capital account, could not be treated as a revenue expenditure deductible under section 10 (2) (xv) of the Act. In two other cases, which were referred to us in the course of the arguments, where money was borrowed by a company on the security of the company's assets, the expenses of the borrowing were regarded as on capital account. In Commissioner of Income?tax v. India. Cements Ltd. ((1963) 47 I T R 438), which. is a case of the Madras High Court, the assessee‑company obtained a loan of Rs. 40 lakhs from a finance corporation on the mortgage of the company's assets agreeing to pay the loan in 10 annual instalments of Rs. 4 lakhs each. It incurred an expenditure of Rs. 84,633 for acquir?ing the loan by way of stamp duty, counsel's fee, etc., and claimed that amount as business expenditure. It was admitted that out of the amount of Rs. 40 lakhs, 25 lakhs was used for repaying a loan, which had been utilised for capital assets, and there was no material to show that the balance of Rs. 15 lakhs was incurred wholly and exclusively for the purposes of the business and was not used for capital purposes. It was held, in view of these facts, that the amount was not a revenue expenditure and could not be allowed under section 10 (2) (xv) on the ground that the loan was incurred for securing an enduring benefit to the assessee and the expenditure was incurred once and for all. It was further held that the fact that the loan was to be repaid within ten years could not affect the nature of the loan, which was raised on capital account. This case, in our opinion, would not help the Department. It would be seen that the nature and purpose of the loan in that case, to the extent to which it could be determined on the facts of the case, was that it was obtained for bringing into existence an advantage of an enduring nature to the company. The purpose of the loan, therefore, being that the amount borrowed was to be spent on capital account, the expenses incurred for the borrowing was an expenditure in the nature of capital expenditure. In Annapurna Cotton Mills Ltd. v. Commissioner of Income-?tax ((1963) 47 I T R 438), the assessee‑company by a debenture trust deed raised a loan of Rs. 10 lakhs, the debentures being redeemable in 10 annual instalments. The loan was secured by the mortgage of movable and immovable properties of the company and carried interest at 7 per cent. per annum. The company also agreed to pay to the brokers in perpetuity a commission of 1 per cent. on the gross sales of the assessee's products. Pursuant to this agreement the assessee paid the assignees of the brokers a sum of Rs. 21,798 during the relevant previous year, for which it claimed deduction under section 10 (2) (xv) of the Indian Income‑tax Act. It was held that the sum was capital expenditure and, therefore, not an allowable deduction under section 10 (2) (xv). This conclusion was arrived at on the ground that having regard to the long term of the loan and having regard to the nature and purpose of the loan and the manner of raising it, the loan formed a part of the capital assets of the company and the commission paid in connec?tion therewith was an expenditure of a capital nature and not allowable as a revenue expenditure under section 10 (2) (xv) of the Indian Income‑tax Act. In our opinion, this case also cannot help the Department. In the case before us the loan was only for the duration of the acquisition and disposal of the stock-?in‑trade of the single venture of the assessee. The purpose for which it was raised was only for the acquisition of the stock‑in?-trade and the manner in which it was raised was the ordinary commercial manner, where a trader for the purpose of acquiring its stock‑in‑trade borrows monies and utilises them for the acquisition of the stock‑in‑trade of the business and after disposal of the stock‑in‑trade repays the borrowed money to the creditor. The manner of raising the loan, therefore, was an ordinary incident of the trade, where circulating capital or stock‑in‑trade is held by borrowing temporary loans. In our opinion, therefore, the sum of Rs. 15,172 could be claimed by the assessee as a deductible revenue expenditure under section 10 (2) (xv) of the Act and the departmental authorities and the Income‑tax Appellate Tribunal were in error in not allowing the said deduction. Our answer, therefore, to the question referred to us is in the affirmative. The assessee will get his costs from the Department. Question answered in the affirmative.