Delhi H.C : Whether, on the facts and in the circumstances of the case, the interest of Rs. 73,449 paid by the assessee can be said to be the capital expenditure not deductible in the computation of the assessee’s business ?

Counsel Appeared

Ajay Jha, for the Petitioner : Sajan Narain, for the Respondent

JUDGMENT

ARIJIT PASAYAT, C.J. :

Pursuant to the direction given by this Court, following question has been referred for opinion of this Court under s. 256(2) of the IT Act, 1961 (in short, the ‘Act’), Income-tax Appellate Tribunal, Delhi Bench ‘A’, New Delhi (in short the Tribunal’) :

“Whether, on the facts and in the circumstances of the case, the interest of Rs. 73,449 paid by the assessee can be said to be the capital expenditure not deductible in the computation of the assessee’s business ?”

2. Factual position, as indicated in the statement of case, is as follows : Assessee is a public limited company, which was at the relevant point of time, that is, for the asst. yr. 1971-72 carrying on the business of manufacture and sale of razor blades. Directorate of Industries had allotted factory shed No. 34 in Okhla Industrial Estate to assessee in March, 1957, on rental basis. In 1970, assessee acquired another factory shed No. 36 in the same industrial estate. Thereafter, Directorate of Industries offered both sheds to the company on hire-purchase basis for 15 years commencing from 1st Sept., 1962. Assessee was also given an option under the scheme to buy the sheds on outright purchase basis. Assessee exercised its option to have outright purchase and got a rebate of Rs. 18,506 on hire-purchase price, on payment of interest for unexpired portion of the period of 15 years fixed under the scheme. Assessee-company was required to pay Rs. 1,77,607 inclusive of interest of Rs. 36,725 on the instalments of hire-purchase scheme relating to the period from 1st Sept., 1962, to 31st July, 1969. Total amount of interest paid by assessee was Rs. 73,449 for both the sheds. Assessee claimed deduction in respect of the same. The ITO disallowed the claim but no reason was indicated for such disallowance. Assessee preferred appeal before Appellate Assistant Commissioner (in short, ‘AAC’). The said authority asked ITO to indicate reasons on the basis of which the disallowance was made. The ITO indicated its reasons vide letter dt. 1st July, 1974. Assessee took the stand that disallowance was unjustified and under the hire-purchase scheme, allottees were given an option to buy sheds on outright purchase basis. The assessee-company opted to buy the sheds and got a rebate. But it was required to pay interest on the unexpired period of hire-purchase from 1st Sept., 1969 to 31st July, 1977. It had paid interest on the amount fixed for sale on the instalments under the hire-purchase scheme for the previous period, that is, 1st Sept., 1962 to 31st July, 1969. The amount, thus, paid in respect of unexpired interest of both the sheds was debitable to P&L a/c and was allowable as a deduction. Reliance was placed on decisions of the apex Court in Bombay Steam Navigation Co. (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC) : TC 16R.881 and State of Madras vs. G.J. Coelho (1964) 53 ITR 186 (SC) : TC 17R.1274. AAC accepted the stand of assessee and held that the amount of Rs. 73,449 was allowable as business expenditure. Matter was carried before the Tribunal by Revenue. The Tribunal upheld AAC’s conclusions inter alia, held as follows : “It was only after the allottees exercised the option and got the sheds on outright purchase basis as business assets that they were required to pay interest. The shifting of the basis to outright purchase was evidently necessary to carry on the business of the assessee more effectively.”

The application filed by Revenue under s. 256(1) of the Act was rejected and thereafter, being moved under s. 256(2) of the Act, this Court directed reference of the question, as set out above.

We have heard learned counsel for Revenue and learned counsel for assessee. Stand of Revenue is that though the Tribunal has recorded a finding that shifting of the basis to outright purchase was necessary to carry on the business more effectively, it did not indicate as to how that per se made the expenditure a revenue one, since what was ultimately acquired was an asset and the interest was clearly relatable to it. Learned counsel for the assessee, on the other hand, referred to G.J. Coelho’s case (supra) to contend that the Tribunal’s conclusions were in order. Through the assets, first of all, were offered on hire-purchase basis, later on, assessee exercised its option to have outright purchase and additional rebate was offered to assessee for effecting the purchase on outright basis. That being the position, according to him, Tribunal’s decision is irreversible.

The question whether an expenditure is ‘capital’ or ‘revenue’ in nature has come up before Courts on various occasions and the distinction has often been said to be very thin. It is not easy ordinarily to evolve a test for ascertaining whether in a given case expenditure is capital or revenue. It would depend upon the factual scenario for determination of question. To consider, whether expenditure is revenue expenditure what is required to be considered is the nature and the objects for which the expenditure incurred in the ordinary course of business. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business has to be viewed in the larger context of business necessity and expediency. If the outgoing or expenditure is so related to carrying on or conduct of the business, it has to be regarded as an integral part of profit-earning process and not for acquisition of an asset or a right of permanent character, the possession of which is a condition of carrying on the business and has to be accordingly treated. Where the expenditure is intrinsically linked with acquisition of an asset or an interest or right of permanent character, it has to be treated as capital in nature. Decision in G.J. Coelho’s case (supra) does not assist assessee in anyway. In that case, it was held that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business may be regarded as revenue expenditure. Though the Tribunal has held that shifting of business to outright purchase was necessary for carry on the business of assessee more effectively that per se did not make the expenditure a revenue expenditure. Similarly, grant of rebate is also not determinative of the character of the expenditure. The interest paid was in respect of asset, which was acquired on an outright basis that was intimately linked with the value of the asset. That determines the character of the expenditure and it was capital in nature. Tribunal was not justified in holding otherwise. Our answer to the question referred is, therefore, in negative, in favour of Revenue and against assessee.

7. This reference is disposed of.

[Citation : 249 ITR 319]