Income Tax Appellate Tribunal - Jaipur
Rajasthan Financial Corporation vs Deputy Commissioner Of Income Tax on 30 September, 1997
Equivalent citations: [1998]66ITD193(JP)
ORDER
R.K. Gupta, J.M.
1. This is an appeal by assessee against the order of CIT(A) pertaining to asst. yr. 1987-88. In first ground the assessee has objected the sustenance of addition of Rs. 85,77,737 on account of guarantee fees and commission payment. The AO found that the assessee has debited a sum of Rs. 85,77,737 on account of commission paid to State Government for raising additional working capital. The AO treated this expenditure as capital expenditure on the basis of asst. yr. 1986-87 wherein these types of expenses were held as capital in nature. During the asst. yr. 1986-87 the AO has mentioned that the transaction is of capital nature or is of revenue nature, the following distinctions have to be made, in respect of each transaction :
(1) Capital expenditure is incurred in acquiring, extending or improving a fixed asset, whereas the revenue expenditure is incurred in the normal course of business as a routine business expenditure.
(2) Capital expenditure produces benefits for several years whereas revenue expenditure is consumed within a previous year.
(3) Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.
In view of these observations the AO found that these are of capital nature and he disallowed the claim of assessee by treating these expenses as capital nature and made an addition of this amount in the income of the assessee.
2. It was argued before the CIT(A) that this amount paid for raising capital was a revenue expenditure and reliance was placed in case of India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC). Reliance was also placed on a decision of Supreme Court in Jeewan Lal (1929) Ltd. vs. CIT (1969) 74 ITR 753 (SC).
3. The CIT(A) considered these submissions and he did not find any favour to the assessee. He further observed in his order that his predecessor vide his order dt. 6th February, 1991 for asst. yrs. 1986-87 and 1988-89 in appeal Nos. 370 and 800/89-90 has confirmed these additions by following the judicial pronouncements reported in Mohan Meakin Breweries Ltd. vs. CIT (1979) 117 ITR 501 (HP) and Hindustan Gas & Industries Ltd. vs. CIT (1979) 117 ITR 549 (Cal) and Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 174 ITR 689 (AP). Therefore, he confirmed the order of the AO. Now the assessee is in appeal before us.
4. The learned counsel reiterated his contentions as made before the CIT(A). He further added that assessee is a Government company and registered under the State Financial Corporation Act, 1955. It was further argued that the only source of the company is through share capital and through bonds spread over in the market. It was further argued that to procure money through bonds the assessee has to pay the guarantee money in the shape of commission to the various parties mainly to State Government. It was further argued that upto asst. yr. 1984-85 the Department has accepted the assessee's claim. He further relied upon the State Financial Act, the copy of the same is placed in the paper-book and he drew our attention at p. 1 of the paper-book. It was also strongly argued that without procuring money the assessee was not able to do any business activity as the main business of the assessee is to finance the various industries in the State and if the industries are not financed by the Corporation then no business is possible for the industries. Therefore, this is revenue expenditure and be treated as revenue expenditure. The learned counsel further placed reliance on (1966) 60 ITR 52 (SC) (supra) and (1969) 74 ITR 753 (SC) (supra).
5. On the other hand, the learned Departmental Representative strongly relied upon the orders of the authorities below. Reliance was placed in the case of CIT vs. Mihir Textiles Ltd. (1994) 206 ITR 112 (Guj), of Gujarat High Court wherein it is held that the guarantee commission paid to the bank was a capital expenditure in nature. In reply to the same, the learned counsel submitted that the ratio of this case is entirely different and distinguishable as facts are different from the assessee's case.
6. We have heard the rival submissions and considered them carefully. We have also perused the material on record. Regarding this ground a limited issue is before us that whether the expenditure incurred for raising capital through bonds for business purposes are revenue in nature or capital in nature ? The Department has rejected the contention of the assessee regarding these expenses by treating the amounts as capital in nature.
First of all we would like to consider the ratio of these decisions as cited by both the parties.
6.1 In case of Mohan Meakin Breweries Ltd. vs. CIT (supra) wherein the Hon'ble Himachal Pradesh High Court has held that -
"By increasing its capital the company would be enabled to hold a more extensive business than it was holding before. Therefore, the increase in the limits of its authorised capital would not only increase its capital but would also result in an advantage of enduring nature. The advantage was so enduring that it would last till the company itself was alive."
In this case the Hon'ble High Court distinguished the ratio in the case of India Cements Ltd. vs. CIT (supra) wherein the Hon'ble apex Court has held that -
"A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases."
The Hon'ble HP High Court distinguished the case because the Hon'ble Supreme Court decided the case in case of debentures and not in case of share capital.
6.2 In case of Hindustan Gas and Industries vs. CIT (supra) the Hon'ble Calcutta High Court has held that :
"The expenditure incurred for payment of legal charges to solicitors on the issue of a prospectus for offering redeemable preference shares to the public and payment of underwriting commission and brokerage for the issue of the same is capital expenditure and not revenue expenditure."
In this case also the ratio of decision in (1966) 60 ITR 52 (SC) (supra) was also considered by the Hon'ble High Court. The ratio of the decision of Hon'ble Supreme Court was found distinguishable by the Hon'ble High Court because the ratio was regarding the debentures and not redeemable preference shares.
6.3 In case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (supra) wherein the Hon'ble Andhra Pradesh High Court has held that the expenditure of Rs. 20,82,944 made for raising additional capital by issuing ordinary shares are in the nature of capital expenditure and was not deductible. The Hon'ble High Court has also discussed the ratio of Supreme Court decision in the case of India Cements Ltd. (supra), wherein their Lordships have observed that :
"We are unable to see the relevance of this principle to the facts of the case before us. That was a case of raising a loan and not of raising additional capital. While raising a loan does not add to the capital base, raising of capital does"
6.4 In case of CIT vs. Mihir Textiles Ltd. (supra) wherein the Hon'ble Gujarat High Court has held that :
"When expenses are incurred in connection with the issue of bonus shares, such expenses are incurred by the company for its permanent structure and are directly connected with the acquisition of capital and an advantage of an enduring nature. Such expenses, therefore, are not deductible as revenue expenditure."
6.5 After perusing all these ratios, we find that all these decisions were given in case of raising share capital. Whereas in the present case the assessee has raised capital through bonds.
6.6 Now we will see the ratio of the decisions relied upon by the assessee.
6.7 In case of Jeewanlal (1929) Ltd. vs. CIT (supra) the Hon'ble Supreme Court has observed that :
"This Court in India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC), held that the expenditure incurred by the assessee for obtaining a loan from the Industrial Finance Corporation secured by a charge on its fixed assets was an admissible allowance under s. 10(2)(xv) of the IT Act, 1922, in the computation of total income. In the view of the Court 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."
By making these observations the Hon'ble Supreme Court held that the expenditure made by the assessee for the business purposes was revenue in nature and not capital in nature.
6.8 Now we will consider the ratio of decision of Hon'ble Supreme Court in the case of India Cements Ltd. vs. CIT (supra). Brief facts of that case were that the appellant obtained a loan of Rs. 40 lakhs from Industrial Finance Corporation of India 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. It was held by the Hon'ble Supreme Court 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 s. 10(2)(xv) of the Indian IT Act, 1922. 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.
6.9 It was further held that where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income.
6.10 In this case their Lordships have discussed the ratio of the decision in the case of Texas Land and Mortgage Co. vs. William Holtham (1894) 3 Tax Cases 255 which was followed by the Bombay High Court and regarding the decision of Bombay High Court the Hon'ble Supreme Court has observed at p. 61 :
"Rightly or wrongly, the English Courts have held that the amount obtained by the issue of debentures is capital employed within the meaning of the rule, but this does not give us any guidance in interpreting the words "capital expenditure" occurring in s. 10(2)(xv) of the Act. In our opinion, the Bombay High Court was wrong in relying on Texas Land and Mortgage Co. vs. William Holtham (supra). But we do not say that the Tata Iron and Steel Co. (1921) 1 ITC 28 case was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures.
6.11 The Hon'ble Supreme Court has also discussed the ratio of the case in Nagpur Electric Light and Power Co. vs. CIT 1931 6 ITC 28 wherein their Lordships have held that expenses for raising debenture loan required for changing the system of supplying current from DC to AC and for discharging a prior loan was not allowable as deduction of the company's assessable income. The Judicial Commissioner followed the case of Texas Land and Mortgage Co. vs. William Holtham (supra) and In re, Tata Iron and Steel Co. Ltd. (supra). It was further observed at p. 61 by the Hon'ble Judges that :
"After referring to these two cases, the only additional reason given was that 'apart from authority, it seems to us to stand to reason that money expended in obtaining capital must be treated as capital expenditure.' With great respect we must hold that this case was wrongly decided."
6.12 It was further observed by the Hon'ble Supreme Court at p. 61 as follow :
"This distinction may be valid in English law but we are unable to appreciate how the distinction is valid under the Indian IT Act. As the decision is mainly based on this distinction and relies, inter alia, on In re, Tata Iron and Steel Co. Ltd. and Nagpur Electric Light and Power Co. vs. CIT we must, with respect, hold that the case was wrongly decided."
6.13 After considering the ratio of Calcutta High Court decision in case of Sri Annapurna Cotton Mills Ltd. vs. CIT (1964) 54 ITR 592 (Cal) the Hon'ble Supreme Court has observed that :
"But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit of the business. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases."
It was further observed that :
"we have to decide the case on principle, and with respect it seems to us that he erred in treating the loan as equivalent to capital for the purpose of s. 10(2)(xv) of the Act."
6.14 After considering the ratio in case of S.F. Engineers vs. CIT (1965) 57 ITR 455 (Bom) the Bombay High Court has held that :
"the expenditure incurred for raising loan for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature."
6.15 It was further held by the Hon'ble Bombay High Court that :
"as 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 assets or raising any initial capital or for expansion of the assessee's business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure."
After considering the ratio of this decision, the Hon'ble Supreme Court has observed at p. 63 :
(a) the loan obtained is not an asset or advantage of an enduring nature;
(b) that the expenditure was made for securing the use of money for a certain period; and
(c) that it is irrelevant to consider the object with which the loan was obtained. Consequently in the circumstances of the case, the expenditure was revenue expenditure within s. 10(2)(xv).
6.16 After going through the ratio in detail, we find that the Hon'ble Supreme Court has distinguished all other cases by saying that there is a difference in capital raised in shape of shares and capital raised in shape of debentures which was not of enduring advantage.
6.17 In the present case the assessee raised capital by floating bonds. The bonds are of limited period and after maturity of the period, the assessee has to repay the bond amount along with profit, as agreed upon by the assessee. We also notice that assessee has shown an earning out of raised capital through bonds in P&L a/c. In all the cases the various High Courts have held that raising capital in shape of shares was of enduring advantage. Therefore, they cannot be treated as expenses of revenue in nature and held that the expenditure are capital in nature. In this case the facts are distinguishable. The assessee has obtained capital through bonds and not through shares. Bonds are like debentures i.e., they are loans to the assessee and, therefore, they are not of enduring advantage and the ratio of the decision in case of India Cements Ltd. (supra), is at the rescue of the assessee. In view of these facts and circumstances, we hold that the amount received through bonds was a stock-in-trade and expenditure incurred in obtaining this loan was revenue in nature. Therefore, the expenditure is deductible while computing the income of the assessee.
6.18 The break-up is not available before us that how much capital was raised through bonds and how much capital was raised through share capital. However, a figure of Rs. 75,64,486 is mentioned as expenditure on bonds in the order of the Tribunal in ITA Nos. 383 & 384/Jp/90, dt. 24th June, 1993, whereas in grounds of appeal before us, the figure is mentioned Rs. 85,77,737. Therefore, the AO is directed that after verification of the correct figure of expenditure made on account of bonds deduction should be allowed. This ground of the assessee is allowed.
7. In the next ground the assessee has objected the sustenance of addition of Rs. 69,760 on account of gratuity contribution. The assessee claimed deduction on account of gratuity fund. The AO disallowed the claim of the assessee as the conditions were not fulfilled as per rules of income-tax. The gratuity fund was not approved by the CIT till date. Therefore, he disallowed this claim.
8. The CIT(A) upheld the action of the AO by stating that similar additions were disallowed by his predecessor in his appellate order dt. 6th February, 1990, in Appeal No. 370/89-90 for asst. yr. 1986-87.
9. Now the assessee is before us. The learned counsel of the assessee submitted that assessee applied for approval before CIT(A) 20 years back but the Department has not taken any action on the application of the assessee. The learned counsel further submitted that similar deductions were disallowed by the AO during the asst. yr. 1994-95. The CIT(A) has allowed the appeal of the assessee and as per the information of the learned counsel the Department has not filed any appeal against that order.
10. On the other hand, the learned Departmental Representative relied upon the order of the CIT(A) and he further stated that no approval is given by the CIT till date, therefore, no deduction should be allowed. He further placed reliance on CIT vs. Sanghi Oxygen Co. (1993) 203 ITR 784 (Raj), Synobiotics Ltd. vs. CIT (1993) 203 ITR 162 (Guj) and CIT vs. Mumbai Khoka Utpadak Sahakari Kendra Ltd. (1995) 211 ITR 836 (Bom).
11. We have heard the rival submissions and considered them carefully. We have also perused the material on record and the ratio of decision cited by the learned Departmental Representative. One point which we noted that the learned counsel stated that the assessee applied for approval as per IT Rules before the CIT who has not passed any order till date. It is very surprising that even after such a long time having been elapsed, no action has been taken by the CIT in spite of several reminders by the assessee. We also notice that similar deductions were disallowed for asst. yr. 1994-95 against which the assessee preferred first appeal and CIT(A) allowed the appeal of the assessee by directing that the deduction should be allowed. As per the information, the Department has not filed any second appeal against the findings of the CIT(A). It means the Department has accepted the contention of the assessee. The ratio of the decision in case of CIT vs. Sanghi Oxygen Co. (supra) wherein it was held that the assessee had not paid any sum towards an approved gratuity fund created by him for the exclusive benefit of his employees under irrevocable trust and, therefore, a deduction under s. 36(1)(v) or under s. 28 could not be allowed. Similar is the ratio of decision in case of Synobiotics Ltd. vs. CIT (supra), wherein the Gujarat High Court has held that "Even if no provision is made by the assessee, s. 40A(7) of the IT Act, 1961, will apply and unless the conditions laid down therein are satisfied, the gratuity amount paid to employees will not be deductible".
12. After going through the ratio of decisions, we feel that the facts of the case are distinguishable as compared to the facts of the case before us. In the instant case the assessee paid amount in gratuity fund and the application for approval of the gratuity fund was filed long back and no reply whatsoever has been given by the CIT till date. In our considered view the only inference can be drawn that the CIT approved the gratuity fund as he has not rejected the application till date. In view of these facts and circumstances we hold that the amount deposited by the assessee is in approved gratuity fund and, therefore, the deduction is allowable. The AO is directed to allow deduction to the assessee. This ground of the assessee is allowed.
13. The next objection of the assessee is in regard to not allowing Rs. 3,01,127 on account of entertainment expenses. The ITO disallowed the claim of the assessee by stating that entertainment expenses under IT Act are not allowable as permissible deduction if they exceed prescribed limit given in s. 37(2A). The corporation had debited a sum of Rs. 3,01,127 which is added to the total income subject to deduction to be allowed while computing the total taxable income.
14. The CIT(A) dealt with this ground in para 7 of his order. The CIT(A) rejected the claim of the assessee by following his predecessor's order in Appeal No. 370/89-90 for asst. yr. 1986-87 where under the similar facts and circumstances the disallowance was sustained.
15. Before us, the learned counsel submitted that these are not in nature of entertainment. The expenses were made as customary and the expenses were made on tea, etc. for the staff members, customers, etc.
16. On the other hand, the learned Departmental Representative relied on the orders of the authorities below and he further placed reliance on Poonam Chand Prem Raj vs. CIT (1994) 207 ITR 895 (Raj), CIT vs. Alleppey Co. Ltd. (1994) 207 ITR 598 (Ker) and CIT vs. Central Distillery & Breweries Ltd. (1993) 202 ITR 45 (Del).
17. We have heard the rival submissions and considered them carefully. We have also perused the material on record. We find that the Tribunal in its order in ITA Nos. 383 & 384/Jp/90, dt. 24th June, 1993, has restored the matter to the file of the AO. In para 8 the Tribunal has observed that "Another issue which is taken up by the learned counsel for the assessee is regarding entertainment expenses. Although he agreed that these are entertainment expenses, yet he requested that amount spent on the staff and included in these expenses may be allowed. The AO may consider the claim of the assessee and decide the issue on merits after giving the assessee a reasonable opportunity of being heard and for providing necessary details".
By concurring with the decision of the Tribunal, we also restore the matter to the file of the AO on the same reasoning and the AO is directed to pass a fresh order after giving an opportunity to the assessee.
18. In the result, the appeal of the assessee is partly allowed.