(a) Income-tax Act (XI of 1922)---

----S.10(2)(xvi)---Assessee company deriving its income from profits and gains from business and from house property---Payment to Bank in liquidation of the loan for the money borrowed for raising the capital for the building property was a capital expenditure not allowable deduction under S.10(2)(xvi) of the Act.

(b) Income-tax Act (XI of 1922)----

----S.10(2)(xvi)---Capital expenditure"---Definition---Payment made to liquidate the debt which was raised for capital of the business is capital expenditure.

Any expense incurred to preserve the capital assets by repayment of debt for the money borrowed for raising the capital assets is not a trading expense, rather it is a capital charge on the trustee. It is very difficult to precisely define what constitutes "Capital expenditure" and "Revenue expenditure". The nature of the expenditure is not the determinant factor in a given case as each factor is not decisive and it is the totality or the cumulative effect of all facts and circumstances that would afford the prime guiding factor. If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital, or income, or linked up with net sales, the outgoing in such a case would be of the nature of capital expenditure. In other words, where the amount is to be paid for the acquisition of an asset of enduring nature, it is settled that the amount is to be so paid by several small amounts or periodic instalments, the capital nature of the expenditure would not cease to be or alter into the nature of a revenue expenditure.

Hylam Ltd.'s case 87 ITR 310 (AP) and Praga Tools Ltd. v. CIT 123 ITR (AP) ref.

Fakir Abdul Mannan for Applicant.

Muhammad Moksudur Rahman for Respondent.

Date of hearing: 18th March, 1992.

JUDGMENT

A. M. MAHMUDUR RAHMAN, J: --This application under section 66(1) of the. Income-tax Act, 1922 is at the instance of the assessee raises the following questions for our decision:

(i) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal is correct in interpretation of provision of section 10(2)(xvi) of the Income-tax Act?

(ii) Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal is justified in disallowing the repayment of loan amounting to Tk. 1,37,500.

The assessee earned income, profits and gains from business and from house property. The assessee company submitted return of its income showing Tk.12,453.00 for the assessment year 1969-70. It showed net loss at Tk.1,29,463.00 as per profit and loss account. The assessee showed gross income from house property at Tk. 2,57,990.00 and claimed deduction of Tk.1,37,500 paid to the Sonali Bank in liquidation of its debt. The assessing officer allowed claim as admissible deduction in computing the total income from house property under section 9 of the Act. Subsequently the Inspecting Joint Commissioner of Taxes, Range-II, Dhaka (South) Zone, Dhaka in exercise of his power under section 34-A revised the assessment order relating to assessment of income from house property on the ground that allowances given by the assessee officer of Tk. 1,37,500, was erroneous and prejudicial to the interest of the Revenue. The Inspecting Joint Commissioner on consideration of the statement submitted before him and construing various clauses of the trust deed came to the conclusion that the assessee was not entitled to get deduction on account of repayment of loan to the bank under section 10(2)(xvi) and modified the assessment order on the reasoning that liability of settler in raising the fund by mortgaging the property cannot be treated as revenue expenditure and held that such liability is to be paid out of the capitalised profit and to be adjusted in the balance-sheet through reduction of liability. He also observed that no such liability was shown in the balance?sheet of the company. So finding, he disallowed the claim and computed the total taxable income at Tk. 2,19,916. The assessee preferred appeal against the order of the Inspecting Joint Commissioner before the Income Tax Appellate Headquarters Bench, Bangladesh, Dhaka. The Accountant Member of the tribunal delivered the judgment. The question No.l as formulated by the applicant is redundant as the decision and answer on question No.2 will govern what has been raised in question No.l.

2. Alhaj A.R. Bhuiyan, the settler, on 15th September, 1963 executed an instrument creating a trust vesting some immovable properties, described in the Schedule to the trust deed, and the running business carried on in the name of A.R. Bhuiyan & Co. with all its assets and liabilities including his personal liability for taking loan to raise the capital of the business by equitable mortgage of the property belonging to him with the object of avoiding future trouble in running the business and for management of his properties. The trust deed provided that after meeting the expenses of management and payment to the beneficiaries the trustees will create a Reserve fund with surplus money as per Article 17 of the trust deed. The trust property was not free from encumbrance and the trustees were directed to make monthly payment of Tk.12,500 from the income of the property till debt was liquidated. The Accountant Member on a detailed discussion of the contentions raised by both the assessee and the Revenue and in construing sections 9 and 10 as well as section 41(2) of the Income Tax Act came to the conclusion that the Inspecting Joint Commissioner of Taxes rightly disallowed the claim of the assessee with regard to payment of debt to the Sonali Bank.

Mr. Fakir Abdul Mannan contended that in view of the provision of trust deed directing the trustees to pay debt to the bank the assessing officer rightly allowed the claim in computing the total income of the assessee, as the said amount was paid in order to preserve the property of the trustee and tribunal was not justified in disallowing the claim of the assessee.

3. The assessee paid the aforesaid amount to liquidate the debt of the settler which was raised for the capital of the business. We find that the tribunal was justified to hold that any expense incurred to preserve the capital assets by repayment of debt for the money borrowed for raising the capital assets is not a trading expense, rather it is a capital charge on the trustee. It is very difficult to precisely define what constitutes "Capital expenditure" and "Revenue expenditure". The nature of the expenditure is not the determinant factor in a given case as each factor is not decisive and it is the totality or the cumulative effect of all facts and circumstances that would afford the prime guiding factor. If it is intrinsically a capital asset, it is, immaterial whether the price for it is paid once and for all, or periodically; or whether it is paid out of capital, or income, or linked up with net sales, the outgoing in such a case would be of the nature of capital expenditure. In other words, where the amount to be paid for the acquisition of an asset of enduring nature, it is settled that the amount is to be so paid by several small amounts or periodic instalments, the capital nature of the expenditure would not cease to be or alter into the nature of a revenue expenditure. This view finds support from the decisions in the case of Hylam Ltd., 87 ITR 310 (AP) and the case of Praga Toots Ltd. v. CIT 123 ITR (AP). Applying the aforesaid tests in the instant case we hold that the payment to the Sonali Bank in liquidation of the loan for the money borrowed for raising the capital for the building property is a capital expenditure and not a revenue expenditure and is not a deductible allowance under section 10(2) (xvi) of the Income-tax Act.

4. Mr. Fakir Abdul Mannan further contended that before the assessment for the assessment year under consideration such payments to the bank were allowed as allowable deduction. He further said that even after assessment year under consideration in subsequent assessment year such claim for deduction was allowed and as such the Tribunal was not justified in disallowing the claim. The contention is not correct inasmuch as each assessment year is an independent one and the principle of res judicata does not apply to the assessment of taxes under Income-tax Act.

For the aforesaid discussion, we answer the question No.l in the affirmative and against the assessee.

M.BA./2434/T???????????????????????????????????????????????????????????????????????????????????? Question answered.