2000 P T D 2691

[237 I T R 253]

[Bombay High Court (India)]

Before Dr. B. P. Saraf and Dr. Mrs. Pratibha Upasani, JJ

COMMISSIONER OF INCOME-TAX

Versus

GWALIOR RAYON SILK MANUFACTURING (WEAVING) CO. LTD.

Income-tax Reference No. 175 of 1984, decided on 03/11/1998.

(a) Income-tax---

----Capital or revenue expenditure ---Tests---Assessee engaged in manufacture of staple fibre for which wood pulp raw material ---Assessee purchasing private forests developing them and planting eucalyptus trees in them for extracting wood pulp---Certain amount of consideration paid immediately on purchase and balance to be paid in instalments---Interest to be paid on unpaid balance and unpaid price to be secured by Bank guarantee---Lands of assessee taken over by Government on nationalisation---Expenditure incurred up to nationalisation in planting and maintaining eucalyptus trees allowed as business loss---Transaction of acquisition of land closely related to carrying on of business and integral part of profit-earning process---Interest and Bank guarantee commission paid are allowable deduction---Indian Income Tax Act, 1961, S.37.

The assessee was engaged in manufacture of staple fibre. Wood pulp was the main taw material for the manufacture of staple fibre. The assessee decided to manufacture the same out of bamboo but there was no sustained availability of bamboo. As a substitute for bamboo the assessee decided to have a project for eucalyptus trees and with that end in view the assessee entered into an agreement with the Government for purchase of private forests 'or a gum of Rs.75 lakhs. The assessee paid Rs.15 lakhs initially and the balance was to be paid to instalments. Interest was to be paid on the unpaid balance. The unpaid price was also secured by a bank guarantee. The assessee developed the land into an industrial plantation and eucalyptus trees weave planted in some areas. However, the Government acquired the lands of the assessee as all private forests were nationalised. The expenditure incurred by the assessee up to nationalisation in planting and maintaining eucalyptus trees were allowed as business loss. The assessee claimed deduction as business expenditure of the interest on unpaid price of land and the bank guarantee commission. The Income-tax Officer disallowed the claim for deduction on the ground that the expenditure was incurred on agricultural activities and such expenditure could be claimed only against the plantation division, which was a distinct business. On appeal, the Appellate Assistant Commissioner held that the expenditure was incurred for establishing a source of regular supply of raw materials for the pulp factory which was related to the assessee's business end that the plantation division was an essential part of the business carried on by the assessee. The Appellate Assistant Commissioner, however, held that all expenditure incurred before the land became fit for us as an asset was capital expenditure. On further appeal, the Tribunal held that the purchase of private forests with standing trees was for the purpose of the staple fibre unit and, therefore, allowed deduction of interest and bank guarantee commission as revenue expenditure. On a reference:

Held, affirming the decision of the Tribunal, that the transaction of acquisition of land was closely related to the carrying on of the business of the assessee and was an integral part of the profit-earning process. It was not the acquisition of an asset as such. Therefore, the interest paid by the assessee was business expenditure and was deductible under section 37(1) of the Income Tax Act, 1961. The bank guarantee commission paid was also allowable as revenue expenditure.

Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC); Mombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT (1965) 56 ITR 52 (SC) and India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) applied.

Kinetic Engineering Ltd. v. CIT (1998) 233 ITR 762 (Bom.) and CIT v. Sivakami Mills Ltd. (1997) 227 ITR 465 (SC) fol.

The assessee purchased Government securities and sold the same immediately as they did not yield a good return, thereby incurring a loss in the transaction. The assessee claimed before the Income-tax Officer deduction of the loss on the ground that the Government securities were purchased by it under compulsion exerted by various Government authorities with whom, the assessee had to deal, as a condition for carrying yon of business. The Income-tax Officer rejected the claim of the assessee for deduction. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. On further appeal, the Tribunal held that Government officials often brought pressure op companies and induced them to buy Government securities and it was not normal for companies to make investment in such securities, that therefore, the investment was made only for purposes of business and hence the loss incurred on sale of such securities was deductible. On a reference:

Held, affirming the decision of the Tribunal that the loss incurred was an allowable deduction.

The assessee being engaged in manufacture of staple fibre was required to import spare parts. Due to the difficult foreign exchange situation, the Government had from time to time announced certain incentive schemes and allowed import of certain items under certain conditions. The incentive schemes were issued by the Textile Commissioner to the textile mills, which were exporting goods abroad. In respect of such exports, they were entitled to import entitlements and these import entitlements could be transferred freely. The assessee-company approached the Textile Commissioner for a clarification whether the import entitlements under that scheme could be transferred by a textile mill to rayon textile industries. The Commissioner agreed that such a transfer could be made. Thereafter, the assessee-company acquired import entitlements worth Rs.10 lakhs and necessary permission was granted by the Textile Commissioner to use these import entitlements for the purchase of the required spare parts for the textile machinery. In acquiring the import entitlements of Rs.10 lakhs, the assessee had to pay a premium of Rs.2, 95,000. However, when the assessee approached for permission to import spare parts, the Government advised it that except for a small amount towards import of reprocess spinners, it would not be possible for them to allow import of essential spares of rayon plant under that scheme. In view of this position, the import entitlements purchased by the assessee became useless. The assessee attempted to get the licences revalidated for a further period but was unsuccessful. The assessee, therefore, wrote off the premium of Rs.2, 95, 000 paid m the previous year relevant to the assessment year 1970-71. The assessee claimed deduction of this amount in computing its income. The Tribunal held that the amount of loss had to be allowed as deduction in the year in which the loss was written off. On a reference:

Held, affirming the decision of the Tribunal that the loss had to be allowed as deduction in the assessment year in which the loss was written off.

CIT v. Kusum Products Ltd. (1984) 149 ITR 250 (Cal.) and R.G.S. Industries v. CIT (1990) 183 ITR 31 (Gauhati) fol.

(b) Income-tax---

----Revenue expenditure---Loss---Purchase of Government securities---Sale of securities as same not yielding good return---On facts Tribunal holding investment in Government securities was for purposes of business---Loss deductible.

(c) Income-tax---

----Revenue expenditure ---Loss---Assessee by paying premium acquiring import entitlements for purchase of spare parts---Government not allowing import of spares except for a small amount---Import entitlements becoming useless as revalidating them unsuccessful---Premium paid for purchase of import entitlements written off as loss---Deduction allowable in year in which loss written off.

(d) Income-tax---

----Deduction---Export profit rebate---Export turnover---Computation of export turnover---Drawback of customs duty and refund of excise duty to be included---Premium gain on value of yarn entitlement not to be included--?Indian Finance Act, 1963, S.2(5)(i).

In computing the export turnover for purposes of export profit rebate, drawback of customs duty and refund of excise duty are to be included in the export turnover but premium gain on value of yarn entitlement is not to be included, for the assessment years 1966-67 and 1967-68.

Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT (1983) 143 ITR 590 (MP) and Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd v. CIT (1988) 173 ITR 126 (MP) fol.

?(e) Income-tax---

----Business---Expenditure---Deduction of interest under S.36(1)(iii) or under S.37 or under S.28---Not deductible---Indian Income-tax Act, 1961, Ss.28, 36(1)(iii) & 37.

Tribunal was justified in holding that the assessee was not entitled to deduction of interest amounting to Rs.23, 14, 872 for the assessment year 1966-67 and Rs.14,65,279 for the assessment year 1967-68 under, section 36(1)(iii) or under section 37 or under section 28 while computing,,,:,,, the income from business.

CIT v. Ghatkopar Estate and Finance Corporation (Ptv) Ltd. (1989) 177 ITR 222 (Bom.) and Ferro Alloys Corporation Ltd. v. CIT (1992) 196 ITR 406 (Bom.) fol.

(f) Income-tax---

----Business expenditure---Company---Surtax---Surtax paid under Companies (Profits) Surtax Act, 1964---Not deductible---Indian Income Tax Act, 1961, Ss.28 & 37---Indian Companies (Profits) Surtax Act, 1964.

Surtax paid under the Companies (Profits) Surtax Act, 1964, is not an allowable deduction under section 28 or section 37 of the Income Tax Act, 1961.

Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 (SC) fol.

Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) fol.

(h) Income-tax---

----Trading loss---Devaluation of rupee---Extra amount payable on account of devaluation of rupee---Is trading loss and is allowable deduction.

The extra amount payable on account of devaluation of rupee is a trading loss and is an allowable deduction.

CIT v. V. S. Dempo & Co. (Pvt.) Ltd. (1994) 206 ITR 291 (Bom.) fol.

CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj.) ref.

R. V. Desai with B. M. Chatterjee for the Commissioner.

S. E. Dastur with S. J. Mehta, R. H. Toprani and P. R. Toprani, instructed by 1. M. Munim and S. J. Mehta for the Assessee.

JUDGMENT

DR. B. P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following 16 questions of law to this Court for opinion. The first six questions are at the instance of the Revenue and the remaining ten at the instance of the assessee. The questions have been numbered consecutively for the sake of convenience:

At the instance of the Revenue:

"(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the amounts of Rs.4, 38, 842 and Rs.3, 62, 588 for the assessment years 1966-67 and 1967-63, respectively, on account of bank charges and interest on unpaid purchase price of the private forest land?

(2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in directing the Income-tax Officer to re-compute the capital employed in the industrial undertaking according to the decision of the Special Bench of Tribunal in the case of Amar Dye-Chem Ltd. by ignoring the liabilities', for the assessment years 1966-67 and 1967-68?

(3) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in directing the Income-tax Officer to add the cost of purchasing old looms for the purpose of depreciation in respect of the new machinery, for the assessment years 1966-67 and 1967-68?

(4) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the loss of Rs.18,358 and Rs.32,600 for the assessment years 1966-67 and 1967-68, respectively, which were incurred on the sale of the Government securities?

(5) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the rebate under section 2(5)(a)(i) of the relevant Finance Act should be calculated by including in the export turnover the amounts representing the drawback of customs duty, refund of excise duty and premium gain on value of yearn entitlement, for the assessment years 1966-67 and 1967-68?

(6) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the deduction of tax under section 2(5)(a)(ii) of the relevant Finance Act should be calculated by including in the total turnover the amounts representing the drawback .of customs duty, refund of excise duty and premium gain on value of gain entitlement, for the assessment years 1966-67 and 1967-68?

At the instance of the assessee:

(7) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee was not entitled to the deduction of interest amounting to Rs.23, 14, 872 for the assessment year 1966-67 and Rs.14, 65, 279 for the assessment year 1967-68 either under section 36(1)(iii) or under section 37 or under section 28 while computing the income from business?

(8) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provisions of Para. F of the First Schedule to the Finance Acts, 1966 and 1967, respectively would be applicable in taxing at the rate of 7.5 percent. the dividend declared during the accounting years, relevant to the assessment years 1966-67 and 1967-68?

(9) Whether the tax paid by the assessee as tax under the Companies (Profit) Surtax Act, 1964, was not a permissible deduction under section 37 or section 28 of the Act for the assessment years 1966-67 and 1967-68?

(10) Whether, on the facts and in the circumstances of the case, the Tribunal in computing the deduction under section 80-E ought to have reduced the profit by the amount of development rebate allowance, for the assessment years 1966-67 and 1967-68?

(11) Whether, on the materials placed before the Tribunal, the Appellate Tribunal was justified in upholding disallowance of the remuneration paid to the follovying ladies:

(1) Mrs. Taramati Mandelia,

(2) Mrs. Damayanti Buch,

(3) Mrs. G. E. Perry,

(4) Mrs. Premlata Shrimal, and

(5) Mrs. Savitridevi Saboo.

(12) Whether, on the facts and in the circumstances of the case, the Tribunal erred in disallowing the deduction of the further expenditure of Rs.16, 213 for 1966-67 and Rs.5, 020 for the year 1967-68 incurred by the assessee in the litigation initiated by it against M/s. Kutty Industrials for the preservation of its capital asset, namely, contractual right?

(13) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have allowed the deduction of legal expenses of Rs.11,000 incurred in connection with Bhiwani Textile Mills for the assessment 1966-67?

(14) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have allowed the deduction of Rs.26, 555 being a trading loss due to devaluation of the rupee?

(15) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that an amount of Rs.13, 250 deducted by the company from the deposits and/or salary of ex-employee for breach of the terms and conditions of the employment was liable to tax, for the assessment year 1966-67?

(16) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred by the assessee in acquiring import entitlements during the accounting year was not allowable as a business expenditure for the assessment year 1967-68?

So far as question No.2 is concerned, Mr. R. V. Desai, learned counsel for the Revenue, submits that in view of the order, dated October 1, 1986, of the Income-tax Appellate Tribunal on the miscellaneous application filed by the Revenue, this question has become infructuous. He, therefore, submits that question No.2 need not be answered. Question No.2 is, therefore, returned unanswered.

So far as question No.3 is concerned, Mr. Desai, learned counsel for the Revenue, stated before us that in view of the decision of the Madhya Pradesh High Court in Gwalior Rayon Silk Mfg. (Weg.) Co. Ltd. v. CIT (1988) 173 ITR 126, the Revenue does not want to press this question. It is, therefore, returned unanswered.

Mr. Desai, further submits that the controversy in questions Nos.5 and 6 stands concluded by the decision of the Madhya Pradesh High Court in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT (1983) 143 ITR 590, and the decision of this Court, dated March 17, 1993, in the assessee's own case in Income-tax Reference No.300 of 1979. The controversy pertaining to drawback of customs duty and refund of yarn entitlement stands concluded by the decision of the Madhya Pradesh High Court in the assessee's own case in Gwalior Rayon Silk Mfg. (Weg.) Co. Ltd. v. CIT (1988) 173 ITR 126, in favour of the assessee. The controversy whether premium gain on value of yarn entitlement should be included its the total turnover for the purposes of section 2(5)(a)(i) of the Finance Act, 1963, has been decided in favour of the Revenue by the decision, dated March 17, 1993, of this Court in the assessee's own case in Income-tax Reference No.300 of 1979. In view of the above, we decide the controversy in these questions pertaining to drawback of customs duty and refund of excise duty, in favour of the assessee and against the Revenue. However, so far as the controversy in regard to the inclusion of premium gain on value of yarn entitlement is concerned, we hold that it would not form part of the turnover under section 2(5)(a)(i) of the Finance Act, 1963. We, therefore, answer this question, so far as it pertains to premium gain on value of yarn entitlement in favour of the Revenue and against the assessee. Question Nos.5 and 6 are answered accordingly, partly in favour of the Revenue and partly in favour of the assessee.

So far as question No.7 which is referred at the instance of the assessee is concerned, learned counsel for the parties are agreed that the controversy therein stands concluded by the decision of this Court in CIT v. Ghatkopar Estate and Finance Corporation (P.) Ltd. (1989) 177 ITR 222 (Bom.) and Ferro Alloys Corporation Ltd. v. CIT (1992) 196 ITR 406, in favour of the Revenue. Following the same, we answer question No.7 in the affirmative, i.e., in favour of the Revenue and against the assessee.

So far as question No.8 is concerned in view of the decision of the Madhya Pradesh High Court in the assessee's own case reported in Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. CIT (1988) 173 ITR 126, this question is not pressed. It is, therefore, returned unanswered.

Learned counsel for the parties are agreed that the controversy in question No.9 stands concluded in favour of the Revenue by the decision of the Supreme Court in Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581. Following the wine, we answer question. No.9 in the affirmative, i.e., in favour of the Revenue and against the assessee.

Mr. Mehta, learned counsel for the assessee, stated before us that the assessee does not want to press questions Nos. 11, 12 and 13. He further submitted that in view of the smallness of the amount involved, he has also instructions not to press question No. 15. Questions Nos. 11,12,13 and 15 are, therefore, returned unanswered.

The controversy in question No. 10 is covered by the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84. Following the same, it is answered in the negative, i.e., in favour of the Revenue and against the assessee.

So far as question No.14 is concerned, learned counsel for the parties are agreed that the controversy therein is covered by the decision of this Court in CIT v. V. S. Dempo & Co. (Pvt.) Ltd. (1994) 206 ITR 291 and following the same it should be answered in the affirmative, i.e., in favour of the assessee and against the Revenue. We answer this question accordingly.

The only questions left for consideration are questions Nos. l and 4 which have been referred at the instance of the Revenue and question No. 16 which has been referred at the instance of the assessee.

Question No. 1:

The material facts for deciding the controversy in question No. l are as under:

The assessee-company has a unit for manufacture of staple fibre. This unit is established at Nagda in Madhya Pradesh. Wood pulp is the main raw material for the manufacture of staple fibre. The assessee proposed to manufacture the same out of bamboo and with that view entered into an agreement, dated May 3, 1958, with the Government of Kerala wherein the Government had assured regular supply of bamboo for the pulp division. However, on account of natural factors, the sustained availability of bamboo was eroded considerably. The assessee, therefore, established a research cell for experimenting with the use of substitutes for bamboo. As the assessee-company was of the opinion that eucalyptus wood would be a good substitute, it had decided to have a project from which eucalyptus would be made available regularly. For this purpose, it obtained permission from the Kerala Government for the purchase of 30,000 acres of private forests with standing trees for a sum of Rs.75 lakhs. The agreement for purchase was on the terms that the assessee would pay Rs.15 lakhs immediately and the balance Rs.60 lakhs in equal instalments of Rs.10 lakhs each. Interest was to be paid on the unpaid balances. The unpaid price was secured by a bank guarantee. On execution of the agreement for sale, the assessee debited the total cost of Rs.75 lakhs to land account and credited the outstanding price of - Rs.60 lakhs to vendors account in the accounts for the year ended March 31, 1966. The assessee-company had undertaken a phased programme of developing the land into an industrial plantation and had already completed planting of eucalyptus in about 10,000 acres. However, in the year 1971, the Government of Kerala passed an Ordinance by which all private forests including the area purchased by the, assessee were nationalised. Up to the date of nationalisation, the company had incurred an expenditure of Rs.53, 68, 571 in planting and maintaining the eucalyptus trees. This expenditure was shown under the head "Stock-in-trade-Eucalyptus Nursery and Plantation". On the nationalisation of the forests, the assessee did no receive any compensation. The total expenditure incurred including the purchase price amounted to Rs.1, 27, 73, 879. This loss was debited to the profit and loss account of the pulp division for the year ended March 31, 1972, relevant to the assessment year 1972-73. This amount was allowed by the Revenue as a business loss.

As observed earlier, the unpaid price of land carried interest. During the accounting year ended March 31, 1966, the interest accruing on the unpaid balances amounted to Rs.3, 92, 500. The assessee had also given bank guarantee. The bank guarantee commission payable in the year amounted to Rs.43, 342. For the accounting year ended March 31, 1967, the corresponding figure totaled was Rs.3, 62, 588. This amount was claimed as business expenditure. The Income-tax Officer did not allow the same as he was of the opinion that these expenditures were incurred by the assessee in respect of land on which agricultural activities had been carried out. The Income-tax Officer was also of the opinion that the plantation division constituted a separate and distinct business and the assessee could claim interest and bank charges against any income from the agricultural activities of the plantation division only. The assessee appealed to the Appellate Assistant Commissioner against the above order of the Income-tax Officer. The Appellate Assistant Commissioner held that the expenditure incurred was for establishing a source of regular supply of raw materials for the pulp factory and, therefore, it had to be held to relate to the assessee's business. He also held that the plantation division did not carry on any independent activity and it was an essential part of the business carried on by the assessee. " He was, however, of the opinion that the land in question had remained in a state unfit for use by the assessee for the purpose of business and the assessee was only experimenting and trying to raise a satisfactory specie of plant which would be used as raw material. Until success was achieved in that regard, it could not be said that the land was used for the purpose of the assessee's business. He, therefore, held that all expenses incurred before the land became fit for use as an asset in the assessee's business had to be held to be in the nature of capital expenditure. In support of this conclusion, he relied upon the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167. The assessee went in further appeal to the Income? tax Appellate Tribunal ("the Tribunal"). The contention of the assessee before the Tribunal was that the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 was not applicable to the case of the assessee. The assessee was carrying on business and the land was purchased by the assessee for the purposes of its business. It was, therefore, contended by the assessee that the interest payable on the unpaid price of the land and the bank guarantee commission payable in respect of borrowing were allowable as revenue deduction. The Tribunal accepted this contention of the assessee. The Tribunal held that the purchase of private forests with standing trees was for the purposes of the staple fibre unit of the assessee and hence interest and bank charges (bank guarantee commission) on the unpaid purchase price would have to be allowed as deduction. In arriving at the above conclusion, the Tribunal also took into account the fact that the ultimate loss suffered by the assessee on nationalisation of the forest land had been allowed by the Revenue as a business loss. The Tribunal, therefore, held that the assessee was entitled to claim deduction in respect of interest and bank charges (bank guarantee commission) for the two years under reference. Not satisfied with this finding of the Tribunal, the Revenue is before us by way of reference of question No. 1.

Mr. R. V. Desai, learned counsel for the Revenue, submits that the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 squarely applies to the facts of the present case and in that view of the matter, the Tribunal was not justified in reversing the findings of the Appellate Assistant Commissioner. It was contended by Mr. Desai that purchase of land was an acquisition of asset by the assessee and interest paid on the unpaid price of the land cannot be regarded as revenue expenditure. We have also heard Mr. S. E. Dastur, learned counsel for the assessee, who submits that the land in this case having been purchased by the assessee for the purpose of its running business, interest payable on the unpaid price thereof would be a revenue expenditure. Reliance is placed in support of this contention on the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) (Ptv) Ltd. v. CIT (1965) 56 ITR 52 and India Cements Ltd. v. CIT (1966) 60 ITR 52. Learned counsel submitted that even the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 supports the case of the assessee. It was pointed out that interest was not allowed as revenue expenditure in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) because it was paid in the period prior to the commencement of the business of the assessee. Learned counsel also relied upon the decision of the Gujarat High Court in CIT v. Alembic Glass Industries LTD. (1976) 103 ITR 715.

We have carefully considered the rival submission. Law is well?-settled that if a transaction of acquisition of an asset is closely related to the carrying on of the assessee's business, the interest paid on unpaid balance of the consideration for the assets acquired, in the normal course, has to be regarded as an expenditure for the purposes of business which was carried on in the account period. In other words, any 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, would be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business. As observed by the Supreme Court in Bombay Steam Navigation Co. (1953) (Pte) Ltd. v. CIT (1965) 56 ITR 52, in considering whether expenditure is revenue expenditure, the Court has to consider the nature and the ordinary course of the business and the objects for which the expenditure is incurred. 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. In Bombay Steam Navigation Co. (1953) (Pte) Ltd. v. CIT (1965) 56 ITR 52 (SC), controversy before the Supreme Court was whether interest paid by the assessee on the balance of consideration due from the assessee for the purchase of an asset to the vendor was a revenue expenditure. In that case, the assessee had agreed that the asset of the value of Rs.81, 55, 000 be taken over by the assessee-company from the vendor (Scindias). A part of the consideration was satisfied by allotment to the Scindias of 29.900 shares fully paid up face value of Rs.100 each in the share capital of the assessee-company and the balance was to be repaid with interest at the rate of six percent. per annum. The balance amount was also secured by hypothecation of all movable properties of assessee in favour or the transferor-Scindias. A question arose whether the interest paid by the assessee was a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922 (corresponding to section 37(1) of the Income Tax Act, 1961), which permits any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business or profession as a permissible allowance in the computation of profits or gains of the business or profession carried on in the year of account. The Supreme Court held that the payment of interest was expenditure which was incurred in that case after the commencement of the business of the assessee. It was in the capacity of the person carrying on business that the interest was paid. The Supreme Court observed that the transaction of acquisition of asset was closely related to the commencement and carrying on of the assessee's business. The Supreme Court held :

"The assessee-company had undoubtedly acquired the assets by pledging its credits. The assessee-company was formed for the purpose of taking over the business, which the Scindias had acquired and or carrying on that business the assets with which the business was to be carried on were required. For obtaining those assets the assessee-comapny rendered itself liable for a sum of Rs.51,56,000 and agreed to pay that sum with interest at the rate stipulated. The transaction of acquisition of the assets was closely related to the commencement and carrying on of the business. Interest paid on the amount remaining due must in the normal course be regarded, as expended for the purpose of the business, which was carried on in the year of account. There is no dispute that if interest was paid for the purpose of the business, it was laid out or expended wholly and exclusively for that purpose."

In India Cements Ltd. v. CIT (1966) 60 ITR 52, the Supreme Court examined the question whether the amount expended by the assessee in obtaining the loan or any part thereof was an allowable expenditure. In that case, the assessee had obtained a loan of Rs.40 lakhs from the Industrial Finance Corporation of India secured by a charge on its fixed assets. In connection therewith it incurred an expenditure of Rs.84,633 towards the stamp duty and claimed it as a business expenditure. The Supreme Court held that the amount spent was laid out or expended wholly and exclusively for the purpose of the assessee's business and was not in the nature of capital expenditure and was, therefore, allowable as a deduction in the computation of the income of the assessee. The Supreme Court observed (page 62):

"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 ...."

The Supreme Court summed up its opinion as under (page 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. "

The controversy in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) was regarding allowability of deduction of interest paid before the commencement of production on the amounts borrowed by the assessee for the acquisition and installation of plant and machinery. It was in that context that the Supreme Court held that in case the money is borrowed by a newly started company which is in process of constructing and erecting its plant, interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. The decision in Challapalli Sugars Ltd. v. CIT (1975) 98 :TR 167 (SC), in our opinion, is not in any way in conflict with the ratio of the decisions of the Supreme Court in Bombay Steam Navigation Co. (1953) (Pte) Ltd. v. CIT (1965) 56 ITR 52 and India Cements Ltd. v. CIT (1966) 60 ITR 52.

Applying the ratio of the above decision to the facts of the present case, we are of the clear opinion that the Tribunal was right in allowing expenditure incurred by the assessee by way of interest as a revenue expenditure. There is no dispute in this case about the fact that land with standing trees thereon was purchased by the assessee in a running business for a sum of Rs.75 lakhs. The assessee had paid a sum of Rs.15 lakhs immediately and the balance of Rs.60 lakhs was payable in six equal instalments of Rs.10 lakhs each. Interest was to be paid on the unpaid balance. The unpaid balance was secured by bank guarantee. It is clear from these facts that the transaction of acquisition of land was closely related to the carrying on of the business of the assessee and was an integral part of the profit earning process. It was not an acquisition of asset as such. The interest paid by the assessee in such a case was a business expenditure and was allowable as deduction under section 37(1) of the Act. The Tribunal, in our opinion, was right in allowing the same.

So far as the bank guarantee commission is concerned, the controversy is now covered by the decision of this Court, dated July 23, 1997, in Income-tax Reference No.231 of 1995 (Kinetic Engineering Ltd. v. CIT (1998) 233 ITR 762) and the decision of the Supreme Court in CIT v. Sivakami Mills Ltd. (1997) 227 ITR 465. It is now well-settled that bank guarantee charges paid to the bank is a revenue expenditure and is an allowable deduction in computing the total income of the assessee.

In view of the above discussion, question No. l is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

Question No.4:

The controversy in this question relates to allowability of deduction of the loss incurred by the assessee on the sale of Government securities. The material facts giving rise to this question are as follows:

The assessee had purchased certain Government securities. They were sold during the accounting year under consideration. On sale, the assessee had incurred a loss of Rs. 32,600, in the staple fibre division and Rs.18, 358 in the pulp division in the accounting year ended March 31, 1966. In the next year, the loss amounted to Rs.77, 857. The assessee-claimed this loss as an allowable deduction in the computation of its income. The contention of the assessee before the Income-tax Officer was that the Government securities were purchased by them under compulsion exerted by various Government authorities with whom the company had to deal. Since the Government securities did not yield a good return, they were sold off immediately. According to the assessee, the purchase of Government securities was only to satisfy the Governmental authorities. The claim of the assessee was rejected by the Income-tax Officer and the Appellate Assistant Commissioner on the ground that there was no evidence to show that the assessee was compelled to purchase the Government securities as a condition for carrying on of business. On further appeal, the Tribunal accepted the contention of the assessee. The Tribunal took note of the fact that the Government officials do bring pressure on companies and induce them to buy Government securities and that it was not normal for companies to make investment in such securities. In the light of the facts and circumstances of the case, the Tribunal arrived at a conclusion that the investment in the Government securities was made by the assessee only for the purpose of business. It was on the basis of this finding that the Tribunal allowed deduction on account of loss suffered by the assessee on the sale of Government securities.

We have heard Mr. Desai, learned counsel for the Revenue, who fairly stated before us that in view of the finding recorded by the Tribunal which had not been challenged by the Revenue as perverse, the decision of the Tribunal cannot be seriously challenged by the Revenue. In view of the above, we answer question No.4 in the affirmative, i.e., in favour of the assessee and against the Revenue.

Question No. 16

The controversy in question No.16 pertains to disallowance of the claim of the assessee for deduction of Rs.2, 95,000 as expenditure in respect of the invalidated import entitlements. The material facts are as follows:

The assessee is engaged in manufacture of staple fibre and for this purpose it was required to import spare parts. Due to the difficult foreign exchange situation, the Government had from time to time announced certain incentive schemes and allowed import on certain items under certain conditions. The incentive schemes were issued by the Textile Commissioner to the textile mills, which were exporting goods abroad. In respect of such exports, they were entitled to import entitlements and these import entitlements could be transferred freely. The assesses-company approached the Textile Commissioner for a clarification whether the import entitlements under that scheme could be transferred by a textile mill to rayon textile industries. The Commissioner agreed that such a transfer could be made. Thereafter, the assesses-company acquired import entitlements worth Rs.10 lakhs and the necessary permission was granted by the Textile Commissioner to use these import entitlements for the purchase of the required spare parts for the textile machinery. In acquiring the import entitlements of Rs.10 lakhs, the assessee had to pay a premium of Rs.2, 95,000. However, when the assessee approached for permission to import spare parts, they ran into difficulties. The Government advised them that except for a small amount towards import of reprocess spinners, it would not be possible for them to allow import of essential spares of rayon plant under that scheme. In view of this position, the import entitlements purchased by the assessee became useless. The assessee attempted to get the licences revalidated for a further period but was unsuccessful. The assessee thereupon thought it fit to write off the premium of Rs.2, 95.000 paid in the previous year relevant to the assessment. year 1970-71. The assesses claimed deduction of this amount in computing its-income. There is no serious dispute about the fact that the amount is allowable as a deduction. The only controversy is about the year in which the deduction could be allowed. The Tribunal was of the opinion that even if this amount is to be allowed as deduction, it would be allowed in the year 1970-71 in which year it is written off and not in the assessment year. We have heard learned counsel for the parties. Mr. Dastur, learned counsel for the assessee, submits that the amount of Rs.2, 95,000 is an allowable deduction. He relied upon the decision of the Calcutta High Court in CIT v. Kusum Products Ltd. (1984) 149 ITR 250 and decision of the Gauhati High Court in R. G. S. Industries v. CIT (1990) 183 ITR 31 in support of his contention that the loss suffered by the assessee is allowable as deduction in the computation of its income. Mr. Desai, learned counsel for the Revenue, did not seriously dispute this part of the controversy. He only submitted that this amount can be allowed as a deduction only in the year in which it was written off. We have carefully considered the submissions of learned counsel for the parties. We are of the clear opinion that this amount of loss is allowable as a deduction in the assessment year 1970-71 in which it is written off. Question No. 16 is answered accordingly.

This reference is disposed of accordingly with no order as to costs.

M.B.A./11/FC

Reference disposed.