B.J. Divan, C.J.
1. In this case, at the instance of the revenue, the following question has been referred to this court by the Tribunal:
'Whether, on the facts and in the circumstances of the case, the guarantee commission paid by the assessee in connection with the purchase of machinery is an admissible deduction under Section 37 of the Income-tax Act, 1961?'
2. The facts leading to this case are as follows :
3. We are concerned with the assessment year 1971-72 and the relevant year of account is the year ending June 30, 1970. The assessee is a public limited company carrying on business of manufacturing textiles. It imported machinery from two concerns in Japan and purchased machinery from M/s. Textool Co. Ltd., Coimbatore, all on deferred payment basis. The deferred payments were guaranteed by banks and insurance companies. The assessee-company agreed to pay guarantee commission to the guarantors and, in the relevant year of account, the assessee paid a sum of Rs. 10,242 as guarantee commission and claimed this amount as business expenditure in the year in question. The ITO disallowed it on the ground that the expenditure was of a capital nature. On appeal by the assessee the AAC allowed this item as revenue expenditure, following the decision of the Supreme Court in India Cements Ltd. v. CIT : [1966]60ITR52(SC) ,Thereafter the revenue took the matter in appeal to the Tribunal and the Tribunal upheld the decision of the AAC and dismissed the appeal. The Tribunal came to the conclusion that the expenditure that was claimed in this case can come only under Section 37 of the I.T. Act, 1961, as there is no specific provision for allowing such expenditure except under the omnibus provision contained in Section 37. Thereafter, at the instance of the revenue, the question set out hereinabove has been referred for our opinion.
4. We find that there are four decisions of the Supreme Court which require to be considered in the instant case. The first in point of time is State of Madras v. G. J. Coelho : [1964]53ITR186(SC) . The Supreme Court in that case was concerned with the provisions of Section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955, and Sikri J. (as he then was) pointed out at page 190 that Section 5(c) of that Act was word for word a reproduction of Section 10(2)(xv) of the Indian I.T. Act, 1922. Hence, the Supreme Court applied the principles culled out from decisions under Section 10(2)(xv) to the case before them. In that case, the respondent-assessee claimed that in computing his agricultural income from his plantations, the entire interest paid by him on monies borrowed for the purpose of purchasing plantation should be deducted as expenditure laid out or expended wholly and exclusively for the plantation under Section 5(e) of the Plantations Agricultural Income-tax Act. The Supreme Court held that the interest was not capital expenditure as no new asset was acquired or any enduring benefit obtained as a result of the payment of the interest. It was held that payment of interest was not a personal expenditure. The Supreme Court pointed out that the assessee had paid for the plantation for working it as a plantation and the payment of interest on the amount borrowed for the purchase of the plantation when the transaction of purchase and working of the plantation is viewed as an integrated whole, was so closely related to the plantation that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantation. After referring to the principles laid down by the earlier decision of the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) , Sikri J. observed at page 191 : [1964]53ITR186(SC)
'If we apply these principles to the facts of this case, the answer seems clear that the payment of interest is revenue expenditure. No new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commercial practice, payment of interest would not be termed as capital expenditure.'
5. This decision of the Supreme Court in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) was followed by the Supreme Court in Bombay Steam Navigation Co. (1953) Ltd. v. CIT : [1965]56ITR52(SC) . In that case, pursuantto a scheme of amalgamation between two shipping companies the assessee-company was incorporated on August 10, 1953, to take over certain passenger and ferry services carried on by one of the former companies. On August 12, 1953, the assessee-company took over assets, which were finally valued at Rs. 81,55,000 and agreed that the price was to be satisfied partly by allotment of Rs. 29,990 fully paid up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining from time to time was to carry simple interest at 6%. By a supplemental agreement the original agreement was modified to the effect that the balance shall be paid by the assessee-company and, until it was paid in full, the assessee-company shall pay simple interest at 6% per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all the movable properties of the assessee-company. During the relevant accounting years, the assessee paid interest on the balance outstanding and the question was whether the interest paid was allowable as a deduction under Section 10(2)(iii) or Section 10(2)(xv) of the Indian I.T. Act, 1922, in computing its profits. It was held that the interest paid by the assessee was business expenditure and was allowable as a deduction under Section 10(2)(xv). The transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the unpaid balance of the consideration for the assets acquired, had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting period. It was pointed out by the Supreme Court that the expenditure made under a transaction which was 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 laid out wholly or exclusively for the purpose of the business. The test laid down by the Supreme Court in this case was that in considering whether expenditure is revenue expenditure, the court has to consider the nature and the ordinary course of 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 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 permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure. Atp. 61 of the report, Shah J. observed (see : [1965]56ITR52(SC) ):
'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 for carrying on that business the assets with which the business was to be carried on were required. For obtaining these assets the assessee-company 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.'
6. Shah J. specifically pointed out that the source of liability could not be said to have arisen prior to the date on which the business of the assessee-company was commenced.
7. In India Cements Ltd. v. CIT : [1966]60ITR52(SC) , the entire case law on this branch of law was considered by the Supreme Court and the decision in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) was relied upon. In that particular case, the assessee had obtained a loan of Rs. 40,00,000 from the Industrial Finance Corporation secured by a charge on the fixed assets of the assessee. In connection with that loan the assessee 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 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 is, therefore, allowable as a deduction under Section 10(2)(xv) of the Indian I.T. 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 (emphasis* supplied). In connection with the earlier decision in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) , Sikri J., who delivered the judgment of the court, observed at page 58:
'This court held that the payment of interest was a revenue expenditure. It observed that 'no new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commercial practice payment of interest would not be termed as capital expenditure.' This court further held that the, expenditure was for the purpose of business. Mr. Desai tried to distinguish that case on the ground that what was at issue was interest on loan and not expenditure incurred for obtaining the loan. In our opinion, there is no justification for drawing this distinction in India. As observed by Lord Atkinson in Scottish North American Trust v. Farmer [1911] 5 TC 693 ' 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'.'
8. The underlined portion from the decision of the Supreme Court in India Cements case : [1966]60ITR52(SC) , makes it clear that if the expenditure is made for securing the use of money for a certain period, it is irrelevant to consider the object with which the loan was obtained. In view of this emphatic opinion of the Supreme Court, it is obvious that in the instant case the question we have to consider is the payment of interest for a particular loan and the object with which the loan was raised is irrelevant for considering whether the payment of interest is to be considered as revenue expenditure or business expenditure.
9. It is certainly true, as Mr. Parvatha Rao for the assessee urged before us, that in view of the three decisions in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) , Bombay Steam Navigation's case : [1965]56ITR52(SC) and India Cements' case : [1966]60ITR52(SC) , the principle which clearly emerges is that irrespective of the object for which the loan was raised, if interest is paid on a loan by a company and the loan is for the purpose of the business of the company, payment of interest will be treated as a revenue expenditure and not as capital expenditure.
10. In Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) , the Supreme Court held that interest paid before the commencement of the production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the actual cost of the assets to the assessee within the meaning of the expression in Section 10(5) of the Indian I.T. Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. In that particular case, on behalf of the revenue, the decision in India Cements' case : [1966]60ITR52(SC) was relied upon for the purpose of urging that payment of interest should not be taken into consideration for the purpose of computation of depreciation allowance or development rebate. In dealing with this contention Khanna J., after setting out the facts and the principles laid down in India Cements' case : [1966]60ITR52(SC) , observed (p. 178):
'This case too is of no assistance to the revenue. The appellant company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case.'
11. In view of this distinction between the principle laid down in Challapalli Sugars' case : [1975]98ITR167(SC) on the one hand and the India Cements' case : [1966]60ITR52(SC) , on the other, the question that we have to consider is from the point of view of interest paid on money borrowed by a running concern for the purpose of its business as distinguished from interest paid prior to the commencement of the business by a company which is newly formed. Again, the observations in Challapalli Sugars' case : [1975]98ITR167(SC) must be read in the light of the facts of that case. Khanna J. emphasises that the question before the Supreme Court in Challapalli Sugars' case was of including interest paid on loan before the commencement of production, in the actual cost of the plant for the purpose of computing depreciation allowance and development rebate. In the instant case, it appears from the papers produced before us that the assessee-company was a running concern prior to the date of buying the machinery for which the bank guarantee and insurance companies' guarantee were secured. In the light of the decisions of the Supreme Court in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) , India Cements Ltd.'s case : [1966]60ITR52(SC) and Bombay Steam Navigation Company's case : [1965]56ITR52(SC) it must be held that the amount of Rs. 10,242 paid to the guarantors as guarantee commission, was business expenditure and the case does not fall within the principle laid down by the Supreme Court in Challapalli Sugars Ltd.'s case : [1975]98ITR167(SC) . Reliance on the decision of the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. : [1971]79ITR48(Cal) , cannot avail the revenue. That decision of the Calcutta High Court on the face of it seems to help the revenue. In that case, the assessee had placed an order with a British concern for the purchase of machinery worth rupees 48 lakhs. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for the sum of rupees 48 lakhs for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. On these facts, the Calcutta High Court held that the amount of Rs. 36,000 should be treated as part of the actual cost to the assessee of the new machinery acquired by it for the purpose of allowance of development rebate in terms of Section 10(2)(vib)of the Indian I.T. Act, 1922. The learned judges of the Calcutta High Court relied upon the earlier decision of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. : [1966]61ITR799(Cal) . Against the decision of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. : [1966]61ITR799(Cal) an appeal was preferred to the Supreme Court. The Supreme Court heard that appeal along with the appeal from the decision of the Andhra Pradesh High Court in Challapalli Sugars Ltd. v. CIT : [1970]77ITR392(AP) , and the decision of the Supreme Court in Challapalli Sugars' case is found reported in : [1975]98ITR167(SC) . We have already indicated the distinction which has been made by the Supreme Court in Challapalli Sugars' case : [1975]98ITR167(SC) between a newly started company incurring certain expenses prior to the commencement of the business and a company borrowing money for the purposes of its business even though the object of incurring that loan may be for capital purposes and the Supreme Court has pointed out as indicated earlier that in such circumstances the object of the borrowing is irrelevant. In view of this statement of law, the decision in CIT v. Fort Gloster Industries Ltd. : [1971]79ITR48(Cal) cannot help the revenue.
12. In view of the three decisions of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) State of Madras v. G. J. Coelho : [1964]53ITR186(SC) and India Cements Ltd. v. CIT : [1966]60ITR52(SC) it is obvious that, in the instant case, since it is not a question of the assessee-company having borrowed money or entered into any arrangement prior to the commencement of the business, the principles laid down by the Supreme Court in the three cases just now referred to will apply. Hence, it must be held that the guarantee commission paid by the assessee in the year of account of the relevant assessment year, Rs. 10,242, must be treated as revenue expenditure and not as capital expenditure. Hence, this expenditure of Rs. 10,242 is an admissible deduction as an expenditure under Section 37(1) of the I.T. Act, 1961. We, therefore, answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. The Commissioner will pay costs of this reference to the assessee. Advocate's fee Rs. 250.