JEEWANLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) -IN this reference under section 66 (1) of the Income-tax Act, 1922 the short point to be decided is whether the expenditure incurred for securing loan under overdraft account is to be treated as revenue or capital expenditure. The assesses had incurred an expenditure of rs. 35,800/- for securing financial overdraft from a bank. The said amount comprised the following heads of expenditure; rs. 12,500/-paid to Manilal kothari as brokerage or commission for successfully negotiating with the bank for overdraft, rs. 11,500/-paid to M/s. Mackenzie Lyall and Co. and M/s. P. P. Shah as costs of valuation of the assets of the assesses to be hypothecated with the bank for overdraft, rs. 11,800/-cost of stamp purchase for deed of hypothecation. Rs. 35,800/-

(2.) THE relevant year of assessment is the year 1952-53 and the corresponding previous year ended on December 31, 1951. The Income-tax Officer refused to allow the said expenditure of Rs. 35,800/ - on the ground that it was capital in nature and, on appeal, the Appellate assistant Commissioner confirmed the order of the Income-tax Officer. On second appeal the Appellate tribunal held that the financial overdraft negotiated with the bank was definitely an advantage of an enduring character and, as such, it was capital in nature. The Tribunal, therefore, concluded that the said sum of Rs. 35,800/ - was incurred by the assesses to secure a capital asset and must, therefore, be regarded as the capital expenditure incurred once and for all. Thus the assessee's claim for deduction or allowance under section 10 (2) (xv) was rejected. On the facts and circumstances set out above the following question of law has been referred to this Hon'ble Court for opinion: "whether on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 35,800/- incurred by the assesses for the purpose of raising or securing overdraft facilities from the bank was an expenditure of a capital nature not allowable under section 10 (2) (xv) ?"

(3.) MR. S. R. Banerjee, learned counsel for the assesses has submitted before us that the said expenditure of Rs. 35,800/- has not been incurred for acquiring any asset or advantage of an enduring character and, as such, should have been allowed as deduction under section 10 (2) (xv ). He has urged the following grounds to substantiate his contention: (a) The true nature of overdraft facilities reveals that they comprise a short term loan repayable on demand, and they are incidental to the running of the company, and do not result in an advantage of an enduring character. He has relied upon a passage from Tannan's Banking Law and Practice (9th Edition) at page 259 to emphasis the fact that unlike cash credits which are long term loans, the overdraft facilities represent only short term loans repayable on demand. He has also referred us to Halsbury (Hailsham Edition) Vol. I, Art. 1388 and 1400 to show us that the intrinsic character of overdraft facilities secured by a deed of hypothecation, is repugnant to the concept of such loan being an asset or advantage of an enduring character. He has added that the true nature of such transaction has not been fully comprehended by the Income-tax authorities inasmuch as the Income-tax Officer has described the transaction as "financial overdraft arrangement", the Appellate assistant Commissioner as "bank overdraft representing capital loan", and the Tribunal as "advantage of an enduring character". (b) There are four primary facts which may be set out as follows: (i) The assesses is a joint stock public company carrying on industrial and manufacturing activities. (ii) The assesses has been incorporated in 1929. (iii) In 1950 the company has taken recourse to overdraft facilities. (iv) The loan has been secured as repayable on demand and on the basis of a deed of hypothecation.