Expenses on borrowings

53.1 General rule -
Expenditure incurred on raising a loan after setting up a business is a revenue expenditure. In determining the nature of expenditure (revenue or capital) incurred in obtaining a loan, it is irrelevant to consider the purpose of the loan - India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC).
53.2 Acquisition of business of another company
Where the assessee is formed for taking over another company’s business and on said acquisition, it pays part of purchase consideration by allotting shares and on balance of consideration outstanding it pays interest to other company, interest is deductible - Bombay Steam Navigation
Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC).
53.3
Payment of bank guarantee commission and expenditure incurred on obtaining letter of credit are capital expenditure - CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389 (Guj.).
53.4
Expenditure incurred on negotiating for overdraft facilities is an admissible deduction - Jeewanlal (1929) Ltd. v. CIT [1969] 74 ITR 753 (SC).
53.5
The registration expenses incurred for obtaining the loan was business expenditure - CIT v. Oswal Spinning and Weaving Mills Ltd. [1986] 160 ITR 426 (P&H)
Expenditure for stamp and registration charges for agreement with bank for overdraft facilities is allowable - Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT [1967] 63 ITR 376 (All.).
Where the assessee, a running concern, incurred certain registration expenses in obtaining loan for setting up a new venture, such expenses are allowable as revenue expenditure - CIT v. Oswal Spg. & Wvg. Mills Ltd. [1986] 160 ITR 426 (P&H).
The expenses incurred on stamps and amount paid to the bank as guarantee fee for obtaining loan from IDBI for purchase of new machinery are not allowable as revenue expenditure - CIT v. Abdul Karim Stone Kota [2002] 124 Taxman 612 (Raj.).
Stamp duty paid on debenture issue
53.6
Expenses incurred in connection with issue of rights shares, does not constitute revenue expenditure and is not deductible in computing the business income - CIT v. Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar.) [also refer CIT v. Motor Industries Co. Ltd. [1998] 229 ITR 137 (Kar.); CIT v. C.W.S. (India) Ltd. [2000] 242 ITR 429 (Ker.)]
53.7
The fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company - Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792 (SC) [also refer Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 (SC)].
The expenses which the assessee company incurred were for its permanent structure and were directly connected with the acquisition of capital and advantage of enduring nature. This expenditure cannot be said to be in the normal course of business. Capital of the company was augmented by increase of paid up share capital by the issue of bonus shares and the expenditure being in the capital field, it must be regarded as of capital nature. The entire expenditure being in connection with increase in the share capital must be regarded as capital in nature - Ahmedabad Manufacturing and Calico Pvt. Ltd. v. CIT [1986] 162 ITR 800 (Guj.).
Expenses incurred in connection with issue of bonus shares is revenue expenditure

53.8 Some relevant Circulars - i) Commitment charge payable by a party on the unused portion of the loan which has not been drawn, has to be taken as an expenditure laid out wholly and exclusively for the purposes of the business and, therefore, permissible as a revenue deduction u/s 37(1) - Circular No. 2-P(XI-6) [F. No.10/67/65-IT (A-I)], dtd. 23.8.1965.
ii) Incidental expenses incurred for raising other short-term loans from financial institutions by way of temporary accommodation or ordinary trading facilities can be allowed as deduction in computing the income from business subject to the following conditions:
a. the short-term loan is of a duration of not more than two years, and
b. the total amount of incidental expenses does not normally exceed 1% of the amount of the loan raised.
- Letter F. No. 32/6/62-IT(A-I), dtd. 16.1.1963 - CIT v. General Insurance Corporation of India [2002] 254 ITR 203 (Bom.). Fee paid to Registrar for expansion of capital base; bonus shares - Expenses on issue of rights shares - continues to be an item of deduction under section 37 of the Income-tax Act, even after the enactment of section 35D of the Income-tax Act - CIT v. Mahindra Ugine and Steel Co. Ltd. [2001] 250 ITR 696 (Bom.) Registration, stamp expenses incurred for obtaining the loan - Negotiating for overdraft facilities - Bank guarantee commission and expenditure on obtaining letter of credit - -