Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX
Vs.
RESPONDENT:
THE MYSORE SUGAR CO., LTD.
DATE OF JUDGMENT:
03/05/1962
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
DAS, S.K.
SARKAR, A.K.
DAYAL, RAGHUBAR
CITATION:
1967 AIR 723 1963 SCR (2) 976
ACT:
Income Tax--Deduction--Expenditure by way of investment and
expenditure in the course of business--Distinction--Test
applicable--Indian Income-Tax Act, 1922 (11 of 1922), ss. 1
(1), (2) (xi), 2 (xv).
HEADNOTE:
The assesses Company used to purchase sugarcane from the
sugarcane growers to prepare sugar in its factory, in which
a very large percentage of shares was owned by the
Government of Mysore. As a part of its business operation
it entered into written agreements with the sugarcane
growers and advanced them seedlings, fertilizers, and also
cash. The cane growers entered into these agreements known
as "oppige" by which they agreed to sell sugarcane
exclusively to the assessee company at current market rates
and to have the
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advances adjusted towards the price. An account of each
"Oppigedar" was opened by the company. These agreements
were entered into for each crop.
In the year 1948-49 due to drought, the assessee company
could not work its mills and the "oppigedar" could not grow
or deliver the sugarcane and thus the advances made in the
year remainded unrecovered. The-Mysore Government realising
the hardship appointed a committee to investigate the matter
and make a report. The Committee recommended that the
assessee company should ex-gratia forgo some of its dues,
and in the year of account ending June 30, 1952, the company
waived its rights in respect of Rs. 2,87,422/-. The Company
claimed this as a deduction under s. 10 (2) (xi) and s. 10
(2) (xv) ’but the Income-Tax Officer declined to make the
deduction and the appeal before the Appellate Assistant
Commissioner also failed. The Tribunal was also of the
opinion that these advances were made to ensure to steady
supply of quality surgarcane and the loss, if any, must be
taken to represent a capital loss and not a trading loss but
the tribunal referred the. question thereby arising for the
decision of the High Court. The High Court relying upon a
decision of this Court in Badridas Daga v. Commissioner of
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Income-tax held, that the expenditure was not in the nature
of a capital expenditure, but was a revenue expenditure and
that this amount was deductible in computing. the profits of
the business for the year in question under s. 10 (1) of the
Income-tax Act.
The central point for decision in the present case, was
whether the money which was given up, represented a loss of
capital or must be treated as a revenue, expenditure.
Held, that s. 10 (2) does not deal exhaustively with the
deductions which must be made to arrive at the true profits
and gains. It mentions certain deductions in cls. (i) to
(xiv) and if an expenditure comes within any of the
emunerated classes of allowance the case has to be
considered under the appropriate class. Clause (xv) is a
general clause which allows an expenditure to be deducted,
if laid out or expended wholly and exclusively for the
purpose of such business, which is not in the nature of
capital expenditure or personal expenses of the assessee.
But the general scheme of the section is that profits or
gains must be calculated after deducting outgoings
reasonably attributable as business expenditure but not so
as to deduct any part of a capital expenditure.
To find out whether an. expenditure is on the capital
account or on revenue, one must consider the expenditure in
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relation to the business. The questions to consider in this
connection are for what was the money laid out ? Was it to
acquire an asset of an enduring nature for the benefit of
the business, or was it an outgoing in the doing of business
? If money be lost in the first circumstance it, is a loss
of capital, but it lost in the second circumstance, it is a
revenue loss. In the first, it bears the character of an
investment, but in the second, it bears the character of
current expenses.
English Crown Spelter Co. Ltd. v. Baker, (1908) 5 T. C. 327,
Charles Marsden & Sons Ltd. v. The Commissioners of Inland
Revenue, (1919) 12 T. C. 217 and Raid’s Brewery Co. Ltd. v.
Nale, (1691) 3 T. C. 273, applied.
Badridas Daga v. Commissioner of Income-tax (1959) S. C. R.
690 and Commissioner of Income-tax v. Chitnavis, (1932) L. R
: 59 I. A. 290, referred to.
Held, in this case, there was hardly any element of
investment which contemplate more than payment of advance
price. The resulting loss to the assessee company was just
as much a loss on the revenue side as would have been, if it
had paid for the ready crop which was not delivered,
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 435 of 1961.
Appeal from the order dated September 7, 1959, of the High
Court of Mysore at Bangalore, in Income-tax Referred case
No. 2 of 1955.
C. K. Daphtary, Solicitor General of India, N. D.
Karkhanis, R. H. Dhebar, and P. D. Menon, for the appellant
A.V. Viswanatha Sastri and K. B. Chaudhuri, for the
respondent.
1962. May 3. The Judgment of the Court was delivered by
HIDAYATULLAH, J.-This appeal by the Commissioner of Income-
tax, Mysore, on a certificate granted under a. 66A of the
Indian Income-tax Act, is directed against a judgment of the
High Court of Mysore dated September 7, 1959, by which the
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following question referred by the Income-tax Appellate
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Tribunal, Madras Bench, was answered in favour of the
respondent :
"Whether there are materials for the tribunal
to hold that the sum of Rs. 2,87,422/aforesaid
represents a loss of capital."
Originally two question were referred, but with the second
question we are not now concerned. The respondent is a
limited liability Company called the Mysore Sugar Co. Ltd.,
in which a very large percentage of shares is owned by the
Government of Mysore. We shall refer to the respondent as
the assessee Company.
The asseesee Company purchases sugarcane from the
sugarcane,growers, and crashes them in its factory to
prepare sugar. As a part of its business operations, it
enters into agreement with the sugarcane growers, who are
known locally as "Oppigddars" and advances them sugarcane
seedlings, fertilisers and also cash. The Oppigedars enter
into a written agreement called the "Oppige", by which they
agree to sell sugarcane exclusively to the assessee Company
at current market rates and to have the advances adjusted
towards the price of sugarcane, agreeing to pay interest in
the meantime. For this purpose, an account of each
Oppigeddar is opened. by the assessee Company. A crop of
sugarcane takes about 18 months to nature, and these
agreements take place at the harvest season each year, in
preparation for the next crop.
In the year 1948-49 due to drought, the assessee Company
could not work its sugar mills and the Oppigedars could not
grow or deliver the sugarcane. The advances made in 1948-49
thus remained unrecovered, because they could only be
recovered by the supply of sugarcane to the assessee
Company. The Mysore Government realising the hardship
appointed
980
a Committee to investigate the matter and to make a report
and recommendations. This report was made by the Committee
on July 27, 1950, and the whole of the report has been
printed in the record of this case. The Oppige bond is not
printed, perhaps because it was in Kaunada, but the
substance of the terms is given by the Committee and the
above description fairly represents its nature. The Com-
mittee recommended that the assessee Company should ex
gratia forego some of its dues, and in the year of
account*ending June 30, 1952, the Company waived its rights
in respect of Rs. 2,87,422/The Company claimed this is a
deduction under ss. 10 (3) (xi) and 10 (2) (xv) of the
Indian Incometax Act. The Income-tax Officer declined to
make the deduction, because, in his opinion this was neither
a trade debt nor even a bad debt but an ex gratia payment
almost like a gift. An appeal to the Appellate Assistant
Commissioner also failed. Before the Income-tax Appellate
Tribunal, Madras. Bench, these two arguments were again
raised, but were rejected, the Tribunal holding that the
payments were not with an eye to any commercial profit and
could not thus be said to have been made out of commercial
expediency, so as to attract s. 10 (2) (xv) of the Act. The
Tribunal also held that these were not bad debts, because
they were "’advances, pure and simple, not arising out of
sales" and did not contribute to the profits of the
business. From the order of reference, it appears that the
Appellate Tribunal was also of the opinion that these
advances were made to ensure a steady supply of quality
sugarcane, and that the loss, if any, must be taken to
represent a capital loss and not a trading loss.
The Appellate Tribunal, however, referred the question for
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the opinion of the High Court, and the High Court held that
the expenditure was not in the nature of a capital
expenditure, and was
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deductible as a revenue expenditure. It relied upon a
passage from Sempath Ayyangar’s Book on the Indian Income-
tax Law and on the decision of this Court in Badridas Daga
v. Commissioner of Incometax (1.), to hold that this amount
was deductible in computing the profits of the business for
the year in question under a. 10 (1) of the Income-tax Act.
The case has been argued before us both under s. 10 (1) and
s. 10 (2) (xv), though it appears that the case of the
assessee Company’ has changed from a. 10 (1) to s. 10
(2) .(xi) and s. 10 (2) (xv) from time to time. The
question, as propounded, seems to refer ss. 10 (2) (xv) and
10(1) and not to s. 10 (2) (xi), We, however, do not wish to
emphasise the nature of the question posed, because, in our
opinion, the central point to decide is whether the money
which was given up, represented a loss of capital, or must
be treated as a revenue expenditure.
The tax under the head "Business" is payable under is. 10 of
the Income-tax Act. That section provides by sub-s. (1)
that the tax shall be payable by an assessee under the head
"Profits and gains of business, etc." in respect of the
profits or gains of any business, etc. carried on by him.
Under sub-s. (2), these profits or gains are computed after
making certain allowances. Clause (xi) allows deduction of
bad and doubtful business debts. It provides that when the
assessee’s accounts in respect of any part of his business
are not kept on the cash basis, such sum, in respect of bad
and doubtful debts, due to the assessee in respect of that
part of his business is deductible but not exceeding the
amount actually written off as irrecoverable in the books of
the assessee. Clause
(1) (1959) S. C. R. 690.
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(xv) allows any expenditure not included in cls. (1) to
(xiv), which ;is not in the nature of capital expenditure or
personal expenses of the assessee, to be deducted, if laid
out or expended wholly and exclusively for the purpose of
such business, etc. The clauses expressly provide what can
be deducted; but the general scheme of the section is that
profits or gains must be calculated after deducting
outgoings reasonably attributable as business expenditure
but so as not to deduct any portion of an expenditure of a
capital nature. If an expenditure comes within any of the
enumerated classes of allowances, the case can be considered
under the appropriate class; but there may be an expenditure
which, though not exactly covered by any of the enumerated
classes, may have to be considered in finding out the true
assessable profits or gains. This was laid down by the
Privy Council in Commissioner of Income-tax v. Chitnavis (1)
and has been accepted by this Court. In other words, s. 10
(2) does not deal exhaustively with the deductions, which
must be made to arrive at the true profits and gains.
To find out whether an expenditure is on the capital account
or on revenue, one must consider the expenditure in relation
to the business. Since all payments reduce capital in the
ultimate analysis, one is apt I to consider a loss as
amounting to a loss of capital. But this is not true of all
losses, because losses in the running of the business cannot
be said to be of capital. The Questions to consider in this
connection are: for that was the money laid out? Was it to
acquire an asset of an enduring nature for the benefit of
the business, or was it an outgoing in the doing of the
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business? If money be lost in the first circumstance, it is
a loss of capital, but if lost in the second circumstance,
it is a revenue loss. In the first, it bears the
(1) (1932) L.R. 59 I.A. 290.
983
character of an investment, but in the second, to use a
commonly understood phrase, it bears the character of
current expenses.
This distinction is admirably brought out in some English
cases, which were cited at the Bar. We shall refer ’Only to
three of them. In English Crown Spelter Co. Ltd v. Baker
0), the English Crown Spelter Co. carried on the business of
zinc smelting for which it required large quantities of
’blende’. To get supplies of blende, a new Company called
the) Welsh Crown Spelter ’Company was formed, which
received-assistance from the English Company in the shape of
advances on loan. Later, the English Company was required
to write off pound 38,000 odd. The question arose
whether the advance could besaid to an investment of
capital, because if theywere, the English Company would
have no right to deduct the amount. If on the other hand,
it was money employed for the business it could be
deducted... Bray, J. who considered these questions,
observed:
"If this were an ordinary business transaction
of a contrary by which the Welsh Company were
to deliver certain trend, it may be at prices
to be settled hereafter, and that this was
really nothing more than an advance on account
of the price of that blend, there "would be a
great deal to be said in favour of the
Appellants It is impossible to look upon this
as an ordinary business transaction of an
advance against goods to be delivered I can
come to no other conclusion but that this was
an investment of capital in the Welsh Company
and was not an ordinary trade transaction of
an advance against goods.........."
(1) (1908) 5 T.C. 327.
984
The second case, Charles Marsdon & Sons. Ltd v. The
Commissioners of Inland Revenue (1), is under the Excess
Profits Duty in England, and the question arose in the
following circumstances: an English Company carried on the
business of paper-making. To arrange for supplies of wood
pulp, it entered into an agreement with a Canadian Company
for supply of 3000 tons per year between 1917-1927. The
English Company made an advance of E. 30,000 against future
deliveries to be recouped at the rate of E. I per ton
delivered. The Canadian Company was to pay interest in the
meantime. Later, the importation of wood pulp was stopped,
and the Canadian Company (appropriately called the Ha Ha
Company) neither delivered the pulp nor returned the money.
Bowlatt, J. held this to be a capital expenditure not admi-
ssible as a deduction. He-was of opinion that the payment
was not an advance payment for goods, observing that no one
pays for goods ten years in advance, and that it was a
venture to establish a source and money was adventured as
capital.
The last case, to which we need refer to illustrate the
distinction made in such cases is Reid’s Brewery Co. Ltd v.
Nale (2). The Brewery Company there carried on, in addition
to the business of a brewery, a business of bankers and
money lenders making loans and advances to their customers.
This helped the customers in pushing sales of the product of
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the Brewery Company. Certain sums had to be written off,
and the amount was held to be deductible. Pollock, B, said:
"of course, if it be capital invested, then it
comes within the express provision of the
Income Tax Act, that no deduction is to be
X X
made on that account"-
(1) (1919) T. T.C. 217.
(2) (1891) 3 T.C. 279.
985
but held that:
" .......no person who is ’acquainted with the
habits of business ,loan doubt that this is
not Capital invested. What it is, is this.
It is capital used by the Appellants but used
only in the sense that all money which is laid
out by persons who are traders, whether it be
in the purchase of goods be they traders
along, whether it be in the purchase of raw
material be they manufacturers.- or in the
case of money lenders, be they pawnbrokers or
money lenders, whether it be money lent in the
course of their trade, it is used and it comes
out of capital, but it is not an investment in
the ordinary sense of the word."
It was thus held to be a use of money in the course of the
Company’s business, and not an investment of capital at all.
These cases illustrate the distinction between an
expenditure by way of investment and an expenditure in the
course of business, which we have described as current
expenditure. The first may truly be regarded as on the
capital side but not the second. Applying this test to this
simple case, it is quite obvious which it is. The amount
was an advanced against price of one crop. The Oppigedars
were to get the assistance not as an investment by the
assessee company in its agriculture, but only as an advance
payment of price. The amount, so far as the assessee
Company was concerned., represented the current expenditure
towards the purchase of sugarcane, and it makes .DO
difference that the sugarcane thus purchased was grown by
the Oppigedars with the seedlings, fertiliser and money
taken on account from the assessee Company. In so far as
the assessee Company was concerned, it was doing no more
than making a forward arrangement for the next
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year’s crop and paying an amount in advance out of the
price, so that the growing of the crop may not suffer due to
want of funds in the hands of the growers. There was hardly
any, element of investment which contemplates more than
payment of advance price. The resulting loss to the
assessee Company was just as much a loss on the revenue side
as would have been, if it had paid for the ready crop which
was not delivered.
In our judgment, the decision of the High Court is right.
The appeal fails, and is dismissed with costs.
Appeal dismissed.
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