http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: COMMISSIONER OF INCOME-TAX, U.P.

       Vs.

RESPONDENT: NAINITAL BANK LTD.

DATE OF JUDGMENT: 15/09/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  453            1967 SCR  (1) 348

ACT: Indian Income-tax Act, 1922, s. 10(2)(xv)-Jewellery  pledged with  bank  stolen-Bank  crediting  cost  of  jewellery   to constituents  accounts and setting off against  such  credit amounts   advanced  to  them-Amounts  so  credited   whether expenditure laid out for the purpose of the business.

HEADNOTE: Jewellery   pledged   with  the  respondent  bank   by   its constituents  was stolen by dacoits.  The bank  settled  the claims  of  the constituents by crediting the value  of  the jewellery against the amounts advanced to the  constituents. When the market value of the jewellery pledged exceeded  the amount  advanced the difference was paid by the bank to  the constituent;  where  the market value of the  jewellery  was less  than the amount advanced the difference was  recovered from  the constituent.  Under the adjustments made  in  this manner the Bank in the year 1952 made a total payment of Rs. 48,891 and     in the year 1953 the Bank paid Rs.  1,21,760. In the return for the    assessment year 1953-54 and 1954-55 the Bank claimed in computing its taxable    income      the amounts  so  paid  to  the  constituents.   The  claim   was disallowed  by the assessing and appellate  authorities  but the  ]High Court in reference under s. 66(2) of  the  Indian lncome-tax  Act,  1922  allowed  it.   The  Commissioner  of Income-tax appealed to this Court by certificate. It was urged on behalf of the appellant that (1) by  writing off  either  partially or wholly the amounts  due  from  its constituents in its books of account the Bank merely forbore to  enforce  its demand against its  constituents  and  such forbearance  was  not expenditure within the meaning  of  s. 10(2)(xv)  of  the Indian Income-tax Act, 1922, (2)  in  any case the expenditure was not laid out wholly and exclusively for the purposes of the business since the bank was under no legal obligation to pay the cost of jewellery. HELD:     (i)   In   its  normal  meaning   the   expression "expenditure"  denotes " spending" or "paying out  or  away" I.e.,  something  that  goes  out  of  the  coffers  of  the assessee.  A mere -liability to satisfy an obligation by  an assessee  is undoubtedly not "expenditure’; it is only  when he satisfies the obligation by delivery of cash or  property

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

or  by  settlement of accounts there  is  expenditure.   But expenditure does not necessarily involve actual delivery  or parting  with money or property.  If there are  crossclaims- one by the assessee against a stranger and the other by  the stranger against the assessee-and as a result of  accounting the  balance due only is paid, the amount which  is  debited against  the  assessee  in the settlement  of  accounts  may appropriately be termed expenditure within the meaning of a. 10(2) (xv). [35OF E-G] It could not be said that there was by the settlements  mere forbearance   to  recover  the  amounts  advanced   to   the constituents.    The  settlements  were  bilateral  :   each constituent admitted his liability to repay the amount which had been advanced to him, and the Bank admitted liability to pay  to the Constituent the value of the  jewellery  pledged with  it.   When  the  Bank  paid  to  the  constituent  the difference  between the value of the jewellery pledged  with it and the amount due by the constituent the Bank in  effect paid  the  value  of the jewellery against  payment  by  the constitu- 349 ent  of  the amount due by him.  In making payment  of  that difference  the Bank in truth laid out expenditure equal  to the value of the jewellery pledged. [351 A-C] (ii) The  Bank  could  have if so advised  taken  its  stand strictly  on its legal obligations and could have  recovered the amounts due by the constituents at the same time denying liability to make any compensation for the loss of jewellery pledged  with  it.  But such a stand might  very  well  have ruined its business, especially in the rural areas in  which it operated.  In choosing to compensate the constituents and thus   maintaining   their  goodwill  the  Bank   laid   out expenditure for the purpose of its business. [351 G-H]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 601 &  602 of 1965. Appeals from the judgment and decree dated April 12, 1962 of the Allahabad High Court in I.T.R. No. 484 of 1960. R.   M. Hazarnavis, R. H. Dhebar and R. N. Sachthey, for the appellant (in both the appeals). S.   T.  Desai,  B.  P.  Singh  and  Naunit  Lal,  for   the respondent (in both the appeals). - The Judgment of the Court was delivered by Shah,  J.  The Nainital Bank Ltd., has its  head  office  at Nainital  and a branch at Ramnagar.  Currency notes  of  the value  of Rs. 1,06,000/- and a large quantity  of  jewellery pledged  with  the Bank by its constituents were  stolen  by dacoits on June 11, 1951 from the premises of the Bank.  The Bank  claimed in its return for the assessment year  1952-53 the loss of currency notes as a permissible deduction.   The departmental  authorities  disallowed the  claim.   But  the claim  was allowed by the High Court of Allahabad  and  that order  was  confirmed  by this  Court  see  Commissioner  of Incometax v. Nainital Bank Ltd.(1). In  regard  to the loss of jewellery the  Bank  settled  the claims of the constituents who had pledged their  jewellery. The terms of settlement were these: when the market value of the  jewellery  pledged exceeded the  amount  advanced,  the difference was paid by the Bank to the constituent: when the market  value  of  the jewellery was less  than  the  amount advanced, the difference was recovered from the constituent. Under the adjustments made in this manner, in the year  1952

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

the  Bank made a total payment of Rs. 48,89 1 /- and in  the year  1953 the Bank paid Rs. 1,21,760.  In its  returns  for the assessment years 1953-54 and 1954-55 the Bank claimed in computing  its  taxable income the amounts so  paid  to  the constituents.  The income-tax Officer disallowed the  claims and  the  order  was confirmed in appeal  to  the  Appellate Assistant   Commissioner.   An  appeal  to  the   Income-tax Appellate Tribunal was also unsuccessful. 1.   [1965] 1 S.C.R. 340 :55 I.T.R. 707. 350 The Tribunal submitted a statement of the case and  referred the  following question to the High Court of  Allahabad  for opinion               "Whether  on  a true interpretation of  s.  10               (1), s. 10 (2) (xi) and s. 10 (2) (xv) of  the               Indian  Income-tax  Act, the  claims  for  the               losses  of Rs. 48,891/- and Rs.  1,21,760/were               permissible  in the assessment  years  1953-54               and 1954-55 respectively ?" Before  the High Court the claim for deduction under  s.  10 (2)  (xi)  was  abandoned by the Bank, and  the  High  Court negatived the claim of the Bank for deduction of the  amount under s. 10 (1).  But the High Court held that having regard to  the  true  nature  of  the  settlements  made  with  the constituents the amounts credited as the value of  jewellery against  the claim of the constituents for amounts  advanced to  them must be regarded as expenditure within the  meaning of  s.  10 (2) (xv) and since such credit was given  by  the Bank in the interest of its business, the amounts paid  were liable to be deducted in computing the taxable income.   The Commissioner  of  Income-tax has appealed  with  certificate granted  by the High Court under s. 66 A (2) of the  Income- tax Act. In  these  appeals counsel for the Commissioner  raised  two contentions: that by writing-off either partially or  wholly the  amounts  due  from its constituents  in  its  books  of account  the  Bank  did not expend or  lay  out  expenditure within the meaning of s. 10 (2) (xv); -and that in any event the expenditure was not laid out wholly and exclusively  for the  purposes  of the business of the Bank.  In  its  normal meaning the expression "expenditure" denotes "spending"  ,or "paying  out  or away" i.e. something that goes out  of  the coffers  of  the assessee.  A mere liability to  satisfy  an obligation by an assessee is undoubtedly not  "expenditure": it  is only when he satisfies the obligation by delivery  of cash  or  property  or by settlement of  accounts  there  is expenditure.   But expenditure does not necessarily  involve actual delivery or parting with money or property. If  there are cross claims-one by the assessee against a stranger  and the  other  by the stranger against the assessee  and  as  a result  of  accounting  the balance due only  is  paid,  the amount  which  is  debited  against  the  assessee  in   the settlement   of  accounts  may  ,appropriately   be   termed expenditure within the meaning of s. 10 (2) (xv). Counsel  for the Commissioner submitted that when  the  Bank advanced  a loan to its constituent it incurred  expenditure and  when  the Bank failed to recover under  an  arrangement with the constituent the amount due to it, there was  merely an act of forbearance to enforce the demand and such an  act of forbearance was not expenditure within the meaning of  s. 10 (2) (xv).  Mere forbearance to realize a claim, it may be accepted, is not expenditure within the meaning of the  Act; but we are not called upon to consider whether                             351 the  advances  made by the Bank to its constituents  may  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

certain circumstances constitute expenditure.  Nor can it be said  that there was by the settlements mere forbearance  to recover  the amount.  The settlements made by the Bank  with its  constituents  were  in  their  nature  bilateral:  each constituent admitted his liability to repay the amount which had been advanced to him, and the Bank admitted liability to pay  to the constituent the value of the  jewellery  pledged with  it.  When the Bank paid to the constituent the  diffe- rence between the value of the jewellery pledged with it and the  amount due by the constituent, the Bank in effect  paid the   value  of  the  jewellery  against  payment   by   the constituent of the amount due by him.  In making payment  of that difference the Bank in truth laid out expenditure equal to the value of the jewellery pledged. It was urged by the Commissioner that the Bank was under  no legal liability to pay to the constituents the value of  the jewellery  pledged with it.  It was said that the Bank  was, as  a  pledge,  a bailer of the jewellery  and  was  in  law required to take as much care of the pledged jewellery as  a person  of  ordinary  prudence  would  take  under   similar circumstances of his own jewellery of the same bulk quantity and  value, and the Bank having provided an adequate  number of watchmen, it was not liable for the loss of the  property pledged.   Granting that on proof that it had taken as  much care  of  the  jewellery pledged with it as  it  would  have taken,  if  it belonged to it, the Bank  could  enforce  its rights   and   recover  the  full  amount   due   from   the constituents,   the  question  still  remains   whether   in admitting liability for the value of the jewellery  pledged, the  Bank  laid  out  expenditure for  the  purpose  of  the business.  The question is not about the strict  enforcement of the legal rights and obligations between the Bank and its constituents.   The  sole question is whether  the  Bank  in incurring  the expenditure acted in the interest of and  for the  purpose  of  its business.  The  Bank  is  carrying  on banking  business  and  advances loans on  the  security  of jewellery.   The  credit  of  a  banking  business  is  very sensitive: it largely thrives upon the confidence which  its constituents  have  in  its management.   To  maintain  that confidence the management has often to make concessions  and thereby  to  preserve the goodwill of the business  and  its relations  with  the clientele.  The Bank could have  if  so advised  taken its stand strictly on its legal  obligations, and could have recovered the amounts due by the constituents at the same time denying liability to make any  compensation for the loss of jewellery pledged with it.  But such a stand might very well have ruined its business, especially in  the rural  areas in which to operated.  The Bank  had  evidently two courses open: to enforce sets rights strictly  according to  law,  and thereby to lose the goodwill it had  built  up among  the constituents, or to compensate  the  constituents for loss of their jewellery, and maintain its business 352 connections   and   goodwill.   In   choosing   the   second alternative, in our judgment, the Bank laid out  expenditure for   the   purpose  of  its  business.   Paying   to   the. constituents the price of the jewellery stolen in a  robbery or  a burglary was therefore expenditure for the purpose  of the  business.  There can be no doubt that  the  expenditure was wholly and exclusively in the interest of the  business. The expenditure was laid out for no other purpose. We   hold   accordingly  that  the  settlements   with   the constituents  and the consequent posting of entries  in  the books  of  account  cannot be  regarded  as  forbearance  to enforce the claim of the Bank to recover the loans advanced.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

The settlement consisted of two constituent  elements-paying by  the Bank of the value of the jewellery pledged  with  it against receipt from the constituent of the amount which was recoverable   by  the  Bank.   The  first  element  of   the transaction  would appropriately be deemed  expenditure  and such  expenditure  having been laid out for  protecting  and furthering the business of the Bank was properly  admissible under s.  10 (2) (xv) of the Income-tax Act, 1922. The  appeals  therefore fail and are dismissed  with  costs. There will be one hearing fee.                                      Appeals dismissed. G.C. 353