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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 977 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 978 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 979 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 981 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. 982 (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 986 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.                         ---------