the Commissioner of Income-Tax v. the Mysore Sugar Co., Ltd.

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appea.l No. 435 of 1961. Appeal from the order dated September 7, 1959, of the High Court of Mysore at Bangalore, in Income-tax keferred case No. :l of 1955. C. K. Daphtary, SolicitOT General of India, N. D. Karkha11is, R. H. Dhebar, and P. D. Merwn, for the appellant. A. V. VistDanatha Sastri and K. R. Chaudhuri, for the respondent. 1962. May 3. The Judgment of the Court Wll.8 delivered by HIDA.YA.TULLAII, J.-Tbis appeal by the Commissioner of Income-tax, Mysore, on a certificate granted under s. d6A of the Indian Income-tax Aot, * is directed against a judgment of tile High Court of Mysore dated September 7, 1959, by which the v j 2 rs.o.~. following question referred by the Income-tax Appellate 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 ooncerned. The respondent is a limited liability Company ca.II· ed 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 assessee Company purchases sugarcane from the sugarcane growers, and orashes 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 loqally as "C>ppi,gedara" and advances them sugarcane seedlings, fertilisers and also cash. The O:jipigeJ/.JrB enter into a written agreement called the "0ppi,ge'', by which they agree to sell sugarcane exclullively 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 Oppigedar is opened by the assessee Company. A crop of sugarcane takes a.bout 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 -as11- essee Company could not work its sugar mill1 and the Oppigedara could not grow or deliver the sugarcane. The advances made in 1948-49 thus remained un· recovered, because they could only be recovered by the supply of sugarcane to the asse1&ee Company. The MJsore GOvernment realising the hardship appointed Comm"usioner Of Ir.come-tax MJ.10r1 Sugar Co., LJd. HirloJatulloh J, I O,mmi11iMW of lncomc-tox M.JSOft (~gar Co., /Jld. a Committee to inve&tigaw 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 hus been printed in the record of this Cl!Be.

The Oppige bond is not print~d, 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 Committee recommended that the 1188c88ee Company shoul:I ex gratia forego some of its dues, and in the year of account ending June 30, I 952, the Company waived its rights in respect of Re. 2,87,422/· The Company claimed this is'a deduction under BB. 10 (3) (xi) and 10 (2) (xv) of the Indian Incometax Aot. The Income-tax Officer declined to make the deduction, because, in hie opinion this was neither a tradt> debt nor even a bad debt but an ex gratia payment almost like a gift. An appeal to the App!lllate A88istant CommiBBioner 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 l'xpediency, so as to attract e. 10 (2) (xv) of th!! 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 Wllll also of the opinion that these advances were made to ensure a steady supply of quality sugarcane, and that the loee, if any, must be taken to represent a capital loee and not· a trading 1088. The Appellate Tribunal, however, referred the question for the opinion of the High Court, and the High Court held that the expenditure was not in the nature of a oapital expenditure, a.ud was I i 2 S.C.lt. SUl'REMK COUlt'l'

R.El'ORT8 deductible as a revenue expenditure. It relied upon a passage from Sempath Ayyangar's Book on the Indian Income·~x Law and on the decision of this Court in Badridas Daga v. Commissioner of · Incomet,ax (1), to hold that this amount was deductible in computing the profits of the business for the year in question under s. 10 (1) of the Inoome·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 assesses Company has changed from s. 10 (1) to s. 10 (2) (xi) and· s. 10 (2) (xvi) from time to' time. 'l'he question, as propounded, ll6ems 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 opin· ion, the central point to decide is whether t'1e money which was given up, represented a 1088 of capital, or must be treated as a revenue expenditure. The tax under the head.

"Business" is payable under 11, 10 of the lnoome,tax Act; That section provides by sub-s, ( 1) that the tax shall be payable by an aBBeBsee under the head "profits and gains of business, etc." in respect of the profits or gains of any busineliB, etc. carried on . by him. Under sub-s'. (:1.), these profits or gains a.re oompu~ ted after making certain allowanoes. · Cle.use (xi) allows deduction of bad and doubtful business debts. It provides that 'l'Vhen the asseesee's accounts in respect of any part of his b~ees are not kept on the cash basis, aooh sum, · in respect of bad and doubtful debts, doe to the al!Se&see .in respect of that part of ·his business ia deductible but not exceeding the amount actually written off as irrecoverable in the books of the aaseseee. Clause (fj 11959) S. C. R. 690. l 62 Commissionsr of lncrJmt--1'"' M11.or6 Sogar Oo., Lid. Hido,,.mllah J, WmmieaJonn of lmonu-lax M:1s011 Suga, Co., LU. (xv) allows any expenditure not included in els.

(i) to (:xiv), which is not in the nature of capital expenditure or peraonal expenses of the assesaee, 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 oalculated after deducting outgoings reasonably attributable aa 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 oan be considered under the appropriate olass; but there may be an expenditure which, though not e:xaotly covered by any of the enumerated olasses, may have to be considered in finding out tho true assessable profits or gaine. This was laid down by the Privy Council in Commi- 88ioner of lneome-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 muat consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all loBBes, because lo88e8 in the running of the business cannot be said to be of oaptial. The questions to consider in thia oonneotion are: for that was the money laid out? Was it to acquire an a.seet of an enduring nature for the benefit of the busineBS, or Wl\S it an outgoing in the doing of the 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 JOBS. In the first, it bears the 11) (1932) LR. S9 I.A. 290. I j 2 S.C.R. SU:::'REME COURT Rl"PORTS character of an investment, but in the second, to use a commonly understood phrase, it bears the - character of current expenses.

This distinction is odmirably brought out in some English cases, which were cited at the Bar. We shall refer only to three of them. In 'English Crown Speller Oo. LW, v. Baker (1), the English Crown Spelter Co. carried on the business of zinc smelting for whioh it required large quantities of •blende'. To get supplies of blende, a new Company ca.lied the Welsh Crown Spelter Comp&ny was formed, which received assistance from the .l!lnglish CQmpany in the shape of advances on loa.n. Later, the English 'Company was required to write oft' £ 38,000 odd. The question arose whether the advance could be so.id to an investment of capital, because if they were, the EngliRh Company would have no right to deduct the amount. If on the other hand, it wa.s money employed for the business, it could be deducted. Bray, J. who consi<!lered these questions, observed:

"If this were an ordinary business · transa.ctron of a contrary by whioh the Welsh Company were to deliver certain trend, it may be at prices to be settled hereafter, and tha.t this wa.s really nothing more than an advance on a~count of the price of tha.t blend, there "would be a great deal to be said ii;i favour of the Appellants ......... It is impossible to look upon this a.s a.n 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 oapita.l in the Welsh Company and was not an ordinary trade transaction of an advance age.inst goods ......... " {I) (1908) 5 T.C. S27. 196t Commissioner of lncorru .. tax MyaOTeSug~r Co., Ltd. H iia,atu/lah J. I95r C;mmis8/0tld' oJ Jricomt•lox Myso'• Sui., Co., LU. HidaJ«uiloA J. The second case, Oharles MarBflon &: Sons. Ltd v. The CommiBSionerB of Inland Revenue ( 1), is under the Excess Profits Doty in England, and the question a.rose in the following circumstances: an Engli.l!h Company carried on the busineBB of paper-ma.king.

To arrange for supplit·s of wood pulp, it entered into a.n agreement with a. Canadian Company for supply of 3000 tons per year between 1917-1927. The English Company made an advance of£. 30,000 against future deliveries to be recouped at the rate of£. I per ton delivered. fhe Canadian Company was to pa.y interest in the meantime. Later, the importation of wood pulp wa.s ~topped, a.nd the Canadian Company (appropriately called the Ha ! Ha.! Company) neither delivered the pulp nor returned the money. Bowlatt, J. held this to be a. capita.I expenditure not admissible as a deduction. He wa.s of opinion that the payment was not an advance payment for goods. observing that no one pays for goods ten yeari in advance, a.nd that it was a. venture to establish a source and money was adventured as capital. 'l he la.st case, to which we neod refer to illustrate the distinction ma.de in each cases is Reid's Brewery Co. Ltd v. Nale <').

The Brcw.,ry 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 the BrewP.ry Comp~ny. Certain eums had to be written off, and the amount was held to be deductible. l'ollock, 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 made on that account";· (I) (1919) I T.C. 217. (l) 11891) 3 TC. 27•. 2 S.C.R. but held ~hat: " .. ~ .... no person wlio is acquainted with the ~abits of b11sines11 "oa.n doubt that this is not capital invested. What it is, is this.

It is capital used bY the Appellants but _use.d only in the sense that all money which is laicl out by persons who are traders, whether it be in the purchase of goods be they trad· era along, whether it be in the purchase of raw material be they manufacturers, o: in the case of money lenders, be they pawn· brokers 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 ca:nital 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 ·or one crop.

The Oppigedarswere t;o get the assistance not as an investment by the asaessee company in its agricul· ture, but only as an advance payment of price. The amount, so far as the assessee Company was concerned, repreiiented · the current expenditure towards the pilrchase of ~garcane, and it makes n.o difference that the sugaroa.ne :thus purchased was grown by tho · Oppigedara with the · seedliiigs, fertiliser and ~oney taken on acoolillt from the asaessee 9ompany. In BO far as. the asseBBee Compa.ny was oonoemed, it was doing no more than making. a forward' arrangement for the next , J98t Commis~ioner of lncom1-loN MJsOf6 Sn.ear Ca., Lid. -- Hidqyolullah J. Commi•siontr of J ntom~·kix JlylOf't SU?Gr Co., Ltd. ll'ilaJ•lullah J. J96t Ma.13. SUPREME OOURT REPOH.lS [1963) year's orop 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 loes to the ass~esee Company was just as much a lose on the revenue side as would have been, if it had paid for the rP-ady crop which waa not delivered. In our judgment, the decision of the High Court is right. The appeal fails, and is dismissed with costs .. .Appeal dismissed. Dr. C. ANNACHl<~RIAM AND A~'OTHER ACHLJTHA MENON AND OTHER) (A. K. SARKAR. K. SU"BBA RAO and J. R. MUDHOLKAR, JJ.) Mammal:l«Jtta~am Law-Karnaron-Power of delegaiicm -Emnt-1/indudu right to manage property and du•ieB arising in connection with management o/ tarrrad-Marumakkattayam Act. 1932 (Mad. 22 o/ 1933), •· 33. A karnavan of a tarwad who was leaving for Bornes where he had taken up a job, appointed one M, who was· the second senior most anandravan, as his mukthia,. by executing a power of attorney, for the reason that the senior most anandrat'an was av.·ay in Madras.

Tl e said mukthiar in conjunction with other adult members of the tarwad sold several properties of the ta,.,etid for discharge of debts of the r ta,.,iad, under the said power of attorney, including the property in suit. The karnamn along with two minor members of the tancad brought a 1uit for setting aoide registered assignment