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 AV Viswanatha Sastri and K B Chaudhuri for the respondent
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 Tribunal Madras Bench was answered in favour of the respondent  Whether there are materials for the tribunal to hold that the sum of Rs 287422aforesaid 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 sugarcanegrowers 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 accountending June 30 1952 the Company waived its rights in respect of Rs 287422The Company claimed this is a deduction under sections 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 section 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 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 vs 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 section 10 1 and section 10 2 xv though it appears that the case of the assessee Company  has changed from a 10 1 to section 10 2 xi and section 10 2 xv from time to time
The question as propounded seems to refer sections 10 2 xv and 101 and not to section 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 section
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 section
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  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 vs Chitnavis 1 and has been accepted by this Court
In other words section 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 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 LR 59 IA 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 vs 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 38000 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   1 984 The second case Charles Marsdon  Sons
Ltd vs 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 30000 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 vs 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 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 TC 217
2 985 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


Summary:
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 287422 
The Company claimed this as a deduction under section 10 2 xi and section 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 vs Commissioner of 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 section 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 section 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 vs Baker  Charles Marsden  Sons Ltd vs The Commissioners of Inland Revenue and Raid s Brewery Co Ltd vs Nale  applied
Badridas Daga vs Commissioner of Income tax 1959 section C R 690 and Commissioner of Income tax vs 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