Case: The Commissioner Of Income-Tax Vs. The Mysore Sugar Co., Ltd

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 character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.8. 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, (1908) 5 Tax Cas .327, 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? 38,000 odd. The question arose whether the advance could be said to be an investment of capital, because if they were, 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 contract by which the Welsh Company were to deliver certain blende, 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 blende, 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 9. The second case, Charles Marsden and Sons Ltd. v. Commissioners of Inland Revenue, (1919) 12 Tax Cas 217, 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 3,000 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 $ 1 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. Rowlatt, J. held this to be a capital expenditure not admissible 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.10. The last case, to which we need refer to illustrate the distinction made in such cases is Reids Brewery Co. Ltd. v. Male, (1891) 3 Tax Cas 279. 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 made on that account.";but held that:". . . no person who is acquainted with the habits of business can doubt that this is not 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 alone 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 Companys business, and not an investment of capital at all.11. These cases illustrate the distinction between 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 advance 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 no 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 years 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Originally, two questions were referred, but with the second question we are not now concerned.The case has been argued before us both under S. 10 (1) and S. 10 (2) (xv), though it appears that case of the assessee Company has changed from S. 10 (1) to S. 10 (2) (xi) and S. 10 (2) (xv) from time to time. The question, as propounded, seems to refer to Ss. 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 whetherthe money which was given up, represented a loss of capital, or must be treated as a revenueother words, S.10 (2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits andgains.7. 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 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 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 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 character of an investment, but in the second, to use a commonly understood phrase, it bears the character of currentwas thus held to be a use of money in the course of the Companys business, and not an investment of capital at all.11. These cases illustrate the distinction between 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 advance 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 no 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 years 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.