Case: Commissioner Of Income-Tax, U.P Vs. Nainital Bank Ltd

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). 5. 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 the advances made by the Bank to its constituents may in 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 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 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. 6. 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 pledgee, a bailee 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 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 it operated. The Bank had evidently two courses open: to enforce its 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 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. 7. 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. 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 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.

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

Explanation:
0[ds]It was said that the Bank was, as a pledgee, a bailee 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 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 it operated. The Bank had evidently two courses open: to enforce its 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 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 purpose7. 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. 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 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, 1922In 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 crosse by the assessee against a stranger and the other by the stranger against thed 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)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 the advances made by the Bank to its constituents may in 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 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 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.