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

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.2. The assessee Company purchases sugarcane from the sugarcane growers, and crushes them in its factory to prepare sugar. As a part of its business operations, it enters into agreements with the sugarcane growers, who are known locally as "Oppigedars", 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 Oppigedar is opened by the assessee Company. A crop of sugarcane takes about 18 months to mature, and these agreements take place at the harvest season each year, in preparation for the next crop.3. 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 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 Kannada; but the substance of the terms is given by the Committee and the above description fairly represents its nature. The Committee 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 as a deduction under Ss. 10 (2) (xi) and 10 (2) (xv) of the Indian Income-Tax 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 businesses. 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.4. 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 capital expenditure, and was deductible as a revenue expenditure. It relied upon a passage from Sampath Ayyangars Book on the Indian Income-tax Law and on the decision of this Court in Badridas Daga v. Commissioner of Income-tax, 1959 SCR 690  : (IR 1958 Sc 783)  , 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 Income-tax act.

Reasoning:
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.