Expenditure incurred by a bank in settling with its constituents and paying them the value of jewellery pledged with it, in order to maintain its goodwill and business connections, is deductible as expenditure laid out wholly and exclusively for the purpose of its business under S. 10 (2) (xv) of the Income-tax Act, 1922.

Judgment

SHAH, J. : The Nainital Bank Ltd. has its head office at Nainital and a branch at Ramnagar. Currency notes of the value of 1,06,000 and a large quantity of jewellery pledged with the Bank by its constituents were stolen by dacoits on June 11, 1951 from the premises of the bank. The Bank claimed in its return for the assessment year 1952-53 the loss of currency notes as a permissible deduction. The departmental authorities disallowed the claim. But the claim was allowed by the High Court of Allahabad and that order was firms by this Court : see Commr. of Income-tax v. Nainital Bank Ltd., (1965) 55 ITR 707:

2. In regard to the loss of jewellery the Bank settled the claims of the constituents who had pledged their jewellery. The terms of settlement were these: when the market value of the jewellery pledged exceeded the amount advanced, the difference was paid by the Bank to the constituent; when the market value of the jewellery was less than the amount advanced, the difference was recovered from the constituent. Under the adjustments made in this manner, in the year 1952 the Bank made a total payment of Rs. 48,891 and in the year 1953 the Bank paid Rs. 1,21,760. In its returns for the assessment years 1953-54 and 1954-55 the Bank claimed in computing its taxable income the amounts so paid to the constituents. The Income-tax Officer disallowed the claims and the order was confirmed in appeal to the Appellate Assistant Commissioner. An appeal to the income-tax Appellate Tribunal was also unsuccessful.

3. The Tribunal submitted a statement of the case and refereed the following question to the High Court of Allahabad for opinion :-

"Whether on a true interpretation of S. 10 (1), S. 10 (2) (xi) and S. 10 (2) (xv)of the Indian Income-tax Act, the claims for the losses of Rs. 48,891 and Rs. 1,21,760 were permissible in the assessment years 1953-54 and 1954-55, respectively?"

Before the High Court the claim for deduction under S. 10 (2) (xi) was abandoned by the Bank, and the High Court negatived the claim of the Bank for deduction of the amount under S. 10 (1). But the High Court held that having regard to the true nature of the settlements made with the constituents the amounts credited as the value of jewellery against the claim of the constituents for amounts advanced to them must be regarded as expenditure within the meaning of S. 10 (2) (xv) and since such credit was given by the Bank in the interest of its business, the amounts paid were liable to be deducted in computing the taxable income. The Commissioner of Income-tax has appealed with certificate granted by the High Court under S. 66-A (2) of the lncome tax Act.

4. In these appeals counsel for 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 fa