1. Business advances to suppliers for exclusive procurement of raw materials — Waiver of unrecovered advances due to crop failure — Claim for deduction under Income-tax Act. (Para 2 , 3 )
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1962 Supreme(SC) 215
SUPREME COURT OF INDIA
1967 AIR(SC) 723 : 1963 (2) SCR 976
Before:- A.K.Sarkar : M.Hidayatullah : Raghubar Dayal : S.K.Das
Commissioner Of Income Tax, Mysore, Bangalore
Versus
Mysore Sugar Company Limited Bangalore
Case No. : 435 of 1961
Date of Decision : 5/3/62
Advocates Appeared: Chaudhuri K.R. : Daphtary C.K. : Dapthary C.K. : Dhebar R.H. : Karkhanis N.D. : Menon P.D. : Sastri A.V.Viswanatha
Advocates:
A.V.VISHWANATHA SASTRI, C.K.DAFTARY, K.R.CHAUDHARY, N.D.Karkhanis, P.D.MENON, R.H.Dhebar
A.V.VISHWANATHA SASTRI, C.K.DAFTARY, K.R.CHAUDHARY, N.D.Karkhanis, P.D.MENON, R.H.Dhebar
The distinction between capital and revenue expenditure depends on whether the outlay was to acquire an asset of enduring nature (capital) or was an outgoing in the ordinary course of business (revenue). Advances for the purchase of raw materials are treated as revenue expenditure.
Headnote:(A) Indian Income-tax Act - Sections 10(1), 10(2)(xi) and 10(2)(xv) - Distinction between capital and revenue expenditure - To determine if an expenditure is on the capital account or revenue, it must be considered in relation to the business - If money is laid out to acquire an asset of enduring nature for the benefit of the business, it is a loss of capital; if it is an outgoing in the doing of the business, it is a revenue loss (Para 7).
(B) Computation of profits - Section 10(2) does not deal exhaustively with deductions; profits or gains must be calculated after deducting outgoings reasonably attributable as business expenditure, provided they are not of a capital nature (Para 6).
Facts of the case:
A company provided advances in the form of seedlings, fertilizers, and cash to growers under agreements to ensure the exclusive supply of raw materials at market rates. Due to drought, the growers were unable to deliver the produce, and the advances remained unrecoverable. The company subsequently waived a portion of these dues. The tax authorities contended that the amount was either a capital loss or an ex gratia payment, whereas the company claimed it as a deductible revenue expenditure.
Findings of Court:
The advances were made as a forward arrangement for the purchase of a crop and were not an investment in the agriculture of the growers. The resulting loss is a revenue loss, similar to paying for a ready crop that was not delivered.
Issues: Whether the sum waived by the company represented a loss of capital or a revenue expenditure deductible in computing the profits of the business.
Ratio Decidendi: The court held that the distinction between investment and current expenditure depends on whether the money was used to acquire an asset of enduring nature or as an outgoing in the course of business. Since the advances were payments against the price of a crop to ensure supply, they constitute revenue expenditure (Para 11).
Result: Appeal dismissed with costs.
Legal Category Hierarchy
Table of Contents
2. Whether waived advances constitute a deductible revenue expenditure or a non-deductible loss of capital. (Para 3 , 4 , 5 )
3. Distinction between capital investment for enduring assets and revenue expenditure for current business operations; advances for raw material procurement are current expenses. (Para 6 , 7 , 8 , 9 , 10 , 11 )
4. Expenditure to acquire an asset of enduring nature is capital, whereas outgoings in the ordinary course of business are revenue expenditure. (Para 7 )
5. Appeal dismissed; High Court judgment upholding the deduction as revenue expenditure affirmed. (Para 12 )
6. How is the distinction between capital and revenue expenditure determined?
The court examines whether the expenditure was used to acquire an asset of enduring nature for the business, which constitutes a capital loss, or was an outgoing in the ordinary course of business, which constitutes a revenue loss. (Para 7 )
7. Are advances paid to suppliers to secure raw materials treated as capital investments?
No, advances made as payment against the price of goods to ensure a steady supply are considered current expenditure in the course of business, not an investment of capital. (Para 11 )
8. Is the list of deductions under Section 10(2) of the Income-tax Act exhaustive?
No, the general scheme allows for the deduction of any outgoings reasonably attributable as business expenditure to find true profits, provided the expenditure is not of a capital or personal nature. (Para 6 )
M.HIDAYATULLAH, J.
(1) 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 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. 2,87,422.00 aforesaid 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.
(2) THE asseesee Company purchases sugarcane from the sugarcane,growers, 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.
(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 27/07/1950, 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 account*ending 30/06/1952, the Company waived its rights in respect of Rs. 2,87,422.00 The Company claimed this is a deduction under ss. 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 s. 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.
(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 a capital expenditure, and was deductible as a revenue expenditure. It relied upon a passage from Sempath Ayyangars Book on the Indian Inco
