An expenditure to be deductible must be incurred in the course of carrying on the business or for the purpose of carrying on the business.

ISMAIL J.

The Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act, 1961, has referred to this court two questions of law for its opinion, namely

"1. Whether the Appellate Tribunal was right in law in holding that the loss of Rs. 16, 096 incurred in the process of the transfer of securities in favour of Karur Vysya Bank Ltd. was admissible ?

2. Whether the Appellate Tribunal was right in law in holding that the sum to the extent of Rs. 18, 931 which formed part of the total sum transferred by the assessee to the Karur Vysya Bank Ltd., by way of gratuity to the employees for the services rendered to it, was admissible as a deduction ?" *

One of the businesses of the assessee was banking business. The assessee transferred its banking business to the Karur Vysya Bank Ltd. under a series of agreements entered into between the two. Actually the transfer took place on December 14, 1964. One of the agreements entered into between the two parties which is relevant and which is annexure "E" to the statement of the case is the agreement dated April 11, 1964. That agreement, among others provided for the valuation of the various items of assets and liabilities of the assessee to be taken over by the Karur Vysya Bank Ltd. in the process of taking over the banking business of the assessee. Clause 2 of this agreement refers to the assessee-bank's buildings at Main Road, Batlagundu, and at North Street, Ramnad Fort, Ramnad, and fixed their value at Rs. 25, 000 each. Clause 3 refers to the furniture and fixtures of the assessee and fixes their aggregate value at Rs. 60, 000 based on the current market value. Clause 4 states

"the transferor-bank (assessee) shall transfer and the transferee-bank (Karur Vysya Bank Ltd.) shall take over from the transferor-bank the liabilities and assets as described in Schedules "A" and "B", respectively, as on April 3, 1964, subject to the variations on the date of actual transfer." *

Schedule "A" to the said agreement deals with the liabilities as on April 3, 1964. Equally, Schedule "B" to the said agreement deals with the assets as on April 3, 1964. With reference to the first question extracted above, we are concerned with Government securities forming part of the assets in Schedule "B" to the agreement referred to above. Schedule "B" gives the book value of the Government securities as Rs. 10, 43, 476.13 and the market value as Rs. 10, 33, 195.85. At the same time, the agreement also provides that the said securities shall be taken over by the transferee-bank at market rate on the date of the transfer. In the present case the market rate as on December 14, 1964, the date of the transfer of the said securities, was Rs. 10, 14, 337 which was less than the cost of the Government securities and, therefore, there was a loss of Rs. 16, 096 suffered by the assessee in respect of the transfer of such securities. The Income-tax Officer in his assessment order took the view that the said loss was of a capital nature and, therefore, was not allowable as a deduction. On appeal preferred to the Appellate Assistant Commissioner, the Appellate Assistant Commissioner disposed of the appeal summarily by stating

"The securities of the appellant-bank were valued at market value when it was taken over as a going concern by the Karur Vysya Bank Ltd. There is no sale of the securities as such or consequent loss. Notional loss on revaluation is only a loss in the process of taking over and, therefore, cannot be allowed as a revenue loss." *

In the result, the Appellate Assistant Commissioner confirmed the conclusion of the Income-tax Officer. However, on further appeal preferred by the assessee, the Income-tax Appellate Tribunal sustained the contention of the assessee. The Tribunal pointed out

"It is common ground, however, that the method of accounting adopted by the assessee over the years is the mercantile system. It was also accepted by both the sides before us that the Government s