Commissioner of Income-Tax, U.P. Vs.
Nainital Bank Ltd. [1966] INSC 167 (15 September 1966)
15/09/1966 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 453 1967 SCR (1) 348
ACT:
Indian Income-tax Act, 1922, s. 10(2)(xv)-Jewellery
pledged with bank stolen-Bank crediting cost of jewellery to constituents
accounts and setting off against such credit amounts advanced to them-Amounts
so credited whether expenditure laid out for the purpose of the business.
HEADNOTE:
Jewellery pledged with the respondent bank by
its constituents was stolen by dacoits. The bank settled the claims of the
constituents by crediting the value of the jewellery against the amounts
advanced to the constituents.
When the market value of the jewellery pledged
exceeded the amount advanced the difference was paid by the bank to the
constituent; where 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 the Bank in the year 1952 made a total payment
of Rs. 48,891 and in the year 1953 the Bank paid Rs. 1,21,760.
In the return for the assessment year 1953-54
and 1954-55 the Bank claimed in computing its taxable income the amounts so
paid to the constituents. The claim was disallowed by the assessing and
appellate authorities but the ]High Court in reference under s. 66(2) of the
Indian income-tax Act, 1922 allowed it. The Commissioner of Income-tax appealed
to this Court by certificate.
It was urged on behalf of the appellant that
(1) by writing off either partially or wholly the amounts due from its
constituents in its books of account the Bank merely forbore to enforce its
demand against its constituents and such forbearance was not expenditure within
the meaning of s. 10(2)(xv) of the Indian Income-tax Act, 1922, (2) in any case
the expenditure was not laid out wholly and exclusively for the purposes of the
business since the bank was under no legal obligation to pay the cost of
jewellery.
HELD: (i) 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 crossclaims- 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 a. 10(2) (xv). [35OF E-G] It could not be
said that there was by the settlements mere forbearance to recover the amounts
advanced to the constituents. The settlements were 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. [351 A-C] (ii) 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. In choosing to compensate the constituents and thus maintaining their
goodwill the Bank laid out expenditure for the purpose of its business. [351
G-H]
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 601 & 602 of 1965.
Appeals from the judgment and decree dated
April 12, 1962 of the Allahabad High Court in I.T.R. No. 484 of 1960.
R. M. Hazarnavis, R. H. Dhebar and R. N. Sachthey,
for the appellant (in both the appeals).
S. T. Desai, B. P. Singh and Naunit Lal, for
the respondent (in both the appeals). - The Judgment of the Court was delivered
by Shah, J. The Nainital Bank Ltd., has its head office at Nainital and a
branch at Ramnagar. Currency notes of the value of Rs. 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
confirmed by this Court see Commissioner of Incometax v. Nainital Bank Ltd.(1).
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. 48,89 1 /- 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.
1. [1965] 1 S.C.R. 340 :55 I.T.R. 707.
350 The Tribunal submitted a statement of the
case and referred 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 Income- tax Act.
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).
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 351 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 diffe-
rence 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.
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 pledge, a bailer
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
is 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 to operated. The Bank had evidently two courses open: to
enforce sets 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 352 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.
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 of 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.
The appeals therefore fail and are dismissed
with costs.
There will be one hearing fee.
Appeals dismissed.
G.C.
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