COMMISSIONER OF INCOME-TAX, U.P. versus NAINITAL BANK LTD.

COMMISSJO.NER OF INCOME-TAX, U.P. v.

NAINITAL BANK LTD.

September 15, 1966. (J. C. SHAH, V. RAMA5WAMI MID V. BHARGAVA, JJ.J

Indian /nt:ome-tax Act, 1922, s. 10(2) (xv)--Jewellery p/edgtd with bank stolen--Bank crediting cost oj jewellery to constituents accounts and setting ofi against such credit amounts advanced to them-Anwunts so credited whether expenditure laid Otlt for the purpose of the business.

Jewellery pledged with the respondent bank by its constituents was stolen by dacoi1". The bank settled the claims of the constituents by crediting the value of the jewellery again.st the amounts advanced to the constituenl.t. When tho market value of the jewellery pledged exceeded the amount advanced the difference was paid by the bank to the constituent; where the market ,...iue of the jewellery was les.. than the amount advanced the difference was recovered from the constituent. Under the adjust ments made in this manner the Bank in the year 1952 made a totnl oay ment of Rs. 48,891 and in the year 1953 the Bank paid Rs. 1,21,760. In the relurna for the a=.ment year 1953-54 and 1954-55 the Bank claimed

in computing its taxable income the amounia;:,c:!: to the eonstituenta. The

claim was dWllowcd by the assessing and a authorities but the High Court in reference under s. 66(2) of the Indian Income-tax Act. 1922 allowed iL The Commissioner of lncom<>-tax appealed to this Court by cert:ficate.

the appellant

It was urged on behalf of

that (I) by writing off eilbcr partially or wholly the amount& &le from ita conslituents in its books of account the Bank merely forbore its demand against it< constituents and such forbearance was not expenditure with in 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.

to enforce

HELD : (i) In il.t normal meaning the expression "expenditure" de notes "spending" or "pay:ng out or away" l.t., somethlnJ that goes out of the coffers of the a.ssessce. A mere liability to satisfy an obligation by an a . s - is undoubtedly not "expenditure"; it is only when he satis fies the obligation by delivery of ca.sh or property or by settlement of ac -.nts there is expenditure. But expenditure does not necessarily involve actual delivery or paning with money or property. If there are crOSt ctaim.~ne by the assessec against a stranger and the other by the stranger against the assmee and as a result of accounting the balance due only ia paid, the amoUDt which is debited against the assessee in the settlement

Of accounts mar appropriately be termed expendirurc within the meaning

of •· 10(2) (xv .

[350 E-0]

It could not be said that there was by the settlement.t mere forbear ance to recover the amounts advanced The settle-. menta were bilateral : each oon.stituent admitted his liability to repay the amount which had been advanced to him, and the Bank admitted liability to pay to tho Constituent the value of the jewellery pledged with it. WheD the Bank paid to the constituent the difference between the value or the iewellery pledged wi1h it and the amount due by the comtituent the Bank m efteet paid the value of the jewellery against payment by the constitu-

to the constituents.

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C.I.T. v. NAINITAL BANK (Shah, J.)

349

the Bank in truth laid out expenditUre equal to the value of the pledged. [351 A.CJ

A mt of the amount due by him. , In making payment of that difference jewellery · (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 constl tuents at the same time denying liability to make any compensation fur the loss of jewellery pledged with it But such a stand might very well have ruined its business, especlally in the rural areas in which it operated. In choosing to compensate the coIIStituents and thus maintaining their aoodwill the Bank laid out expenditure for the purpose of itS business. [351 G-Hl

B

CML APPELLATE JURISDICTION : Civil Appeals Nos. 601 &

602 of 1965.

c

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. Sjngh and Nawiit Lal, for the respondent

(in both the appeals).

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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 cla'imed in its return for the &Ssessment 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 Income- · tax v. Nainital Bank Ltd.(').

In regai;d to the loss of jewellery the Bank settled the clailll$ .of the constitµents who had pledged their jewellery. The teflll$ of settleinent 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 jewel lery. was less than the amount advanced, ·the difference was. recovered from adjustments. ·the constituent. Under made in this manner, in the year 1952 the Bank made a total pay ment of Rs. 48,891/-andin 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 ~nstituents. The Income-tax Officer disallowed the clailll$ and the order was confirmed in appeal to the Appellate Assistant Commissioner. An appeal to the Income-tax Appellate. Tribunal was ·also unsuccessful.

the

1. [196Sl 11S.C.R. 34o : SS I.T.R. 707 .

.

350

SUPllBWI! COUllT

J.EPOllTS

( 1967] I S.C.R.

The Tribunal submitted a statement of the case and referred the following question to the High Court of Allahabad for opinion :

A

"Whether on a true interpretation of s. 10 (I), s. 10 (2) (xi) and s. 10 (2) (xv) 0£ the Indian Income-tax Act, the claims for the losSC!. 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 (I). 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.

two In these appeals counsel for the Commissioner raised rontentions: 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 a.ssessee. 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 settle ment of accounts there is expenditure. But expenditure does not necessarily involv.e 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 the assessee in the settlement of accounts may debited against appropriately be termed expenditure within the meaning of s. JO (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 expen diture within the meaning of s. JO (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

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C,J,T. V, NAJNITAL BANK (Shah, /.)

351

A

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t.he 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 Col)llJlissioner that the Bank was under no legal liability to pay to the constituents the value of the jewellery It was said that the Bank was, as a pledgee, a pledged with it. bailee 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 t:are 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 liablity 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 good will of the business and its relations with the clientele. The Bank could have if so advised taken its stand strictly on its legal obliga tions, 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. The Bank had evidently two courses open: to enforce its rights strictly according to law, and thereby to Jose the gootl will it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business

352

SuPl.EMI! COURT

llEPOl.TS

[1967] I S.C.R.

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.

!

B

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 C of the amount which was recoverable by the Bank. The first cle ment of the transaction would appropriately be deemed expenditure and such expenditure having been laid out for protecting and fur thering 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 D

will be one hearing fee.

Appeals dismissed.

G.C.