1966 (9) TMI 46 - SC - Income Tax

Whether on a true interpretation of section 10(1), section 10(2)(xi) and section 10(2) (XV) of the Indian Income-tax Act, the claims for the losses of ₹ 48,891 and ₹ 1,21,760 were permissible in the assessment years 1953-54 and 1954-55 respectively? Held 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 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 section 10(2) (XV) of the Income-tax Act, 1922. Appeal dismissed.

Summary

Issues:
- Deductibility of amounts paid to constituents for loss of jewelry under section 10(2)(xv) of the Income-tax Act.
- Interpretation of the term "expenditure" within the meaning of section 10(2)(xv).
- Whether the payments made by the bank to constituents for the loss of jewelry qualify as expenditure laid out wholly and exclusively for the purposes of the bank's business.

Analysis:
The case involved a dispute regarding the deductibility of amounts paid by a bank to its constituents for the loss of jewelry under section 10(2)(xv) of the Income-tax Act. The bank had settled claims with constituents who had pledged jewelry, paying the difference between the market value and the amount advanced. The Income-tax Officer disallowed the claims, leading to appeals. The High Court held that the amounts paid were expenditure within the meaning of section 10(2)(xv) as they were in the interest of the bank's business.

The main contention raised by the Commissioner was that the act of writing off amounts due did not constitute expenditure under section 10(2)(xv) and that the expenditure was not laid out wholly and exclusively for the bank's business. The court clarified that expenditure involves actual delivery of money or property, and in this case, the bank's settlements with constituents constituted expenditure as they involved bilateral agreements and payments made in the interest of the bank's business.

The Commissioner argued that the bank's legal obligation was limited to taking care of the pledged jewelry and was not liable for its loss. However, the court emphasized that the question was not about strict legal rights but whether the bank's actions were in the interest of its business. The court found that the bank's decision to compensate constituents for the loss of jewelry was a business strategy to maintain goodwill and customer relations, thus qualifying as expenditure for the purpose of the business.

Ultimately, the court held that the settlements and payments made by the bank to constituents were not mere forbearance but constituted expenditure laid out wholly and exclusively for the bank's business under section 10(2)(xv) of the Income-tax Act. The appeals were dismissed, affirming the deductibility of the amounts paid to constituents for the loss of jewelry as permissible deductions for the bank's taxable income.