Commissioner of Income Tax vs Deccan Sugars and Abkhani and Co. Ltd.

Ramanujam, J.—In this petition filed under s. 256(2) of the IT Act by the revenue, a direction is sought for referring the following question

for the opinion of this Court :

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that sum of Rs. 60,000 being the

unrecoverable advances made to the Employees Stores should be allowed as a business loss ?

On a consideration of the facts and circumstances of the case, we are satisfied that no direction to refer the said question need be given in this

case. The assessee in this case is a manufacturer of sugar. Where completing the assessment for the year 1976-77, the ITO disallowed a sum of

Rs. 60,000 being the amount given to the employees stores which could not be recovered. The said employees stores was established for the

supply of rice provisions and other articles to employees of the factory. It was administered by a managing committee of 12 members with the

General Manager of factory as Ex-Officio President. The day-to-day management of the stores was carried on by the paid staff of the stores. The

assessee had advanced a sum of Rs. 1 lakh to the said stores. Out of which Rs. 50,000 will be free of interest, and the amount over and Rs.

50,000 will carry interest. The said sum of Rs. 1 lakh was advanced for the purchase of rice and other provisions for the stores. In or about 1973,

some serious irregularities in the conduct of the said cooperative store were noticed. The assessee asked its auditor to enquire into the matter. The

auditor after the necessary enquiry reported that in view of loss of Rs. 1,42,615 sustained by the stores, the assessee will not able to recover the

amount advanced by the assessee. Later, a detailed investigation was undertaken regarding the affairs of the said cooperative stores and ultimately

the stores manager and other person connected were charge-sheeted and the General Manager of the factory who is ex-officio President of the

stores was strictly instructed to run stores no proper lines. At that stage, the Board of Directors of the assessee passed a resolution dt. 13-9-1974

to write off 50% of the loss amounting to Rs. 60,000 and to recover the balance over a period of 5 years by proper increase in the prices of rice,

provisions and other articles dealt with by the stores. The assessee claimed the said sum of Rs. 60,000 as a business loss. That was disallowed by

the ITO on the ground that the loss was each of year ending with 31-12-1973 and hence it is not admissible for the asst. yr. 1976-77. On appeal,

the CIT held that the assessee having decided to write off the amount due to it only in the previous year to the assessment year under

consideration, it cannot be considered as a loss arising during the earlier years and, therefore, it should be allowed as a deduction on account of

commercial expediency. The revenue took the matter in appeal to the Appellate Tribunal. The Appellate Tribunal held that the advances made by

the assessee to the employees stores in the course of its business is a welfare expenditure and, therefore, that advances were found irrecoverable

only during the previous year and the loss should be considered to be a business loss sustained during that year and, therefore, it should be allowed

as claimed by the assessee. Aggrieved by the decision of the Tribunal, a reference was sought for under s. 256(1) of the IT Act. But that was

rejected. The revenue has failed this application under s. 256 (2).

The ld. counsel for the revenue makes a two-fold contention. One in that the store having incurred the loss in years earlier to the previous year

of the assessment, the assessee cannot claim the said loss during the assessment year. Secondly it is contended that the loss cannot be said to be a

business loss, but it can be treated only as a capital loss.

It is seen from the order of the Tribunal that the only contention urged by the revenue was that the loss, if any can be claimed only in the year

during which the stores suffered the loss and not during the assessment year in question, and the Tribunal dealing with that question held that though

the stores suffered the loss in question in the earlier years, as far as the assessee us concerned it found the sum of Rs. 60,000 to be irrecoverable

only during the year and, therefore, as far as the assessee is concerned it should be taken to have been occurred only during the assessment year in

question and that such a loss should be allowed on the ground of commercial expediency. Thus the order of the Tribunal indicates that the question

as to whether the loss is a business loss or a capital loss has not been considered. Presumably that question is not put forward in the form in which

it is placed before us by the revenue. Once it is found that the assessee on receipt of the auditors report regarding the affairs of the stores found

that it is not able to recover a sum of Rs. 60,000 and writes off the same, it should be taken to be a business loss. Though the learned counsel for

the revenue says that the loss if any is the loss of the stores and not the loss of the assessee, we are not in a position to agree with this contention,

for, the running of the stores for the supply of rice, provisions and other articles to the workmen concerned is a welfare measure which the

assessee is to undertake to keep the workmen contended. Therefore, the expenditure incurred for enabling the store to carry on the supply of rice

and other provisions to the workmen should be taken to be for the purpose of its business. The step taken by the assessee in writing off 50% of

the amount due to it by the stores should be considered to be on account of commercial expediency, as such a step is necessary to keep its

employees contended. In this view of the matter, the Tribunal appears to have come to the right conclusion and we do not, therefore, feel that any

reference is called for in this case. The petition is dismissed. No costs.