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

Ramanujam, J.—In this petition filed u/s 256(2) of the Income Tax 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 the sum of Rs. 60,000 being the

irrecoverable advances made to the employees'' co-operative 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. While completing the assessment for the year 1976-77, the Income Tax Officer

disallowed a sum of Rs. 60,000 being the amount given to the employees'' co-operative stores which could not be recovered. The said

employees'' co-operative stores was established for the supply of rice, provisions and other articles to the employees of the factory. It was

administered by a managing committee of 12 members with the general manager of the 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 above 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 co-operative

stores were noticed. The assessee asked its auditor to enquiry into the matter. The auditor, after 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 co-operative stores and ultimately the stores'' manager and other persons connected were charge-

sheeted and the general manager of the factory who is the ex-officio president of the stores was strictly instructed to run the stores on proper lines.

At that stage, the board of directors of the assessee passed a resolution dated September 13, 1974, to write off 50% of the loss amounting to Rs.

60,000 and to recover the balance over a period of five 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 Income Tax Officer on the ground that

the loss was for the year ending with December 31, 1973, and hence it is not admissible for the assessment year 1976-77. On appeal, the

Commissioner of Income Tax (Appeals) held that the assessee having decided to write off the amount due to it only in the previous year relevant 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 that the 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 a claimed by the assessee. Aggrieved by the decision of the Tribunal, reference was sought for u/s 256(1) of the Income Tax

Act. B that was rejected. The Revenue has filed this application u/s 256(2).

The learned counsel for the Revenue makes a two-fold contention. One is that the stores having incurred the loss in the 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, and 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, a far as the assessee is 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 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 auditor''s 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 an not the loss of the assessee, we are not in a position to agree with the

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 had to undertake to keep the workmen contented. Therefore, the expenditure incurred for enabling the stores 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 contented. In this view of the matter, the Tribunal appears to have come the right conclusion and we do not, therefore, feel that any

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