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C.I.T. V. MYSORE SUGAR CO. LTD., BANGALORE AIR 1967 SC 723

C.I.T. V. MYSORE SUGAR CO. LTD., BANGALORE AIR 1967 SC 723

 

FACTS

  • The assessee Company, engaged in sugar production, entered into agreements with sugarcane growers called "Oppigedars" to exclusively sell sugarcane to the company at market rates.
  • Due to drought in 1948-49, the company couldn't operate its sugar mills, and advances made to Oppigedars for sugarcane remained unrecovered.
  • A committee recommended the company forego some dues, and in 1952, the company waived its rights in respect of Rs. 2,87,422. The company claimed this as a deduction under section 10 of the Indian Income-tax Act.
  • The income tax department and Appellate Tribunal rejected the claim.
  • The Income-tax Appellate Tribunal, Madras Bench, had referred a question to the High Court regarding whether a sum of Rs. 2,87,422 represented a loss of capital.
  • High court held the amount as revenue expenditure and hence, deductible under sec 10 (2) (ix) of Act,1922
  • The appeal was filed by the Commissioner of Income-tax, Mysore against a judgment of the High Court.

ISSUE

  • Whether the sum of Rs. 2,87,422 represent a loss of capital or is deductible as revenue expenditure?

RULE

  • Expenditure must be considered in relation to the business to determine if it's capital or revenue expenditure.
  • Expenditure laid out to acquire an enduring asset for the business constitutes a loss of capital, whereas expenditure in the regular course of business is revenue loss.

HELD

  • In Charles Marsden and Sons Ltd. v. Commissioner of Inland Revenue (1919) 12 Tax Cas 217, court held that the payment made by the English Company to the Canadian Company for wood pulp supplies constituted a capital expenditure. It was observed that the payment was not an advance payment for goods but a venture to establish a source, thus constituting an investment of capital.
  • In Reid’s Brewery Co. Ltd. v. Male (1891) 3 Tax Cas 279, The court held that the sums written off by the Brewery Company were deductible as revenue expenditure. It was observed that although the money used by the company came out of capital, it was not an investment in the ordinary sense but rather a use of money in the course of the company's business
  • The amount waived by the company represented an advance payment against the price of sugarcane, not an investment in agriculture.
  • The loss incurred by the company was a revenue loss as it was part of the regular expenditure towards purchasing sugarcane, akin to paying for a ready crop not delivered due to drought.
  • Therefore, the High Court's decision to allow the deduction as revenue expenditure was upheld.
  • The appeal was dismissed with costs.

COMMENTARIES RATIO/NOTE-

  • Business loss includes- 

For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilization of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilized for acquisition of fixed asset, if at the time of devaluation, it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be revenue loss and not a capital loss. [CIT v Woodward Governor India (P) Ltd. (2007) 294 ITR 451 (Del) and also followed by CIT v Goyal M.G. Gases P. Ltd. (2010) 320 ITR 669 (Del) S.L.P in this case refused by the Supreme Court t in (2009) 313 ITR (St) 32]