Syed-Wasi-Ud-Din, J.
1. This is a reference under Section 256 of the Income-tax Act of 1961 made by the Income-tax Tribunal, Chandigarh Bench, and the question which has been referred by the Tribunal is as follows:
'Whether, on the facts and in the circumstances of the case, the deduction of Rs. 27,959 claimed by the assessee was rightly refused by the Appellate Tribunal.
2. The relevant facts which are not disputed and which are stated in the statement of the case submitted by the Tribunal are as follows :
The reference application pertains to the assessment year 1964-65, for which the accounting year commenced on 1st of May, 1962, and ended on 30th April, 1963. The assessee is a firm of forest lessees consisting of two partners both of which are private limited companies. The aforesaid contracts which were being exploited by the assessee-firm ended and the firm was dissolved some time in 1,967-68. For the exploitation of forests, i.e., felling of trees, cutting the same into sizeable logs for conversion thereof by sawing into scantlings and carnage of the timber sawn to the banks of side stream for ultimately being floated down the Chenab river and carting and lorrying to the sales depots at Jammu and Pathankot, the assessee-firm had to engage various sub-contractors. These sub-contractors had to be given advances before coming to the works, besides supply of subsidised rations to the labour at the works. Both the advances as also the cost of rations supplied had to be recouped from the sub-contractors' earnings during the working season. Any balance left at a debit or credit gets carried forward to the year following, when again some advances had to be made for the labour to come out to the works. The assessee for the assessment year 1964-65 filed his return of income declaring a net loss of Rs. 1,72,669 and the expenses included, inter alia, the amount of Rs. 40,977 in respect of bad debts. After a scrutiny of the details of these bad debts the Income-tax Officer disallowed the bad debts amounting to Rs. 27,959 (as per details given in the statement of case as well as in the account statements which are annexures to the statement of the case). The Income-tax Officer did not allow any extension in respect of a sum of Rs. 27,959 advanced to various sub-contractors on account of the fact that the assessee had not taken any step for the realisation of those debts.
3. The assessee being aggrieved by this order of the Income-tax Officer filed an appeal and the Appellate Assistant Commissioner disallowed the claim and confirmed the order of the Income-tax Officer. The Appellate Assistant Commissioner also observed that the assessee had also not produced any evidence to prove that these debts had become bad. The assessee, thereafter, preferred a second appeal before the Tribunal and the Tribunal accepted the department's contention holding that the deductions claimed on account of bad debts was not permissible under Section 36(2)(i)(a). It also appears that the assessee in the alternative before the Tribunal had also contended that the deductions should be allowed as contemplated by Section 37 of the Act but this contention was also not accepted by the Tribunal because the Tribunal was of the opinion that the case of the assessee was covered by the aforesaid Section 36 and, therefore, on the principle as laid down in the latin maxim generalia specialibus non terogant, the claim under Section 37 could not be allowed because there was a special section, viz., Section 36, by which it was covered. The Tribunal was also of opinion that there was another difficulty in interpreting the claim as a claim of expenditure, because, in law, the expenditure is admissible in the year in which it is incurred or accrued and here in this case the amounts had been advanced in the year in which it is considered to be non-recoverable. So the claim is, therefore, in respect of the amounts which neither accrued nor incurred in the previous year. The Tribunal, as it appears from its order, also observed that Section 36 appears to be a harsh section against the trading assessee because it practically debars all bad debts which arise out of ordinary transactions except those which are incurred by way of sales but the Tribunal felt that they could not interpret otherwise the clear provisions of the statute. The Tribunal was of the view that a question of law did arise for consideration and, therefore, formulated the question already mentioned above and has made a reference to this court.
4. At the time of the hearing it may be mentioned here that the learned counsel appearing for the assessee-firm conceded this position that he could not claim deduction on account of its being a bad debt if it did not come within the purview of Section 36(2) of the Act, and this position was also not disputed that in this reference such matter cannot be gone into which relates to facts on the question whether it was a bad debt or not as contemplated by Section 36 of the Act. But the learned counsel for the assessee-firm submitted that a perusal of the relevant sections of the Income-tax Act and a combined reading of the same in the light of several decisions of the courts on which he has relied, it would be clear that the assessee was entitled to a deduction under Section 28 read with Section 37 of the Act. It was also contended that the nature of business was such that the assessee had to keep his business going on, had to advance money to the subcontractors because without doing so he would not have been able to get the labour in time and carry on the work. The system of the work was such that the advances made were necessary concomitants and adjuncts of the business.
5. The learned counsel appearing for the department has made two submissions, one of these is to the effect that the advances which had been made cannot be regarded as an expenditure and it would be in the nature of a debt and as it was not such a debt which would come within the purview of Section 36, so the assessee cannot claim any deduction on this account. Secondly, it has been urged that the assessee cannot seek protection under Sections 28 and 37 because when Section 36 is applicable then Section 37 will not be applicable. The charging section is Section 4 which lays down that the income-tax shall be charged for any assessment year in respect of the total income of the previous year or previous years, as the case may be. The words 'total income' are very important and I may now turn to Section 2(24) which defines 'income'. Income has been defined to include several items which have been enumerated thereunder and we are concerned here with item No. 1 which is profits' and gains. Section 14 deals with the computation of total income and it lays down a classification of the several heads of income and Section 14D is the head of profits and gains of business or profession. The next section to which reference may be made is Section 28 which is under the heading 'profits and gains of business or profession' and it lays down the profits and gains which shall be chargeable for income-tax and Section 28(i) lays down that one of the items is 'profits and gains of any business or profession which was carried on by the assessee at any time during the previous year'. In my opinion a combined reading of these sections would show that the charge, i.e., income-tax, is leviable not on gross receipts or sale proceeds but on profits and gains properly so called and in the words of Lord Halsbury the word 'profit' has to be understood in its natural and proper sense, i.e., in a sense in which no commercial man would misunderstand. See Gresham Life Assurance Society v. Styles, [1892] 3 T.C. 185 (H.L.). This was also approved by the Privy Council in connection with the case of Pondicherry Railway Co. v. Commissioner of Income-tax, A.I.R. 1931 P.C. 165. The Supreme Court has also approved of this and I may now refer here to a decision of the Supreme Court in the case of Badridas Daga v. Commissioner of Income-tax, [1958] 34 I.T.R. 10 (S.C.). It may be mentioned here that the aforesaid case was in respect of the provisions contained in Section 10(1), (2)(xi), (xv) of the Indian Income-tax Act of 1922, but it may be noted here that those provisions are similar to those contained in Section 28 of the Income-tax Act of 1961. It was held that, while Section 10(1) of the Indian Income-tax Act of 1922 imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed, and profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles.
6. In another decision of the Supreme Court in the case of Commissioner of Income-tax v. Basumal Jagat Narain, [1960] 38 I.T.R. 447 (Punj.), which was a case where the assessee was a distributer and as an exhibitor of films he financed film producers against arrangement for distribution rights for certain defined territories. The assessee entered into an agreement with the producers of a motion picture of which the assessee acquired the right to distribute and exhibit in Northern India for five years from the date of delivery. The assessee agreed to pay a sum of Rs. 2,50,000 by way of advance in four instalments and was to recover in full the entire sum as well as Rs. 50,000 by way of commission by adjusting all first realisations received from the exploitation of the picture. It so happened that the picture proved a failure and the assessee was able to recover only a part of the amount and the producers were also adjudicated insolvent. It was in such circumstances that the assessee claimed deductions and their Lordships were pleased to observe in that connection that to constitute a valid debt the money must have been advanced with reasonable belief at the time that it would be paid and, for purposes of taxation, a debt is a legally enforceable obligation for payment of money and further it, was held that the question whether a debt is a bad debt or the question in what year it became a bad debt are questions of fact and the findings of the Tribunal on these questions can be disturbed by the court only if there is no evidence to support them, and the question whether the activities of the assessee constitute the carrying on of trade or business under a statute allowing deduction of bad debts from gross income is largely one of fact and the solution of which requires an examination of the facts in each case. It has been urged by the learned counsel for the assessee in the present case that the advances used to be made to sub-contractors just as a prudent man of business would do it with the reasonable belief at the time the advances were made that these would be adjusted and recouped and further that the statements submitted by the assessee also show that amounts used to be advanced, some payments used to be made and those used to be adjusted and then further amounts used to be advanced. The assessee fell a victim of the circumstances because the forest lease was not renewed and as such the assessee could not recover the amounts which had been advanced.
7. Reliance has also been placed on another decision of the Supreme Court in the case of Commissioner of Income-tax v. Nainital Bank Ltd., [1965] 55 I.T.R. 707 (S.C.) and it was held that under Section 10(1) of the Indian Income-tax Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation, and that whether loss is incidental to the operation of a business is a question to be decided on the facts of each case having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out, and further that the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material.
8. In another case, Commissioner of Income-tax v. Mysore Sugar Co. Ltd., [1962] 46 I.T.R. 649 (S.C.) a similar question came up for consideration. In that case the assessee company used to, purchase sugar-cane from the sugar-cane growers and used to crush the same in the factory to prepare sugar. As a part of its business operations it used to enter into agreement at harvest season each year with the sugar-cane growers who are known commonly as 'oppigedars' and used to advance; to them sugar-cane seedlings, fertilisers and also cash. The 'oppigedars' used to enter into a written agreement called the 'oppige' by which they agreed to sell sugar-cane exclusively to the assessee-company at current market rates and to have the advances adjusted towards the price of sugar-cane, agreeing to pay interest in the meantime. It so happened that in the year 1948-49, due to drought, the assessee-company could not work its sugar mills and the 'oppigedars' could not grow or deliver the sugar-cane. The advances made in 1948-49 thus remained unrecovered because they could only be recovered by the supply of sugar-cane to the assessee-company. The Government set up a committee to investigate into the matter and the committee recommended that the assessee-company should ex gratia forgo some of its dues and the company in pursuance of the same waived its rights in respect of a large sum of money. A question arose whether the assessee-company was entitled to a deduction in tins respect and it was urged on behalf of the department that no deduction could be permissible as it was a gratuitous relief by the assessee-company. Hidayatullah J., as his Lordship then was, has been pleased to observe regarding such transactions as follows :
'To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss a amounting to as loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : For what was the money laid out Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.'
9. It may be mentioned here that the learned counsel for the parties submitted at the time of the hearing that there was no decision of the Supreme Court available in respect of forest leases particularly in respect of the advances made to the sub-contractors and therefore the learned counsel for the assessee-company has relied by way of an analogy and conclusions on the decisions already cited and discussed above.
10. Now I will examine the other relevant sections of the Act. Along with Section 28, 29 lays down as follows :
'29. Income from profits and gains of business or profession, how computed.--The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43.'
11. In my opinion if Section 28 is read along with Section 29 then it would be clear that the computation of the income as contemplated by Section 28 has to be in accordance with the provisions contained in Sections 30 to 43 which means that it should be also in accordance with Section 37 if the case falls under Section 37. In the present case out of Sections 30 to 43 the only sections which can be made applicable are either Section 36 or 37. I have already stated above that the assessee-company's learned counsel is not relying on Section 36 but is relying on Section 37 and to me it appears that Sections 28 and 29 read together do not show that if a case comes under Section 36 then the applicability of Section 37 will be taken out but rather it means that a case may come either under Section 36 or Section 37 and a computation may be made under either of the sections.
12. It also appears that there is a clear distinction between a business expenditure and a business loss, the former is indicative of a volition but in loss it comes upon him so to speak as ab extra and I am also of opinion that non-capital expenditure incurred for the purpose of business would fall to be deducted under the omnibus residuary Section 37 to which I will be now referring. Section 37(1) lays down as follows :--
'Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'.'
13. The essential ingredients of the section are, therefore :
'(i) that it should be an expenditure of the nature not described in Sections 30 to 36 ;
(ii) it should not be in the nature of capital expenditure or personal expenses of the assessee ;
(iii) that it should be laid out or expended wholly and exclusively for the purposes of the business, etc.'
14. The facts and the circumstances which I have stated above would in my opinion clearly show that the advances which had been made by the assessee in the present case were certainly of a type which would be within the contemplation of the words 'laid out or expended wholly and exclusively for the purposes of the business'. Now, with regard to the contention whether Section 37 would be applicable when Section 36 is applicable in the present case, in my opinion it is important to note that the legislature has advisedly used the word 'described' and not 'covered' in Section 37. Section 37 clearly appears to be a residuary section extending the allowance to items of business expenditure and not of business losses which are deductible on the ordinary principles of commercial accounting. It may also be noted here that on a comparison of Section 10(2)(xv) of the Act of 1922 with Section 37 of the Act of 1961, it is clear that the latter is a redraft of the former and as far as Section 10 is concerned, I have already referred to the various decisions of the Supreme Court.
15. It would be also relevant here to quote a passage from Iyengar's Income Tax Commentary, 6th edition, volume 1, page 911, which runs as follows:
'Specific section v. Residuary section.--Section 36(1)(vii) vis-a-vis Section 37(1). Both Section 36(1)(vii) andsection 37(1) cover losses incurred in business. The claim under either head would only be maintainable if the loss is incidental to the business. To this extent, the considerations for the grant of the allowance are common. The departure arises this way. If the loss is due not to irrecoverability, the claim would not arise under the present Section 36. The claim under Section 36(1)(vii) is restricted only to cases where by reason of the inability or insolvency of the debtor to pay, the money is unable to be recovered. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which requires that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business. Consequently, there would be a certain amount of overlapping of these two sections and the validity of a claim might have to be considered under both the sections. Not all allowable losses are bad debts, but all bad debts are allowable losses.'
16. On a consideration of all the facts, it is clear that the nature of the business, the system of working was such that it was necessary to carry on the business that advances may be made and without which the forest lessees may find it extremely impossible to carry on the business. The advances made in the ordinary course of business would have been adjusted and recouped if there had been a renewal of the leases but this could not be possible only because there was no renewal of the leases and as already mentioned above the circumstances show that the non-recoverability was a result of the circumstances. In view of all the facts already stated above, I am also of the view that the word 'income' or 'profit' should not be given an artificial meaning but should be given a meaning as would be given by a reasonable and prudent businessman. The assessee was therefore entitled to a deduction in respect of this advance as expenditure as contemplated by Section 37 of the Income-tax Act of 1961 and the question referred by the Tribunal is, therefore, answered in the negative. There will be no order as to costs.
17. Let a copy of the order be forwarded to the Appellate Tribunal as contemplated by Section 260(1) of the Income-tax Act of 1961.
Mian Jalal-Ud-Din , J.
18. I agree.