1974 (11) TMI 34 - HC - Income Tax

Loss on purchase and sale of government bonds: s.37 allowability remitted for rehearing to decide capital versus revenue

Whether loss on purchase and sale of Government bonds is deductible under s.37: Court framed two legal bases - (a) treat difference as revenue expenditure ... Deduction u/s 37 - loss on purchase and sale of Government bonds - Whether, the Tribunal had material to hold and was right in law in holding that the loss on the purchase and sale of Government bonds was allowable either as expenditure laid out wholly and exclusively for the purpose of the assessee's business or as a loss incurred in the course of the carrying on of that business and incidental to that business ? - HELD THAT:- The first part relates to the allowability of the difference between the outlay on Government bonds and their sale value as an expenditure. The second part refers to the allowability of the same as a business loss. As already stated, assessee at the time of arguments before us did not want to claim the difference as a business loss. In order to entitle a deduction under section 37, two conditions have to be satisfied : (1) the expenditure should have been incurred wholly and exclusively for the purpose of the business ; and (2) such expenditure shall not be in the nature of a capital expenditure. The Tribunal considered the first question and did not consider the second. Therefore, the question of law which arises in this case, even as reframed by us, could not be answered without a finding by the Tribunal on the nature of the expenditure. However, the reference must be answered technically in favour of the assessee. But we want to make it clear that it would be open to the Tribunal now to consider the nature of the expenditure when it rehears the appeal under section 260(1) and, on recording, after hearing parties, a clear finding, decide the allowability of the same. Issues involved: Assessment of loss on purchase and sale of Government bonds as allowable deduction u/s 37 of Income-tax Act, 1961.Summary:The assessee, a private limited company operating buses and lorries, incurred a loss of Rs. 13,820 on the purchase and sale of Government bonds. The Inspecting Assistant Commissioner and the Commissioner of Income-tax initially disallowed the claim, stating that the loss was not part of the assessee's business. However, the Tribunal allowed the deduction, considering the pressure from road transport authorities and the necessity to mobilize funds for the business. The Tribunal held that the expenditure was incurred for the purpose of the business and directed the deletion of the disallowance.The High Court, in compliance with the directions, considered the question of whether the loss on Government bonds was allowable as a business expenditure u/s 37 of the Income-tax Act, 1961. The court noted the pressure felt by the assessee from the authorities and the commercial expediency behind the investment in bonds. Referring to relevant case laws, the court emphasized that if there is a nexus between the expenditure and the business, it can be considered as incurred in the course of business. The court reframed the question to focus on the deductibility of the difference between the outlay on bonds and their sale proceeds under section 37.The court highlighted the conditions for deduction u/s 37 - expenditure incurred wholly and exclusively for business and not in the nature of capital expenditure. While the Tribunal had considered the first condition but not the second, the court technically ruled in favor of the assessee. However, it directed the Tribunal to reexamine the nature of the expenditure in the rehearing of the appeal to determine its allowability under section 37.