Ismail, J.:— The Income-tax Appellate Tribunal, Bangalore Bench, at the instance of the assessee, under section 256(1) of the Income-tax Act, 1961, has referred the following question of law for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, it has been rightly held that the expenditure of the two sums of Rs. 12,039 and Rs. 20,550 were not revenue expenses and as such not admissible deductions?”
2. The assessment year was 1967-68 for which the accounting year was the year ending on 31st December, 1966.
3. The first amount represented the cost of construction of a building. It stood on an account called “Mill Colony School Building Account”, and it was transferred to “Labour Welfare Account” during the close of the year. This amount represented What was spent by the assessee in the construction of an elementary school on the land belonging to the Palani Andavar Employees' Housing Cooperative Society. Part of the expenditure representing the amount in question was met by the assessee and the balance was met by the aforesaid society. On the completion of the building it was handed over to the Udamalpet Municipality to be run as a school for the benefit of the children of the employees of the assessee. The Income-tax Officer treated this amount as expenditure of a capital nature and, therefore, declined to allow it as a deduction.
4. The second item represented the advances made by the assessee to about forty-nine employees to enable them to construct houses through a co-operative society. These advances Were made during the period from 1959 to 1963 and were debited in an account called “Staff House Construction Advance”. At the close of the accounting year concerned the assessee transferred this amount to “Staff welfare account”. The Income-tax Officer negatived this claim for the reason that no expenditure was incurred during the year under reference and, further, that it was not incurred for providing any amenity to all the employees or even a majority of the employees. These conclusions of the Income-tax Officer were affirmed by the Appellate Assistant Commissioner as well as by the Tribunal. It is the correctness of these conclusions that is challenged in the form of the question referred to this court extracted already.
5. As far as the first item is concerned; as we pointed out already, it represented the amount spent in the construction of a school building which was subsequently handed over to the Udamalpet Municipality. The Tribunal did not find against the claim of the assessee that the school building was exclusively used for the children of the employees. From this it will be seen that the building did not constitute an enduring asset to the assessee. As a matter of fact, the Tribunal itself points out in its order that the municipality wrote to the assessee on April 1, 1963, informing the assessee that it could not incur any expenditure of a capital nature and, therefore, requesting the assessee to put up a school building at the cost of the co-operative society to be handed over to the municipality for future maintenance. Therefore, cven at the very inception the school building was not intended to be an asset of the assessee, but it was intended to be part of a welfare scheme for the eductional facilities of the children of the employees of the assessee, Consequently, the conclusion of the authorities below that the expenditure was in the nature of capital expenditure is clearly erroneous.
6. As far as the second item of Rs. 20,550 is concerned, it stands on a different footing. As we pointed out already, admittedly, during the period from 1959 to 1963, various amounts were advanced to forty-nine employees for the construction of houses and they were debited in the account of the assessee as “Staff house construction advance”. Only at the close of the accounting year, namely, on December 31, 1966, the entire advances thus given were written off to profit and loss account by a charge to “Staff welfare account”. Thus, it is clear that the money was originally advanced as loan to the employees and subsequently during the relevant year the loans were written off by creating a charge to “Staff welfare account”. We are clearly of the opinion that the nature of the payments as well as the manner in which the same were dealt with in the accounts show that the assessee intended only to advance loans to the employees and, there fore, the simple fact that on the last day of the accounting year it debited the entire amount in question to the profit and loss account by a charge to the staff welfare account would not make it a business expenditure to be allowed in the computation of the profits and gains of the assessee. How ever, Mr. S. Swaminathan, the learned counsel for the assessee, very strong ly relied on the decision of the Supreme Court in Commissioner of Income-tax v. Mysore Sugar Co. Ltd., [1962] 46 ITR 649 (SC). In that case the assessee, who was engaged in the manufacture of sugar, used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rate and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year, owing to drought, the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A committee appointed by the Government recommended that the assessee should ex-gratia forgo some of its dues. The assessee, accordingly, waived its rights in respect of Rs. 2,87,422 and claimed this amount as a deduction under sections 10(2)(xi) and 10(2)(xv) of the Indian Income-tax Act, 1922. The question was whether the amount of Rs. 2,87,422, which was given up by the assessee, represented a loss of capital or was a revenue expenditure. In the context of considering that question, the Supreme Court made certain general observations as to when an expenditure would be of a capital nature or revenue nature. The Supreme Court observed at page 653:
“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 payment's reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a 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.”
7. After examining a few decisions bearing on this distinction, the Supreme Court observed, with regard to the facts of the case before it (page 655):
“The amount was an advance against price of one crop. The Oppigeders were to get the assistance not as an investment by the assessee-Company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee-company was concerned, represented the current expenditure towards the purchase of sugarcane, and it makes no difference that the sugarcane thus purchased was grown by the Oppigeders with the seedlings, fertiliser and money taken on account from the assessee-company. In so far as the assessee-company was concerned, it was doing no more than making a forward arrangement for the next year's crop and paying an amount in advance out of the price, so that the growing of the crop may not suffer due to” want of funds in the hands of the growers. There was hardly any element of investment which contemplates more than payment of advance price. The resulting loss to the assessee-company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.”
8. We are clearly of the opinion that this decision has no bearing on the present case before us. In the first place, in that case what was paid was advance price for the raw material of the assessee-company. Secondly, there was a natural calamity in the form of drought which prevented the sugarcane growers from growing sugarcane and delivering the same to the assessee. Thirdly, the committee constituted by the Government recommended that the assessee should write off the amount in question. Consequently, it is clear from the facts of that case that what was originally advanced was payment of price for the next year's crop and, therefore, that has no relevancy to the point we have to consider in the present case. As far as the present case is concerned, even the assessee treated the amount paid by it to its employees from 1959 to 1963 only as a loan. Suddenly, on December 31, 1966, it chose to treat the loans as not recoverable, by charging the same to staff welfare account. From one point of view, during the accounting year in question, the assessee did not incur any expenditure at all and, therefore, the question of deducting any such expenditure does not arise. If, on the other hand, the claim of the assessee is to be on the basis of any write-off, such a claim can be allowed, only when the write-off is in relation to a trading transaction, where the money due to the assessee could not be recovered and, therefore, had to be written off. No such consideration applied to the present case. Under these circumstances, we are clearly of the opinion that the authorities below, including the Tribunal, were right in holding that the assessee was not entitled to any deduction of this amount.
9. The result is that we answer the question referred to us in the negative and in favour of the assessee, as far as the amount of Rs. 12,039 is concerned, and in the affirmative and against the assessee so far as the amount of Rs. 20,550 is concerned. There will be no order as to costs.