# COMMISSJO.NER OF INCOME-TAX, U.P v. NAINITAL BANK LTD. September 15, 1966

- **Citation:** [1967] 1 S.C.R. 348
- **Court:** Supreme Court of India
- **Decided:** 1966-09-15
- **Bench:** J. C. Shah, V. Rama5Wami Mid V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissjo-ner-of-income-tax-u-p-v-nainital-bank-ltd-september-15-1966-3831
- **Pages:** 5

## Headnote

Indian /nt:ome-tax Act, 1922, s. 10(2) (xv)--Jewellery p/edgtd with
bank stolen--Bank crediting cost oj jewellery to constituents accounts and
setting ofi against such credit amounts advanced to them-Anwunts so
credited whether expenditure laid Otlt for the purpose of the business.
Jewellery pledged with the respondent bank by its constituents was
stolen by dacoi1".
The bank settled the claims of the constituents
by
crediting the value of the jewellery again.st the amounts advanced to the
constituenl.t. When tho market value of the jewellery pledged exceeded the
amount advanced the difference was paid by the bank to the constituent; where
the market ,...iue of the jewellery was les.. than the amount advanced
the difference was recovered from the constituent.
Under
the adjustments made in this manner the Bank in the year 1952 made a totnl oayment of Rs. 48,891 and in the year 1953 the Bank paid Rs. 1,21,760. In
the relurna for the a=.ment year 1953-54 and 1954-55 the Bank claimed
in computing its taxable income the amounia;:,c:!: to the eonstituenta. The
claim was dWllowcd by the assessing and a
authorities but the High
Court in reference under s. 66(2) of the Indian Income-tax Act. 1922
allowed iL
The Commissioner of lncom<>-tax appealed to this Court by
cert:ficate.
It was urged on behalf of the appellant that (I)
by writing
off eilbcr partially or wholly the amount& &le from ita conslituents in
its books of account the Bank merely forbore
to enforce
its
demand
against it< constituents and such forbearance was not expenditure within the meaning of s. 10(2) (xv) of the Indian Income-tax Act, 1922, (2)
in any case the expenditure was not laid out wholly and exclusively for
the purposes of the business since the bank was under no legal obligation
to pay the cost of jewellery.
HELD : (i) In il.t normal meaning the expression "expenditure" denotes "spending" or "pay:ng out or away" l.t., somethlnJ that goes out
of the coffers of the a.ssessce.
A mere liability to satisfy an obligation
by an a.s- is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of ca.sh or property or by settlement of ac-
-.nts there is expenditure.
But expenditure does not necessarily involve
actual delivery or paning with money or property. If there are crOStctaim.~ne by the assessec against a stranger and the other by the stranger
against the assmee
and as a result of accounting the balance due only
ia paid, the amoUDt which is debited against the assessee in the settlement
Of accounts mar appropriately be termed expendirurc within the meaning
of •· 10(2) (xv . [350 E-0]
It could not be said that there was by the settlement.t mere forbearance to recover the amounts
advanced to the constituents.
The settle-.
menta were bilateral : each oon.stituent admitted his liability to repay the
amount which had been advanced to him, and the Bank admitted liability
to pay to tho Constituent the value of the jewellery pledged with it.
WheD
the Bank paid to the constituent the difference between the value or the
iewellery pledged wi1h it and the amount due by the comtituent the Bank
m efteet paid the value of the jewellery against payment by the constituB
c
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C.I.T. v. NAINITAL BANK (Shah, J.)
349
A
mt of the amount due by him. , In making payment of that difference
the Bank in truth laid out expenditUre equal to the value of the jewellery
pledged. [351 A.CJ
·
(ii) The Bank could have if so advised taken its stand strictly on its
legal obligations and could have recovered the amounts due by the constltuents at the same time denying liability to make any compensation fur
the loss of jewellery pledged with it But such a stand might very well
B
have ruined its business, especlally in the rural areas in which it operated.
In choosing to compensate the coIIStituents and thus maintaining
their
aoodwill the Bank laid out expenditure for the purpose of itS business.
[351 G-Hl
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CML APPELLATE JURISDICTION : Civil Appeals Nos.

## Text

COMMISSJO.NER OF INCOME-TAX, U.P.
v.
NAINITAL BANK LTD.
September 15, 1966.
(J. C. SHAH, V. RAMA5WAMI MID V. BHARGAVA, JJ.J
Indian /nt:ome-tax Act, 1922, s. 10(2) (xv)--Jewellery p/edgtd with
bank stolen--Bank crediting cost oj jewellery to constituents accounts and
setting ofi against such credit amounts advanced to them-Anwunts so
credited whether expenditure laid Otlt for the purpose of the business.
Jewellery pledged with the respondent bank by its constituents was
stolen by dacoi1".
The bank settled the claims of the constituents
by
crediting the value of the jewellery again.st the amounts advanced to the
constituenl.t. When tho market value of the jewellery pledged exceeded the
amount advanced the difference was paid by the bank to the constituent; where
the market ,...iue of the jewellery was les.. than the amount advanced
the difference was recovered from the constituent.
Under
the adjustments made in this manner the Bank in the year 1952 made a totnl oayment of Rs. 48,891 and in the year 1953 the Bank paid Rs. 1,21,760. In
the relurna for the a=.ment year 1953-54 and 1954-55 the Bank claimed
in computing its taxable income the amounia;:,c:!: to the eonstituenta. The
claim was dWllowcd by the assessing and a
authorities but the High
Court in reference under s. 66(2) of the Indian Income-tax Act. 1922
allowed iL
The Commissioner of lncom<>-tax appealed to this Court by
cert:ficate.
It was urged on behalf of the appellant that (I)
by writing
off eilbcr partially or wholly the amount& &le from ita conslituents in
its books of account the Bank merely forbore
to enforce
its
demand
against it< constituents and such forbearance was not expenditure within the meaning of s. 10(2) (xv) of the Indian Income-tax Act, 1922, (2)
in any case the expenditure was not laid out wholly and exclusively for
the purposes of the business since the bank was under no legal obligation
to pay the cost of jewellery.
HELD : (i) In il.t normal meaning the expression "expenditure" denotes "spending" or "pay:ng out or away" l.t., somethlnJ that goes out
of the coffers of the a.ssessce.
A mere liability to satisfy an obligation
by an a.s- is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of ca.sh or property or by settlement of ac-
-.nts there is expenditure.
But expenditure does not necessarily involve
actual delivery or paning with money or property. If there are crOStctaim.~ne by the assessec against a stranger and the other by the stranger
against the assmee
and as a result of accounting the balance due only
ia paid, the amoUDt which is debited against the assessee in the settlement
Of accounts mar appropriately be termed expendirurc within the meaning
of •· 10(2) (xv . [350 E-0]
It could not be said that there was by the settlement.t mere forbearance to recover the amounts
advanced to the constituents.
The settle-.
menta were bilateral : each oon.stituent admitted his liability to repay the
amount which had been advanced to him, and the Bank admitted liability
to pay to tho Constituent the value of the jewellery pledged with it.
WheD
the Bank paid to the constituent the difference between the value or the
iewellery pledged wi1h it and the amount due by the comtituent the Bank
m efteet paid the value of the jewellery against payment by the constituB
c
D
E
F
G
H
C.I.T. v. NAINITAL BANK (Shah, J.)
349
A
mt of the amount due by him. , In making payment of that difference
the Bank in truth laid out expenditUre equal to the value of the jewellery
pledged. [351 A.CJ
·
(ii) The Bank could have if so advised taken its stand strictly on its
legal obligations and could have recovered the amounts due by the constltuents at the same time denying liability to make any compensation fur
the loss of jewellery pledged with it But such a stand might very well
B
have ruined its business, especlally in the rural areas in which it operated.
In choosing to compensate the coIIStituents and thus maintaining
their
aoodwill the Bank laid out expenditure for the purpose of itS business.
[351 G-Hl
c
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E
F
G
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CML APPELLATE JURISDICTION : Civil Appeals Nos. 601 &
602 of 1965.
Appeals from the judgment and decree dated April 12, 1962
of the Allahabad High Court in I.T.R. No: 484 of 1960.
R. M. Hazarnavis, R. H. Dhebar and R. N. Sachthey, for the·
appellant (in both the appeals).
S. T. Desai, B. P. Sjngh and Nawiit Lal, for the respondent
(in both the appeals).
The Judgment of the Court was delivered by
Shah, J. The. Nainital Bank Ltd., has its head office at Nainital
and a branch at Ramnagar. Currency notes of the value of
.Rs. 1,06,000/-and a large quantity of jewellery pledged with the Bank
by its constituents were stolen by dacoits on June 11, 1951 from
the premises of the Bank. The Bank cla'imed in its return for the
&Ssessment year 1952-53 the loss of currency notes as a permissible
deduction. The . departmental authorities disallowed the claim.
But. the claim was allowed by the High Court of Allahabad and
that order was confirmed by this Court see Commissioner of Income- ·
tax v. Nainital Bank Ltd.(').
In regai;d to the loss of jewellery the Bank settled the clailll$
.of the constitμents who had pledged their jewellery. The teflll$
of settleinent were these: when the market value of the jewellery
pledged exceeded the amount advanced, the difference was paid
by the Bank to the constituent: when the market value of the jewellery. was less than the amount advanced, ·the difference was.
recovered from
·the
constituent.
Under
the
adjustments.
made in this manner, in the year 1952 the Bank made a total payment of Rs. 48,891/-andin the year 1953 the Bank paid Rs. 1,21,760.
In its returns for the assessment years 1953-54 and 1954-55 the Bank
claimed in computing its taxable income the amounts so paid to
the ~nstituents. The Income-tax Officer disallowed the clailll$
and the order was confirmed in appeal to the Appellate Assistant
Commissioner. An appeal to the Income-tax Appellate. Tribunal
was ·also unsuccessful.
1. [196Sl 11S.C.R. 34o : SS I.T.R. 707 .
.
350
SUPllBWI! COUllT J.EPOllTS
( 1967] I S.C.R.
The Tribunal submitted a statement of the case and referred
the following question to the High Court of Allahabad for opinion :
"Whether on a true interpretation of s. 10 (I), s. 10 (2)
(xi) and s. 10 (2) (xv) 0£ the Indian Income-tax Act, the
claims for the losSC!. of Rs. 48,891/- and Rs.
1,21,760/-
were permissible in the assessment years 1953-54 and
1954-55 respectively ?"
Before the High Court the claim for deduction under s. 10 (2) (xi)
was abandoned by the Bank, and the High Court negatived the
claim of the Bank for deduction of the amount under s. 10 (I).
But the High Court held that having regard to the true nature of
the settlements made with the constituents the amounts credited
as the value of jewellery against the claim of the constituents for
amounts advanced to them must be regarded as expenditure within
the meaning of s. 10 (2) (xv) and since such credit was given by
the Bank in the interest of its business, the amounts paid were
liable to be deducted in computing the taxable income. The
Commissioner of Income-tax has appealed with certificate granted
by the High Court under s. 66 A (2) of the Income-tax Act.
In these appeals counsel for the Commissioner raised two
rontentions: that by writing-off either partially or wholly the amounts
due from its constituents in its books of account the Bank did not
expend or lay out expenditure within the meaning of s. 10 (2) (xv);
and that in any event the· expenditure was not laid out wholly and
exclusively for the purposes of the business of the Bank. In its
normal meaning the expression "expenditure" denotes "spending"
or "paying out or away" i.e. something that goes out of the coffers
of the a.ssessee. A mere liability to satisfy an obligation by an
assessee is undoubtedly not "expenditure": it is only when he
satisfies the obligation by delivery of cash or property or by settlement of accounts there is expenditure. But expenditure does not
necessarily involv.e actual delivery or parting with money or property.
If there are cross claims-one by the assessee· against a' stranger
and the other by the stranger against the assessee-and as a result
of accounting the balance due only is paid, the amount which is
debited against the assessee in the settlement of accounts may
appropriately be termed expenditure within the meaning of s. JO
(2) (xv).
Counsel for the Commissioner submitted that when the Bank
advanced a loan to its constituent it incurred expenditure and when
the Bank failed to recover under an arrangement with the constituent
the amount due to it, there was merely an act of forbearance to
enforce the demand and such an act of forbearance was not expenditure within the meaning of s. JO (2) (xv). Mere forbearance to
realize a claim, it may be accepted, is not expenditure within the
meaning of the Act; but we are not called upon to consider whether
A
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C,J,T. V, NAJNITAL BANK (Shah, /.)
351
t.he advances made by the Bank to its constituents may in certain
circumstances constitute expenditure. Nor can it be said that,
there was by the settlements mere forbearance to recover the amount.
The settlements made by the Bank with its constituents were in
their nature bilateral: each constituent admitted his liability to
repay the amount which had been advanced to him, and the Bank
admitted liability to pay to the constituent the value of the jewellery
pledged with it. When the Bank paid to the constituent the difference between the value of the jewellery pledged with it and the
amount due by the constituent, the Bank in effect paid the value
of the jewellery against payment by the constituent of the amount
due by him. In making payment of that difference the Bank in
truth laid out expenditure equal to the value of the jewellery
pledged.
It was urged by the Col)llJlissioner that the Bank was under
no legal liability to pay to the constituents the value of the jewellery
pledged with it. It was said that the Bank was, as a pledgee, a
bailee of the jewellery and was in law required to take as much
care of the pledged jewellery as a person of ordinary prudence
would take under similar circumstances of his own jewellery of
the same bulk quantity and value, and the Bank having provided
an adequate number of watchmen, it was not liable for the loss· of
the property pledged. Granting that on proof that it had taken
as much t:are of the jewellery pledged with it as it would have taken,
if it belonged to it, the Bank could enforce its rights and recover
the full amount due from the constituents, the question still remains
whether in admitting liablity for the value of the jewellery ·pledged,
the Bank laid out expenditure for the purpose of the business.
The question is not about the strict enforcement of the legal rights
and obligations between the Bank and its constituents. · The sole
question is whether the Bank in incurring the expenditure acted
in the interest of and for the purpose of its business. The Bank
is carrying on banking business and advances loans on the security
of jewellery. The credit of a banking business is very sensitive:
it largely thrives upon the confidence which its constituents have
in its management. To maintain that confidence the management
has often to make concessions and thereby to preserve the goodwill of the business and its relations with the clientele. The Bank
could have if so advised taken its stand strictly on its legal obligations, and could ·have recovered the amounts due by the constituents
at the same time denying liability to make any compensation for
the loss of jewellery pledged with it. But such a stand might very
well have ruined its business, especially in the rural areas in which
it operated. The Bank had evidently two courses open: to enforce
its rights strictly according to law, and thereby to Jose the gootlwill it had built up among the constituents, or to compensate the
constituents for loss of their jewellery, and maintain its business
352
SuPl.EMI! COURT
llEPOl.TS
[1967] I S.C.R.
connections and goodwill. In choosing the second alternative,
!
in our judgment, the Bank laid out expenditure for the purpose of
its business. Paying to the constituents the price of the jewellery
stolen in a robbery or a burglary was therefore expenditure for the
purpose of the business. There can be no doubt that the expenditure
was wholly and exclusively in the interest of the business. The
expenditure was laid out for no other purpose.
B
We hold accordingly that the settlements with the constituents
and the consequent posting of entries in the books of account
cannot be regarded as forbearance to enforce the claim of the
Bank to recover the loans advanced. The settlement consisted
of two constituent elements-paying by the Bank of the value
of the jewellery pledged with it against receipt from the constituent
C
of the amount which was recoverable by the Bank. The first clement of the transaction would appropriately be deemed expenditure
and such expenditure having been laid out for protecting and furthering the business of the Bank was properly admissible under
s. 10 (2) (xv) of the Income-tax Act, 1922.
The appeals therefore fail and are dismissed with costs. There
D
will be one hearing fee.
Appeals dismissed.
G.C.