1. The assessee is a private limited company operating a fleet of buses and lorries under permits granted by the road transport authorities of the Government of Tamil Nadu. In the year ending March 31, 1962, the company had subscribed to certain Government bonds at the instance of the road transport authorities. Within a short time of its purchase, these bonds were sold and there was a loss of Rs. 13,820. For the previous year ending March 31, 1962, the company returned an income of Rs. 12,16,625 and in arriving at this income it claimed the above sum of Rs. 13,820 as loss incidental to its business. It was contended before the Inspecting Assistant Commissioner, who did the assessment in this case, that the assessee was forced to purchase these bonds by the Regional Transport Authorities, that the assessee had borrowed large sums of money for the purpose of its business at very high rates of interest and that in order to make the money available for its business the assessee had to sell the bonds very soon after its purchase at a loss. The Inspecting Assistant Commissioner rejected this claim on the ground that no evidence had been produced to show that the assessee had been forced to purchase the bonds by the road transport authorities and that there was no evidence that if the assessee had not purchased the bonds its business would suffer.
2. The Commissioner of Income-tax also dismissed the appeal in the view that the loss was occasioned on account of purchase and sale of bonds which was not the business of the assessee, and, consequently, the amount cannot be treated to be a revenue loss. The assessee preferred a further appeal to the Tribunal. In the course of the hearing the assessee produced several letters and notices issued by the road transport authorities calling upon them to subscribe to the Government bonds. It was argued that the assessee had to purchase the bonds as its business depended on the goodwill of the road transport authorities, and that it had to sell the bonds so soon after purchase even at a loss as the assessee was in need of funds for its own business and its borrowings were heavy and on payment of high interest. The Tribunal was of the view that the letters and notices, coming as they are, from the road transport authorities could not have been easily ignored by the assessee when its entire business depended upon the goodwill of the officers. Though there was no compulsion or threat specifically held out in these letters and notices, they could have left no doubt in the mind of the assessee that it could ignore the request only at its peril. The assessee also did not have any surplus funds and, on the other hand, had borrowed considerable amounts for its business at much higher rate of interest than that which the assessee would get under the bonds. It was also necessary for the assessee to mobilise all its available resources in order to carry on its business and, therefore, it had to sell the bonds at a short time after the purchase. These facts, according to the Tribunal, proved that, though the purchase and sale of bonds was not part of the business of the assessee, the expenditure was incurred by the assessee only for the purpose of its business. In this view, the Tribunal held that the assessee was entitled to claim this loss in computing its assessable income and there was no justification for disallowing the same. Accordingly, it directed the deletion.
3. In compliance with the directions of this court under Section 256(2) of the Income-tax Act, 1961 (hereinafter called 'the Act'), at the instance of the revenue, the following question has been referred :
'Whether, in the circumstances of the case, 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 ?'
4. There could be no doubt on the facts stated above that the assessee must have felt some kind of a pressure or compulsion from the road transport authorities and a feeling that any failure to comply with the request might involve the displeasure of the authorities. The nature of the business of the assessee is such that it might have to keep the road transport authorities in good humour and the assessee might have bona fide felt that it was necessary in order to carry on the business that it shall not displease the authorities. It is not also out of place to mention that the assessee had borrowed at heavy rates of interest large amounts of money for the purpose of its business and it did not have any surplus funds which could have been invested. In the circumstances, therefore, the investment must have been motivated or inspired only by commercial expediency and not with a view to make profits on investment. It should also be borne in mind that the jurisdiction of the revenue in this regard is confined to deciding the reality of the expenditure and whether it was wholly or exclusively for the purpose of the business and it is not for the revenue to question the commercial expediency of the expenditure. Commercial expediency is a matter entirely left to the judgment of the assessee--vide Amarjothi Pictures v. Commissioner of Income-tax.
5. The learned counsel for the assessee in this connection relied on the decision in Ambala Bus Syndicate Private Ltd. v. Commissioner of Income-tax. In that case also the assessee was a transport company whose road permits were to expire on June 30, 1969. There was a threat of complete nationalisation of transport business and the Government had also issued a notification in that regard. The transport companies formed a forum styled Punjab Motor Union in order to prevent nationalisation. All the transport operators donated money to this union which, in turn, made donations out of that money to different political parties. In that way the transport operators were able to exercise their weight with the Government through the political parties and ultimately the total nationalisation was prevented. The assessee for his part also got an extension of seven years for its route permits. The assessee who paid Rs. 10,000 to the union claimed it as arevenue expenditure. The High Court allowed this expenditure on the ground that there was a clear connection between the contribution and the business of the assessee because it got over the notification issued for nationalisation and also got an extension of its route permits.
6. The learned counsel for the revenue distinguished this case on the ground that on the day when the amount was paid the assessee therein had applied for renewal of the permits and in order to prevent the nationalisation of the bus routes and renewal of the permits he had to incur that expenditure. The learned counsel for the revenue also contended that since it has been found by the Tribunal that on the admitted fact that the purchase and sale of Government bonds was not part of the assessee's business, the amounts spent for the purchase could not be considered as an expenditure strictly for the purpose of its business, though the expenditure might have been incurred in the course of carrying on the business of the assessee.
7. The Supreme Court in Indian Molasses Co. (P.) Ltd. v. Commissioner of Income'tax considered the meaning of the word 'expenditure' in Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held therein that in the context in which that word was used in the clause, it means money laid out by calculation and intention. It is what is paid out or away and something which is gone irretrievably. It is in this sense we are also concerned in the present case.
8. It is true that in Ambala Bus Syndicate Private Ltd. v. Commissioner of Income-tax there was an immediate or direct benefit to the assessee. But it is difficult to accept the contention that only when there is an immediate or direct benefit to be obtained any expenditure incurred in that connection could be said to have been incurred for the purpose of business. If there is some connection or nexus between the expenditure and the business carried on by the assessee it would amount to an expenditure incurred in the course of business and for the purpose of the same. We have no doubt on the facts and circumstances of this case that the expenditure was incurred by the assessee in the course of its carrying on the business as a transport operator and it was wholly and exclusively laid out for the purpose of the same.
9. The learned counsel for the revenue then contended that compulsion, if any, could have been only for investment in bonds and the bonds could not be considered as its stock-in-trade as it was not the assessee's line of business. The learned counsel also pointed out that the Tribunal, while it gave a finding that the expenditure was incurred by the assessee only for the purpose of its business, it did not go into the question whether the expenditure was not in the nature of a capital expenditure. The learnedcounsel for the assessee did not want to argue the case before us as an allowable loss but contended that the bonds were never intended to be treated as a commercial asset or investment and it was merely acquired to satisfy outside authority and thereby to gain benefits in the business as a transport operator.
10. Now, the question referred to us consists of two parts. The first part relates to the allowa'bility 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, the learned counsel for the assessee at the time of arguments before us did not want to claim the difference as a business loss. The question will, therefore, have to be reframed and, accordingly, we reframe the question as follows:
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 13,820 representing the difference between the assessee's outlay on Government bonds and their sale proceeds is an allowable deduction under Section 37 of the Income-tax Act, 1961 ?'
11. 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. Bat 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. There will be no order as to costs.