1. The question referred by the Income-tax Appellate Tribunal, Madras, for the opinion of this court at the instance of the revenue is this :
' Whether, in the circumstances of the case, the Tribunal was right in law in holding that the loss in the purchase and sale of Government bonds was allowable as a loss incidental to the carrying on of the assessee's business ?'
2. The assessee, a private limited company carrying on bus transport business, returned for the assessment year 1965-1966, an income of Rs. 71,934, claiming certain deductions inclusive of a loss of Rs. 3,127 which was stated to have been incurred in the purchase and sale of certain Government bonds during the relevant accounting year. The taxing officer disallowed this sum of Rs. 3,127 in computing the net income at Rs. 80,310 after allowing some deductions. In the assessee's appeal before the AAC, it was contended that the assessee had to subscribe to Government loans at the instance of the road transport authorities as otherwise permits would not have been granted to ply the buses and that the taxing officer should have allowed deduction of the loss of Rs. 3,127 incurred by the assessee by the sale of the Government bonds before they became ripe for payment, The AAC confirmed the taxing officer's order disallowing this amount on the ground that it was only capital loss not relating to the business carried on by the assessee whose business does not include the purchase and sale of Government bonds. In the assessee's further appeal to the Tribunal, it was considered that there is no specific provision in Section 10(2) of the I.T. Act for allowing the deduction claimed by the assessee and that it could be allowed only if it could be said to have resulted out of carrying on of the business and to be incidental to it having regard to the accepted commercial practice and trading principles. The Tribunal found that the motor vehicles inspector had handed over the necessary forms to the assessee for purchasing Government bonds, that the assessee was under an obligation to purchase the bonds for the smooth running of the transport business especially when the mandate for the purchase came from the motor vehicles inspector, that the assessee borrowed the necessary money from the bank at 10% interest and purchased the Government bonds on August 25, 1963, and that since the bonds fetched interest of only 4 1/2%, the assessee who was incurring loss, was obliged to sell the bonds on October 13, 1964, at a loss of Rs. 3,127. The Tribunal held, following this court's decision in CIT v. Coimbatare Salem Transport (P.) Ltd. : 61ITR480(Mad) , that the loss was incurred while trying to discharge the obligation in accordance with the accepted commercial practice in this line of business and that the assessee was entitled to the deduction claimed, and allowed the appeal.
3. Since the matter revolves on Section 37(1) of the I.T. Act, 1961, we shall extract it:
' Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80V and not being in the nature of capitalexpenditure 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'.'
4. The scope of the expression 'for the purpose of the business ' was considered by the Supreme Court in CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , where their Lordships have observed (p. 150):
' The expression ' for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.'
5. In CIT v. Nainital Bank Ltd. : 55ITR707(SC) a public company which carried on the business of banking had a branch where in the usual course of its business large amounts were kept in various safes in the premises. There was a dacoity in the branch at about 7.00 P.M. on June 11, 1951, and the dacoits carried away cash amounting to Rs. 1,06,000. Their Lordships of the Supreme Court held that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the company from the banking business and they have observed 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. In Venkatachalapathy Iyer v. CIT : 20ITR363(Mad) , which came up before a Division Bench of this court, the assessee, a firm carrying on business as yarn merchants, employed a clerk who in such capacity acted as salesman, received and disbursed cash in the absence of the managing partner and collected bills and maintained cash chitta of transactions conducted by him including collections and expenses. In May, 1941, it was discovered that the clerk had embezzled a total sum of Rs. 36,000 odd during the period of about one year up to 24th October,1940, by short totalling the receipts and overtotalling the payments made by him and pocketing the difference. The clerk subsequently paid a sum of Rs. 16,250 to the assessee in full settlement of the claim. The assessee claimed deduction for the difference between the amount embezzled and the amount paid by the clerk. The learned judges held that the sums could be treated as a loss in the accounting period of the assessment year and was deductible from the profits of that period. In Badridas Daga v. CIT : 34ITR10(SC) , their Lordships of the Supreme Court have observed that the loss resulting from embezzlement by an employee or agent in a business is admissible as a deduction under Section 10(1) of the Indian I.T. Act of 1922 if it arises out of the carrying on of the business and is incidental to it. In that case, the assessee carried on business as money-lender, dealt in shares and bullion and commission agent, through a power of attorney agent who had authority to operate even on bank accounts. The agent withdrew from the bank sums aggregating to Rs. 2,30,636 and applied them in satisfaction of his personal debts. The assessee cancelled the power-of-attorney granted to him when they came to know of the true state of affairs and filed a suit against him and could recover only a sum of Rs. 28,000 from him. The assessee wrote off the balance and subsequently claimed deduction for the amount in computing the income for the purpose of income-tax. It has been held that misappropriation of funds by the agent was incidental to the carrying on of the business and that the difference was deductible, in computing profits, under Section 10(1) of the Act of 1922.
6. In Addl. CIT v. Badrinarayan Shrinarayan Akodiya : 101ITR817(MP) decided by a Division Bench of the Madhya Pradesh High Court, the assessee had paid two sums as donation to the Chief Minister's Drought Relief Fund and clained deduction of the said amounts as business expenses under Section 37(1) of the I.T. Act, 1961. Those amounts were found to be voluntary donations, and it has been held that they could be properly allowed only as voluntary donations for charitable purposes under Section 80G(2)(a)(v) of the Act and not as expenses under Section 37(1) of the Act. It has been observed by the learned judges that any donations to political parties or Government sponsored funds, with the object of gaining some advantage in future would not be deductible expense and that they are opposed to public policy. But a different view has been taken so far as the subscriptions to Government sponsored funds are concerned by a Bench of this court in CIT v. Gobald Motor Service (P.) Ltd. : 100ITR240(Mad) . In that case, the assessee, a bus operator, subscribed for certain Government bonds at the instance of the road transport authorities and within a short time thereafter, sold them at a loss of Rs. 13,820. The claim for deduction of the amount as an expenditure incidental to the business was disallowed by the departmental authorities but allowed by theTribunal as expenditure incurred in the course of and for the purpose of the assessee's business. The learned judges have observed (p. 242):
' 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 k shall not displease the authorities. '
7. 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.
8. But the learned judges, however, reframed the question as follows (p. 244);
' 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 ?'
and have observed (p. 244) :
' 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. '
9. The records in the present case show that the assessee, a bus transport company, had borrowed money from a bank at 10% interest and subscribed to the Government bonds carrying interest only at 4 1/2% at the instance of the road transport authorities. Evidently as it had happened in CIT v. Gobald Motor Service (P.) Ltd : 100ITR240(Mad) it was to keep the road transport authorities in good humour under the bona fide belief that it was necessary in order to carry on the business as a bus operator. Subscribing to Government loans as in the present case is not, in our opinion, opposed to public policy, and we are of the opinion that the Tribunal has rightly found that the assessee was obliged to sell the bonds before they became ripe for payment only to stop incurring further loss as the money with which the subscription for the Government bonds had beenmade had been borrowed by the assessee from a bank at 10% interest while the bond carried interest only at 4 1/2%. The Tribunal has further found that the loss was incurred while trying to discharge the obligations in accordance with the accepted commercial, practice in the line of business. In those circumstances, we find that the Tribunal was right in law in holding that the loss in the purchase and sale of the Government bonds was allowable as a loss incidental to the Carrying on of the assessee's business. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the revenue. The assessee shall be entitled to its costs. Advocate's fee Rs. 150.