Hidayatullah, J. - (1.) This appeal by the Commissioner of Income-tax, Mysore, on a certificate granted under S. 66A of the Indian Income Tax Act, is directed against a judgment of the High Court of Mysore, dated September 7, 1959, by which the following question referred by this Income-tax Appellate Tribunal, Madras Bench, was answered in favour of the respondent. "Whether there are materials for the tribunal to hold that the sum of Rs. 2,87,492 aforesaid represents a loss of capital." Originally, two questions were referred, but with the second question we are not now concerned. The respondent is a limited liability Company called the Mysore Sugar Co. Ltd., in which a very large percentage of shares is owned by the Government of Mysore. We shall refer to the respondent as the assessee Company.
(2.) The assessee Company purchases sugarcane from the sugarcane growers, and crushes them in its factory to prepare sugar. As a part of its business operations, it enters into agreements with the sugarcane growers, who are known locally as "Oppigedars", and advances them sugarcane seedlings, fertilisers and also cash. The Oppigedars enter into a written agreement called the "Oppige", by which they agree to sell sugarcane exclusively to the assessee Company at current market rates and to have the advances adjusted towards the price of sugarcane, agreeing to pay interest in the meantime. For this purpose, an account of each Oppigedar is opened by the assessee Company. A crop of sugarcane takes about 18 months to mature, and these agreements take place at the harvest season each year, in preparation for the next crop.
(3.) In the year 1948-49 due to drought, the assessee Company could not work its sugar mills and the Oppigedars could not grow or deliver the sugarcane. The advances made in 1948-49 thus remained unrecovered because they could only be recovered by the supply of sugarcane to the assessee Company. The Mysore Government realising the hardship appointed a Committee to investigate the matter and to make a report and recommendations. This report was made by the Committee on July 27, 1950, and the whole of the report has been printed in the record of this case. The Oppige bond is not printed, perhaps because it was in Kannada; but the substance of the terms is given by the Committee and the above description fairly represents its nature. The Committee recommended that the assessee Company should ex-gratia forego some of its dues, and in the year of account ending June 30, 1952, the Company waived its rights in respect of Rs. 2,87,422. The Company claimed this as a deduction under Ss. 10 (2) (xi) and 10 (2) (xv) of the Indian Income Tax Act. The Income-tax Officer declined to make the deduction, because, in his opinion, this was neither a trade debt nor even a bad debt but an ex-gratia payment almost like a gift. An appeal to the Appellate Assistant Commissioner also failed. Before the Income-tax Appellate Tribunal, Madras Bench, these two arguments were again raised, but were rejected, the Tribunal holding that the payments were not with an eye to any commercial profit and could not thus be said to have been made out of commercial expediency, so as to attract Section 10 (2) (xv) of the Act. The Tribunal also held that these were not bad debts, because they were "advances, pure and simple, not arising out of sales" and did not contribute to the profits of the businesses. From the order of reference, it appears that the Appellate Tribunal was also of the opinion that these advances were made to ensure a steady supply of quality sugarcane, and that the loss, if any, must be taken to represent a capital loss and not a trading loss.;