S.K. Mal Lodha, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short " the Tribunal ") has referred the following question for our opinion : " Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee-firm had not incurred any liability daring the accounting year under consideration to make payment for pressing the bales at anything more than Rs. 16 per bale and, accordingly, disallowing the assessee's claim for deduction of Rs. 14,200 for arriving at the assessee's total income ? "
(2.) THE assessee is a firm. For the assessment year 1974-75, its accounting year ended on March 31, 1974. It deals, inter alia, in the purchase and sale of cotton. It gets its cotton ginned and baled from the cotton ginning and pressing factories situated near about Bhadra. Daring the assessment year 1974-75, it got 1,420 bales of cotton baled by Shree Mahalaxmi Cotton Ginning & Pressing Factory, Sri Ganganagar ("the Factory" herein). It had paid to the factory Rs. 26.10 per bale for pressing. This rate was fixed by the Association of Ginning and Pressing Factories of Sri Ganganagar District (hereinafter referred to as " the Association ")-THE Government of Rajasthan made an order (" the Order" herein), vide No. SO/90 dated October 16,1973, in exercise of the powers conferred by Sub-rule (2) of Rule 114 of the Defence of India Rules, 1971, and all other powers enabling it in this behalf, fixing the pressing charges at Rs. 16 per bale. THE order was challenged by the association in this court. A stay order was made on April 3, 1974, i.e., after the accounting period. As the dispute was pending, the assessee-firm debited pressing charges at Rs. 26.10 to the cotton account and credited the same to the provision for pressing charges account. Actual payment to the factory was made at Rs. 26.10 per bale. In the accouning period immediately next following, corresponding to the assessment year 1975-76, the factory paid back to the assessee Rs. 14,200 as the association had decided to charge Rs. Section 16 only with retrospective effect for pressing a bale. THE assessee claimed the entire expenditure as its business expenditure for this year and accordingly filed its return. THE Income-tax Officer (ITO) disallowed the claim of Rs. 14,200 and added the same to the total income of the assessee for the assessment year 1974-75. On appeal, the learned Appellate Assistant Commissioner (AAC) confirmed the aforesaid order of the ITO in this regard. A further appeal was taken to the Tribunal and the Tribunal by its order dated March 31, 1976, dismissed the appeal. So far as the disallowance of the claim of Rs. 14,200 by the ITO was concerned, the Tribunal made the following observations. "We have carefully examined the rival contentions. In our opinion, the contention of the learned departmental representative is correct. Qnce the notification of the Government of Rajasthan being S.O. 90 dated October 16, 1973, was issued (and during the accounting period, it was not stayed by the Rajasthan High Court), the payment for pressing charges after that date (it is common ground that all the payments were made after this date) could not be made in excess of Rs. 16 per bale. Any contract to the contrary would be void being against public policy. THE assessee-firm cannot be said to have incurred any liability to make payment for pressing the bales at anything more than Rs. 16 per bale. Inasmuch as this amount has already been allowed by the Income-tax Officer as business expenditure, no further relief is called for. THE appeal of the assessee on this point, therefore, fails. " It may be stated that an application for rectification of the order was filed before the Tribunal as there were some discrepancies which required modification. The Tribunal by its order dated April 28, 1977, modified the original order and rectified the discrepancies. After rectification, the order of the Tribunal runs as follows ; " The assessee-firm, pending the aforesaid dispute, debited pressing charges at Rs. 26.10 to the cotton account and credited the same to the ' Provision for pressing charges account '. Actual payment to the pressing factory was, however, made at Rs. 26.10 per bale. In the accounting period immediately next following, corresponding to assessment year 1975-76, Mahalaxmi Cotton and Ginning Factory paid back to the assessee Rs. 14,200 as the Association of Cotton Ginning & Pressing Factories of Sri Ganganagar District had in the meanwhile decided to charge Rs. 16 only with retrospective effect for pressing a bale. The assessee claimed the entire expenditure as its business expenditure for this year and accordingly filed its return." A reference application was filed under Section 256 (1) of the Act and the Tribunal has referred the above-mentioned question for our opinion. We have heard Mr. R. Balia, learned counsel for the assessee. It was contended by Mr. Rajesh Balia, learned counsel for the assessee, that the order of the Tribunal is incorrect when it maintained the disallowance in the assessee's total income on the ground that the assessee had not incurred any liability to pay pressing charges and in accordance with the mercantile system of accounting, the same should be allowed to the assessee while completing the assessment for the year 1974-75. According to the rate fixed by the association, the assessee-firm was required to pay to the factory at Rs. 26.10 per bale for pressing, whereas according to the order, the assessee was required to pay only Rs. 16 per bale. By means of the stay order passed by this court on April 3, 1974, in the writ proceedings challenging the order, the operation of the order was stayed by this court. This was done after March 31, 1974, when the accounting year for the assessment year 1974-75 had come to an end. The assessee, therefore, in accordance with the rate fixed by the association, debited the pressing charges at Rs. 26.10 to the cotton account and credited the same to the provision for pressing charges account. Actual payment was made at Rs. 26.10 per bale by the assessee. In accordance with the order, the amount was paid back to the assessee as the association had decided to charge in accordance with the rates fixed in the order.
(3.) THE question is whether the assessee could claim the expenditure as its business expenditure for the assessment year 1974-75. Section 37 of the I.T. Act, 1961 ("the Act"), occurs in Chapter IV, Part D which deals with " Profits and gains of business or profession ". It is a general provision. At the relevant time, the material part of Section 37(1) of the Act was as follows : "Section 37(1). Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure 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 '." Section 37 is a residuary section and extends the allowance of the business expenditure which is not covered by the preceding sections. It is a general section. The word used is " expenditure ". In Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC), the expression "expenditure" which occurs in Section 10(2)(xv) of the Indian I.T. Act, 1922 (No. 11 of 1922) (the old Act), came up for consideration and it was observed (p. 78) : " The question, however, limits the approach as to whether the payments made towards the policy were ' expenditure' within Clause (xv). ' Expenditure' is equal to ' expense ' and ' expense ' is money laid out by calculation and intention though in many uses of the word, this element may not be present, as when we speak of a joke at another's expense. But the idea of 'spending ' in the sense of ' paying oat or away ' money is the primary meaning and it is with that meaning that we are concerned. ' Expenditure ' is thus what is ' paid out or away' and is something which is gone irretrievably." The other important expressions used in Section 37(1) are " aid out " or " expended wholly and exclusively for the purpose of the business ". Section 41(1) of the Act provides for "Profits chargeable to tax". The material part of Section 41(1) of the Act is as under : " Section 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. " ;