Northern India Chemical ... vs Commissioner Of Income Tax
2000 Latest Caselaw 1112 Del

JUDGMENT

Arijit Pasayat, C. J.

On being moved by the assessee for reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), following question has been referred for opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in sustaining the disallowances of Rs. 63,405 and Rs. 2,750 being the amount paid to the State Trading Corporation and legal expenses incurred in connection therewith, respectively, claimed as allowable deductions in computing the business profit of the assessee for the assessment year 1972-73 ?"

2. Background facts, as indicated in statement of the case, are as follows :

2. Background facts, as indicated in statement of the case, are as follows :

Assessee is a public limited company and it maintained its books on mercantile system of accounting. So far as for assessment year 1972-73 is concerned, the previous year ended, on 31-12-1971. Assessee at the relevant point of time, carried on business as an importer of Chemicals. These were not allowed to be imported directly and hence the assessee was acting as a distributor of the Chemicals imported, under the Authority of the State Trading Corporation (hereinafter referred to as "the Corporation"), since 1962. In 1963 Central Government decided to permit import of betelnuts. The imports from Malaysia and Ceylon were to be done under the Authority of the Corporation. The Northern India Betelnuts and Spices Importers Association (hereinafter referred to as "the Association") requested the Corporation to release the import quota of betelnuts on its behalf to the assessee. Matter was discussed amongst the parties concerned i.e., the Corporation, the Association and the assessee. Certain terms were settled on 30-8-1963, between the assessee and the Association. Subsequently assessee entered into an agreement on 4-10-1963, with the Corporation. Board of Directors of the assessee's-company had adopted a resolution passed on 22-8-1963, under which, assessee had decided to take up the work of import and distribution of betelnuts in northern India, acting as Corporation's agents having been appointed as a "trading body" of the Association. Under the agreement, assessee was to be in-charge of the betelnuts import quota allotted by the Corporation and it had to distribute the same in conformity with its agreement with the Corporation. According to the assessee, during the assessment years 1963-64 and 1964-65, some of the quota-holders did not lift the quotas fixed for them by the Corporation. Therefore, there was some unlifted stocks of betelnuts left with the assessee. There was no agreement with the Corporation regarding the disposal of such unlifted quota. One A.S. Gupta, who was the director, in-charge of the operations, was of the opinion that the assessee had the right to dispose of such stocks. A resolution was adopted on 27-1-1964, which permitted disposal of the unlifted stock through the agency M/s. Mam Raj Radhey Shiam Gupta. Incidentally, A.S. Gupta was the proprietor of the said concern. As per the books of accounts maintained by the assessee on the sales of such unlifted stocks effected by it, there was a net profit, which was taxed. The total quantity imported was 3,85,879.630 kgs; total quantity sold to quota-holders was 3,31,583.540, and the quantity sold, through M/s Mam Raj Radhey Shiam was 51,073.200 kgs., There was thus a shortage. The value of goods sold through M/s. Mam Raj Radhey Shiam was Rs. 3,05,093.60 and the total profits earned from the sale, during the assessment years 1965-66 and 1966-67, was Rs. 64,552.02 in total. When the Corporation became aware of the fact that the assessee had disposed of the unlifted stocks, in the manner noted above, it wrote to the assessee on 31-1-1969, pointing out various irregularities. Substantially, there were three charges against the assessee. Assessee furnished its reply dated 3-6-1969. On 8-5-1970. Corporation wrote to the assessee pointed out that a much larger sum from what was indicated in its reply, dated 3-6-1969, was recoverable from the assessee. Corporation further stated that the disposal of large quantity of betelnuts was unauthorised and assessee was responsible. Assessee did not accept the claim of the Corporation and stated that it had become victim of mischief by A.S. Gupta and since it had no reason at all to suspect dishonesty on his part, it would have tried to recover the amount due from him in case the goods had really been sold at prices higher than the prices reported by A.S. Gupta to the assessee. Finally after exchange of correspondences, assessee agreed to pay Rs. 63,405.45 in full and final settlement and paid the amount during the relevant assessment year. In the aforesaid background assessee claimed the amount as a deduction from the business profits. The assessing officer noted that the sum was debited to purchase account and was not shown in the profit and loss account. It was further observed that assessee had to pay the amount as damages, because one of its directors who was in-charge of the work at the relevant period had unauthorisedly and dishonestly sold the goods through its proprietary concern and the liability having been arisen because of the deliberate and dishonest violation of the terms of agency, the expenditure was not incidental to the business. A counsel fee of Rs. 2,750, in respect of the transactions, in question was also disallowed. The matter was carried in appeal before the Appellate Assistant Commissioner, who confirmed the views of the assessing officers. Matter was carried in further appeal before the Tribunal. After noticing the factual aspects, Tribunal came to hold that the authorities were justified in disallowing the claim.

On being moved by the assessee, reference has aforestated, has been made. There is no appearance on behalf of the assessee when the matter is called. We have heard the learned counsel for the revenue .

3. The only question that needs to be adjudicated is, "whether the expenditure as claimed was incidental to assessee's business and, therefore, was an allowable expenditure" ? Tribunal with reference to the factual aspects, held that A.S. Gupta was not acting sub rosa. The expenditure in question was not made by way of payment of damages for breach of contract. The payment was also not made in settlement of a civil action tor damages on the ground of fraud committed in the course of assessee's business. The situation was one brought in by assessee's wilful departure from ordinary incidents of business conduct and, therefore, falls outside the area of business deductions. According to learned counsel for the revenue , these conclusions are factual in nature and, therefore, no question of law is involved.

3. The only question that needs to be adjudicated is, "whether the expenditure as claimed was incidental to assessee's business and, therefore, was an allowable expenditure" ? Tribunal with reference to the factual aspects, held that A.S. Gupta was not acting sub rosa. The expenditure in question was not made by way of payment of damages for breach of contract. The payment was also not made in settlement of a civil action tor damages on the ground of fraud committed in the course of assessee's business. The situation was one brought in by assessee's wilful departure from ordinary incidents of business conduct and, therefore, falls outside the area of business deductions. According to learned counsel for the revenue , these conclusions are factual in nature and, therefore, no question of law is involved.

4. As a general proposition, damages paid for breach of warranty or for failure to perform a trading contract or payment made to procure extension of time for performance of such contract is allowable as business deduction. But where liability for damages is caused by dishonest breach of contract, e.g., payment under a decree passed against the company for misfeasance committed by its directors, the claim is not allowable. A sum paid in settlement of a civil action for damages on the ground of fraud committed in the course of assessees business, is to be allowed as a business expenditure. The factual position is different in the present case. The mere fact of a settlement is not a proof of any infraction of law. Thus, the essence of the matter is, where there is a breach of contract and the breach is not dishonest, it can be looked upon as one of the incidents of carrying on business and, therefore, damages payable be allowed as a deduction. Where there is no dishonest act on the part of the assessee in carrying on business a loss arising from a breach of warranty or terms of contract, could be a "contemplable loss" to use the expression used in IRC v. Warness & Co. (1919) 2 KB 444 by Rowlatt, J. Where the loss, however, is occasioned by a dishonest act on the part of the assessee, it would not be a contemplable one Tribunal was, therefore, justified in holding that the claim of Rs. 63,405, as a business expenditure, was not maintainable. So far as legal expenses are concerned, it was noticed by the Tribunal that expenditure was for getting legal advice in connection with the negotiations with the Corporation and the claim was dependent on allowability or otherwise of the main claim. Since we have already held that the claim was not deductible, disallowance of Rs. 2,750 is in order. Our answer to the question, therefore, is in the affirmative, in favour of the revenue and against the assessee.

4. As a general proposition, damages paid for breach of warranty or for failure to perform a trading contract or payment made to procure extension of time for performance of such contract is allowable as business deduction. But where liability for damages is caused by dishonest breach of contract, e.g., payment under a decree passed against the company for misfeasance committed by its directors, the claim is not allowable. A sum paid in settlement of a civil action for damages on the ground of fraud committed in the course of assessees business, is to be allowed as a business expenditure. The factual position is different in the present case. The mere fact of a settlement is not a proof of any infraction of law. Thus, the essence of the matter is, where there is a breach of contract and the breach is not dishonest, it can be looked upon as one of the incidents of carrying on business and, therefore, damages payable be allowed as a deduction. Where there is no dishonest act on the part of the assessee in carrying on business a loss arising from a breach of warranty or terms of contract, could be a "contemplable loss" to use the expression used in IRC v. Warness & Co. (1919) 2 KB 444 by Rowlatt, J. Where the loss, however, is occasioned by a dishonest act on the part of the assessee, it would not be a contemplable one Tribunal was, therefore, justified in holding that the claim of Rs. 63,405, as a business expenditure, was not maintainable. So far as legal expenses are concerned, it was noticed by the Tribunal that expenditure was for getting legal advice in connection with the negotiations with the Corporation and the claim was dependent on allowability or otherwise of the main claim. Since we have already held that the claim was not deductible, disallowance of Rs. 2,750 is in order. Our answer to the question, therefore, is in the affirmative, in favour of the revenue and against the assessee.