Distillers' Trading Corporation ... vs Commissioner Of Income-Tax
2000 Latest Caselaw 1099 Del

JUDGMENT

Arijit Pasayat, C.J.

1. On being moved by the assessed under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), the Income-tax Appellate Tribunal, Delhi Bench "D", Delhi (in short "the Tribunal"), has referred the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the disallowance of the loss of Rs. 2,00,000 claimed by the assessed, as capital loss ?"

2. The factual position giving rise to the reference is as follows : The assessed, a public limited company, during the relevant period carried on business in the purchase and export of industrial alcohol, bulk handling and storage of liquid Chemicals and acted as agents of the State Trading Corporation of India (in short "the Corporation") for storage and handling of their vegetable oils. For the assessment year 1973-74, relating to the previous year ending on September 30, 1972, the assessed disclosed a net income of Rs. 3,70,840. It claimed a sum of Rs. 2,93,876 as bad debts

written off in respect of the amounts due from Digvijay Spinning and Weaving Co. Ltd, (in short "Digvijay"). The amount consisted of the following three items :

Rs.

(i) Debit balance in "P.V.C. plant deposit account"            2,00,000
(ii) Opening debit balance in running account with Digvijay:
(a) Amount due on account of business transactions              48,150
(b) Interest charged at 10 per cent, per annum on the              45,726
amount of Rs. 6,00,000                                              _______
                                                                   2,93,876
                                                                     _______
 

3. In support of its claim, the assessed filed before the Assessing Officer, a copy of the agreement entered into between it and Digvijay and the details relating to the claim. The Assessing Officer accepted the assessed's contentions in regard to two sums, i.e., Rs. 48,150 and Rs. 45,726 and their write off as admissible deductions, However, the claim in relation to Rs. 2 lakhs was rejected and it was held that the said sum was in the nature of a security deposit and was not revenue expenditure which had already been appropriated as hire charges, amounting to Rs. 4 lakhs in the second and third year. The amount in question was held to be a capital loss and not a business loss. On appeal, the Appellate Assistant Commissioner (in short "the AAC") held that clause (5) of the agreement dated February 27, 1967, indicated that the amount paid was a deposit and did not relate to Installments. In other words, he held that it was only a payment of capital nature, i.e., deposit, which could earn interest and not payment of revenue nature and therefore it did not satisfy the requirements of a bad debt. He confirmed the Assessing Officer's view that the loss was capital in nature. The assessed carried the matter in further appeal before the Tribunal. Referring to various clauses of the agreement, the Tribunal held that the amount in question was a capital loss and not a business loss. On being moved for reference as aforestated question, as set out above, has been referred for opinion.

4. There is no appearance on behalf of the assessed in spite of notice. We have heard learned counsel for the Revenue.

5. We find that in various clauses of the relevant agreement, i.e., the agreement dated February 27, 1967, an indication is given as to the nature of the amount in question. Clauses (24) and (25) show that the assessed was given the option, at any time during the three year period, to purchase the P. V. C. plant for Rs. 12 lakhs from Digvijay and also the premises where the said plant was located, from Digvijay. The Tribunal observed that the amount appeared to be a deposit adjustable against the price of P. V. C. plant and machinery if the assessed exercised its option within the stipulated period. The Tribunal further observed that the amount appeared to be a sort of earnest money deposit on which Digvijay agreed to pay inter-

est and also allowed Hen on its P. V. C. plant and machinery in favor of the assessed. Thus, the deposit of Rs. 2 lakhs pertained to a capital asset, namely, the P. V. C. plant, which the assessed did not own but was using on hire for its business and which it intended to purchase under the agreement, In view of the aforesaid conclusions, the Tribunal held that the loss of the amount was only a capital loss and not a revenue loss.

6. In an illustrated case of ClT v. Motiram Nandram [1940] 8 ITR 132 (PC), it was observed as follows (page 138) :

"It was in one aspect a loan made to the company, but it was not a loan made in the course of carrying on the business of organising agents or in the course of the business of a money-lender. It was not a recurring expenditure. On the other hand, it was contemplated that in whole or in part the deposit should be returned to the assesseds by the receipt of deposit from selling agents ; so that if the Rs, 50,000 does fall to be regarded as invested in a business of organising agents, it was invested with a prospect that it might be a temporary investment and not a permanent one--in other words that the capital might later be withdrawn from the business. The question in such a case as the present must be 'what is the object of the expenditure ?' and it must be answered from the standpoint of the assesseds at the time they made it--that is, when they were embarking upon the business of organising agents for the company. The deposit was clearly exacted by the company as a condition of the assesseds being given an agency which they hoped to manage profitably. Their Lordships think that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature, and that the deposit cannot, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business."

7. In ClT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649, the Supreme Court laid down the following tests at page 653 of the reports :

"To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses."

8. After discussing the three English decisions in English Crown Spelter Co. Ltd. v. Baker [1908] 5 TC 327 (KB) ; Charles Marsden and Sons Ltd. v. IRC |1919] 12 TC 217 (KB) and field's Brewery Co. Ltd. v. Male [1891] 3 TC 279 (QB), the Supreme Court further observed as follows at pages 654 and 655 of the reports :

"These cases illustrate the distinction between an expenditure by way of investment and an expenditure in the course of business, which we have described as current expenditure. The first may truly be regarded as on the capital side but not the second".

9. In Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263, the Supreme Court summed up the principles in the following words at page 269 of the reports :

"The principle applicable in India is more or less the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although, in terms neither in the 1922 Act nor in the 1961 Act, there is a provision like Section 51(1) of the Australian Act."

10. In view of the conclusions of the Tribunal with reference to different clauses of the agreement dated February 27, 1967, the inevitable conclusion is that the amount in question was a capital loss, as held by the Revenue and not business loss as claimed by the assessed. The question, therefore, is answered in the affirmative, in favor of the Revenue and against the assessed.

11. Reference stands disposed of accordingly.