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1986 Supreme(Cal) 359
High Court Of Calcutta
Satish Chandra, Suhas Chandra Sen
COMMISSIONER OF INCOME-TAX - Appellant
Versus
HASHIMARA INDUSTRIES LTD. - Respondent
Income-Tax Reference 100 Of 1977
Decided On : 08/29/1986
The loss of Rs.20 lakhs deposited by the assessee with Saksaria Cotton Mills Ltd. pursuant to Clause 17 of the said agreement arose in the carrying on of the assessee's business and was incidental to it and was accordingly allowable as a business loss.
Headnote:
INCOME TAX - Business Loss - Leave and License Agreement - Deposit - Whether the loss of Rs.20 lakhs deposited by the assessee with Saksaria Cotton Mills Ltd. pursuant to Clause 17 of the said agreement arose in the carrying on of the assessee's business and was incidental to it and was accordingly allowable as a business loss. - Whether the payment by the assessee of insurance premium and rates and taxes for nine months after the said agreement had come to an end was made in the course of the carrying on of the business of the assessee and was, therefore, allowable as a deduction.
Fact of the Case:
The assessee, a public limited company, was engaged in the business of manufacturing and sale of tea and had some money-lending business. In 1960, it altered its memorandum of association to enter into cotton business. Saksaria Cotton Mills Ltd., a public limited company in the process of liquidation, was allowed to be run by the assessee, along with one S. L. Bajoria, a shareholder of Davenport and Co. (P.) Ltd., the managing agents of the assessee, under a scheme approved by the Bombay High Court. The assessee, in partnership with S. L. Bajoria, entered into a lease agreement in respect of the mills belonging to Saksaria Cotton Mills Ltd. for a brief period from January 28, 1961, to October 30, 1961. Thereafter, the assessee had a financial agreement with Saksaria Cotton Mills Ltd. which was in force from November 1, 1961, to March 31, 1963. After the expiry of the financial agreement, the assessee entered into a leave and license agreement with Saksaria Cotton Mills Ltd. on October 19, 1963, for a period of three years from April 1, 1963, to March 31, 1966. That leave and license agreement was extended to June 30, 1966. After June 30, 1966, Saksaria Cotton Mills Ltd. had some business of its own, but ultimately went into liquidation on March 12, 1968. The assessee deposited Rs.20 lakhs with Saksaria Cotton Mills Ltd. under Clause 17 of the leave and license agreement and acquired a right to work the mills. The assessee also paid insurance premium, rates and taxes and other expenses for the whole of the year though the extended period of the leave and license agreement was only for three months. The assessee debited these expenses for the remaining nine months to the account of Saksaria Cotton Mills Ltd. The amounts debited were Rs.1,48,470 for insurance premium and Rs.1,42,882 for rates and taxes and other expenses. The assessee claimed these amounts as deduction as bad debts.
Finding of the Court:
The Tribunal held that the loss of the deposit of Rs.20 lakhs arose in the course of carrying on of the assessee's business and was incidental to it. The Tribunal also held that the payment by the assessee of insurance premium and rates and taxes for nine months after the said agreement had come to an end was made in the course of the carrying on of the business of the assessee and was, therefore, allowable as a deduction.
Issues: 1. Whether the loss of Rs.20 lakhs deposited by the assessee with Saksaria Cotton Mills Ltd. pursuant to Clause 17 of the said agreement arose in the carrying on of the assessee's business and was incidental to it and was accordingly allowable as a business loss. 2. Whether the payment by the assessee of insurance premium and rates and taxes for nine months after the said agreement had come to an end was made in the course of the carrying on of the business of the assessee and was, therefore, allowable as a deduction.
Ratio Decidendi: 1. The deposit of Rs.20 lakhs was not in the nature of a loan or a salami. It was a deposit made by the assessee as security for the due performance of the terms of the agreement by the assessee as a result of the day-to-day operations of his business. The payment was not made once for all and it was refundable at the expiry of the period of the license. Therefore, the loss of Rs.20,00,000 arose in the carrying on of the assessee's business and was incidental to it. 2. The payments of insurance premium, rates and taxes for the whole of the year, though the extended period of the leave and license agreement was only for three months, had to be made out of necessity and in the course of carrying on of the business of the assessee.
Final Decision: Question No. 1 is answered in the negative and against the assessee. Question No. 2 is answered in the affirmative and in favour of the assessee.
( 1 ) IN this reference, the assessment year involved is 1968-69 for which the previous accounting period ended on March 31, 1968.
( 2 ) THE facts found by the Tribunal are as under : the assessee is a public limited company. It owned several tea estates and its main income was from sale of tea. Davenport and Co. (P.) Ltd. are the managing agents of the assessee. In 1960, the assessee altered its memorandum of association with the approval of the Calcutta High Court for the purpose of diversifying its activities and it took cotton business in addition to its business in tea. Saksaria Cotton Mills Ltd. was also a public limited company and in 1957, it was in the process of liquidation. The assessee, along with one Sri S. L. Bajoria, a shareholder of Davenport and Co. (P.) Ltd. , produced a scheme which was approved by the High Court and liquidation proceedings came to an end. The assessee and Shri S. L. Bajoria entered into an agreement for the lease of the mills from Saksaria Cotton Mills Ltd. There was a partnership in the lease between the assessee and Sri S. L. Bajoria in a certain ratio. That lease was for the period from January 28, 1961, to October 30, 1961. After the expiry of that period of lease, the assessee alone entered into a financing agreement with Saksaria Cotton Mills Ltd. and that agreement remained in force from November 1, 1961, to March 31, 1963. After the expiry of that financial agreement, the assessee entered into another agreement with Saksaria Cotton Mills Ltd. , on October 19, 1963, for a period of three years from April 1, 1963, to March 31, 1966. This agreement was described as a leave and licence agreement. In accordance with Clause 17 of the agreement, the assessee deposited Rs. 20 lakhs on April 3, 1963, with Saksaria Cotton Mills Ltd. and Saksaria Cotton Mills Ltd. handed over its properties to the assessee. The assessee ran the mills. The leave and licence agreement, after expiry of the period stipulated in that agreement, was extended up to June 30, 1966. The Tribunal was informed by the counsel for the assessee that the extension was on the same terms and conditions on which the leave and licence agreement had been made. The assessee made a credit entry of Rs. 1,40,000 being the interest receivable by it from Saksaria Cotton Mills Ltd. on the deposit of Rs. 20 lakhs at the rate of 7% per annum. This entry was reversed in the year under consideration. During the extended period of three months, the assessee paid insurance premium, rates and taxes and other expenses for the whole of the year though the extended period was only for three months. The assessee debited these expenses for the remaining nine months to the account of Saksaria Cotton Mills Ltd. The amounts debited were Rs. 1,48,470 for insurance premium and Rs. 1,42,882 for rates and taxes and other expenses. The interest amount of Rs. 1,40,000 and these expenses aggregated to Rs. 4,31,352. The amount of Rs. 20 lakhs of the deposit and the expenses of Rs. 4,31,352 remained unpaid by Saksaria Cotton Mills Ltd. Saksaria Cotton Mills Ltd. had its own business after June 30, 1966, but suffered loss and was ultimately closed down on October 18, 1967, and went into liquidation on March 12, 1968. The assessee wrote off the above amounts of Rs. 20 lakhs of deposit and Rs. 4,31,352 as having become irrecoverable on account of incapacity of Saksaria Cotton Mills Ltd. to pay the same. The assessee claimed these amounts as deductions by way of bad debts.
( 3 ) THE Income-tax Officer, in the assessment order, disallowed the assessee's claim for deduction of the two aforesaid amounts. The Income-tax Officer held that the deposit of Rs. 20 lakhs with Saksaria Cotton Mills Ltd. represented initial deposit at the time of taking lease. It was a capital expenditure and was not allowable. The Income-tax Officer further held that even otherwise, the assessee's claim was premature as the amounts had not become recoverable in the ac
