TMI Blog1985 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ich came to Rs. 2,550. Against the amount of the net profit, the assessee claimed a sum of Rs. 23,608 as a trading loss on account of the deficiency between the minimum guaranteed amount of Rs. 80,400 and the actual purchase of Rs. 56,901. The assessee claimed this deficiency in accordance with the stipulations contained in the licence issued to the assessee, enabling it to sell the country liquor during the accounting period which commenced from April 1, 1967, and ended on March 31, 1968. The Income-tax Officer in his order dated March 30, 1972, did not accept the assessee's claim of deficiency as a trading loss, for, according to him, the minimum guarantee was given by the assessee to acquire the right of carrying on business in a particular area and as such it constituted capital expenditure. The Income-tax Officer has observed as under "First of all, regarding the loss, the position is that the shortfall in guarantee which is not a revenue loss cannot be allowed. Assessee agrees to pay the minimum guarantee amount for acquisition of a right to carry on the business in a particular area and, therefore, in fact, the amount agreed to be paid as guarantee money or in other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons for allowance are: (1) The expenditure must not be governed by the provisions of sections 30 to 36 and section 80VV. (2) the expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee. (3) the expenditure must not be personal in nature. (4) the expenditure must not be capital in nature. According to the stipulations contained in the licence-deed, the assessee in case of failure to lift the country liquor of the minimum amount of guarantee, was liable to make good the loss to the State Government. The liability to make good the loss to the Government of Rajasthan arose from carrying on of the assessee's business. It is not disputed by the learned counsel for the Revenue that the assessee was under an obligation to make good the deficiency if it fails to lift the country liquor of the minimum amount of guarantee and to make good the loss to the Government of Rajasthan in regard to the deficiency. This arose directly from the stipulations contained in the licence. According to section 37(1) of the Act, this amount has been laid out wholly and exclusively for the purpose of business of the assessee, namely, the sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme which we have set out above for the sum to be paid in default of fulfilling the export obligation has been described as a penalty but, in the ultimate analysis, it is the substance of the transaction between the parties which has to be considered for purposes of determining what is the nature and import of the scheme and the bond executed in pursuance thereof. The exercise of option, as stated above, may be the result of commercial expediency as well as certain extraneous factors over which the manufacturers might not have control and, therefore, in view of the scheme and the bond with which we are concerned here, it cannot be said that there is a breach of a public policy which may render the payment, agreed to be made for the default arising as a result of the breach, as one akin to penalty. Under no circumstances, without violence to the language, it can said to be infraction of the law. In that view of the matter, therefore, we do not find any reasons to interfere with the order of the Tribunal when it viewed the payment in question as expenses wholly and exclusively laid out for the business." In Addl. CIT v. Arvind Mills Ltd. [1977] 109 ITR 212 (Guj), a special p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protection fee and in consideration of that payment, the lessor undertook not to grant any lease, permit or prospecting licence for limestone in a group of quarries without a condition that no limestone will be used for the manufacture of cement. The appellant also agreed to pay Rs. 35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question arose whether in computing the profits of the appellant, the sums of Rs. 5,000 and Rs. 35,000 paid to the lessor by the appellant could be deducted under section 10(2)(xv) of the Indian Incometax Act, 1922 (the old Act). It was held that the payment of Rs. 40,000 was a capital expenditure and was, therefore, rightly disallowed as deduction under section 10(2)(xv) of the Act. In Behari Lal Beni Parshad v. CIT [1959] 35 ITR 576 (Punj), the assessee paid a competitor in its business a sum of money so that the assessee may itself secure the contract for the purchase of armour plates from the American Field Commission without any competition. It was held in that case that as no stock-in-trade was purchased with that amount and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpediency in order to facilitate the carrying on of the business, it is allowable under section 10(2)(xv)." In this case, in terms of the licence, the assessee was under an obligation to lift country liquor of the value of Rs. 80,400 and on its failure to lift the country liquor to that extent, it was under an obligation to make good the deficiency to the Government of Rajasthan. The liability to pay the deficiency was there in terms of the licence and arose directly from the carrying on of the assessee's business. The principles laid down in the authorities cited by the learned counsel for the assessee are attracted. In these circumstances, the Tribunal was right in holding that the difference of Rs. 20,967 between the guarantee amount and the actual purchase of country liquor was allowable as trading loss in the computation of the assessee's total income for the assessment year 1968-69. The result is that the question referred by the Tribunal is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. We leave the parties to bear their own costs of this reference. Let the answer be returned to the Tribunal as required by section 260(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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