1970 (7) TMI 10 - HC - Income Tax

Admissibility of a sum of Rs. 89,241 as an outgoing against the profits earned by the firm -loss of security deposits kept with the sole selling agents - since assessee received interest after termination of agency, loss is incidental to business of assessee, hence allowable under section 10(1)

Summary

Issues Involved:
1. Admissibility of Rs. 89,241 as an outgoing against the profits.
2. Nature of the security deposit and whether its loss is capital or revenue.
3. Timing of the debt becoming irrecoverable.
4. Classification of the loss as a trading loss or capital loss.

Issue-wise Detailed Analysis:

1. Admissibility of Rs. 89,241 as an Outgoing Against the Profits:
The primary issue was whether Rs. 89,241, part of the sum of Rs. 1,64,087 written off by the assessee, could be considered a capital loss or a revenue loss. The Tribunal initially held that the amount represented a capital loss, as it was part of a security deposit, which was a "pre-requisite to the acquisition of the sole selling agency." However, the court found that this was not supported by the terms of the agreement, which indicated that the security deposit was a condition subsequent, not precedent, and was meant to safeguard the company's interests rather than to acquire the right to carry on the business.

2. Nature of the Security Deposit and Whether Its Loss is Capital or Revenue:
The court examined whether the security deposit was a capital expenditure. It concluded that the payment of the security deposit was not a capital expenditure but a trading loss. The court noted, "The payment of the security money cannot, therefore, be regarded as a capital expenditure as contended on behalf of the revenue. It was, in fact, not an expenditure at all, much less a capital expenditure." The security deposit was made in the course of business operations and was intended to be returned with interest, thus making the loss incidental to the business.

3. Timing of the Debt Becoming Irrecoverable:
The Tribunal had found that the debt became irrecoverable in the accounting year under reference. The court did not dispute this finding but focused on the nature of the loss. The Tribunal had allowed the balance amount as a bad debt under section 10(2)(xi), indicating that it recognized the irrecoverability of the debt within the relevant accounting period.

4. Classification of the Loss as a Trading Loss or Capital Loss:
The court emphasized the distinction between a capital loss and a trading loss. It referred to various precedents, including the Supreme Court's decision in Badridas Daga v. Commissioner of Income-tax, which supported the view that losses connected with and incidental to the business are allowable as trading losses. The court stated, "The loss of the security is, thus, a loss incidental to the business of the assessee and it is allowable under section 10(1) of the Act." The court also cited the Bombay High Court's decision in Narandas Mathuradas & Co. v. Commissioner of Income-tax, which held that the forfeiture of a security deposit in the course of business is a trading loss.

Conclusion:
The court concluded that the amount of Rs. 89,241 was a trading loss and not a capital loss. It answered the question referred by the Tribunal in the negative and in favor of the assessee, stating, "We answer the question referred by the Tribunal in the negative and in favour of the assessee." The assessee was entitled to its costs, assessed at Rs. 200, with the counsel's fee assessed at the same figure.