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Late M.S. Ramasamy, Rep By M.R. Saraswathy Versus The Income Tax Officer, ARD I (7) , Salem - 7

2015 (9) TMI 335 - MADRAS HIGH COURT

Claim of business loss rejected - loss comprised of deposit relatable to dealership/distributorship and the balance referable to cylinder hire charges due to fraud/cheating on him - business loss v/s capital loss - Held that:- Admittedly, the assessee had not commenced its distributorship business. The deposits made by the assessee was for the purpose of acquiring profit and securing dealership/distributorship. Originally, the assessee was in the business of manufacturing handloom silk and not i .....

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pose of acquiring a profit-making asset to carry on business in LPG. Therefore, the said deposit made should not be treated as revenue in nature and the loss thereof must not be treated as business loss. The loss thereof was a loss suffered on the capital account and could not be deducted on the basis that it was a business loss. See Hasimara Industries Ltd. v. Commissioner of Income Tax and another reported in [1997 (9) TMI 5 - SUPREME Court]. - Decided against the assessee - Tax Case (Appeal) .....

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lding the orders of the lower authorities in rejecting the claim of business loss comprised of deposit of ₹ 1,00,650/- relatable to dealership/distributorship and the balance of ₹ 8 lakhs referable to cylinder hire charges due to fraud/cheating on him? 2. Whether the Appellate Tribunal is correct in not considering the claim of business loss especially with reference to the proviso to Section 3 of the Act? 3. Whether the Appellate Tribunal is correct in disallowing the claim of loss .....

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es due to fraud/cheating on him?" 2. The brief facts of the case are as follows: The assessee/respondent was engaged in the manufacture of handloom silk and proceeded to venture into a new business in the distribution of LPG Cylinders. In this regard, it appears that the assessee had paid a sum of ₹ 9.00 lakhs to M/s.Jagmeeta Enterprises LPG Private Limited for getting dealership/distributorship of LPG manufactured by Birla Blue Flames Ltd. However, the distributorship business never .....

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ness. The Assessing Officer further held that the loss in question was a capital loss and could not be claimed as a deduction. The Assessing Officer also held that this loss could not be claimed as bad debt, as the conditions laid down under Section 36(2) of the Income Tax Act are not fulfilled. 3. Aggrieved by the said order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who by placing reliance on the decision of the Allahabad High Court .....

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Officer, thereby dismissed the appeal. For better clarity, the relevant portion of the order of the Commissioner of Income Tax (Appeals), reads as follows: "12.The next issue in the appeal relates to rejection of the appellant's claim of loss of ₹ 9,00,650/- as loss from Agency business. During the previous year, the appellant had made payment of ₹ 9,00,000/- to M/s.Jagmatha Enterprises (LPG) Pvt. Ltd., Madras for getting dealership/distributorship of LPG, manufactured by Bi .....

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e to M/s.Jagmeetha Enterprises (LPG) P. Ltd., had gone bad, he is entitled to claim it as a loss to be set-off against his income from the other business. On the fact and in the circumstances of the case, it appears clearly that the assessee is not entitled to set-off his loss against the profits from the other business as the payment made for distributorship of LPG, a business which never commenced, is not a business loss. It cannot also be claimed as bad debt because the conditions laid down u .....

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submissions made on behalf of the appellant and also the facts of the case as discussed by the A.O. in the assessment order. For the purpose of acquiring another business, the appellant had made payment of a sum of ₹ 9 lacs, to M/s.Jagmeetha Enterprises (LPG) P. Ltd., Madras for getting dealership/distributorship of LPG manufactured by Birla Blue Flames Ltd. The A.O. has rightly rejected the appellant's claim for deduction as it is a capital loss because the business of distributorshi .....

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r the purpose of securing an enduring benefit of capital natue, loss was not allowable. In the case of Shah Construction Co.Ltd., - vs- ITO 26 TTR 378 (Bom.), it was held by the Tribunal that where the assessee has placed an order for purchasing a machinery along with security deposit and the assessee could not purchase the machinery resulting in forfeiture of security deposit, such loss was capital loss. In the case of Pragati Construction Co. -vs- DCIT 54 ITD 153 (Del.) where the amount deposi .....

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ng an enduring benefit of capital nature, the loss of ₹ 9 lacs, is clearly a capital loss as the business had never commenced. I, therefore, uphold the order of the A.O., disallowing the appellant's claim for deduction of ₹ 9,00,965/-." 4. As against the said order of the Commissioner of Income Tax (Appeals), the assessee once again pursued the matter before the Income Tax Appellate Tribunal. 5. The Tribunal by placing reliance on the decision of the Supreme Court in the cas .....

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essee on the anvil ratio decedendi of the aforesaid Apex Court decision, we decide this issue against the assessee and confirm the order of the ld. CIT(A)." 6. Aggrieved by the above-said order of the Tribunal, the assessee is before this Court. 7. Heard learned counsel appearing for the assessee and the learned Standing Counsel appearing for the Revenue and perused the materials placed before this Court. 8. Admittedly, the assessee had not commenced its distributorship business. The deposi .....

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ness. The deposit was made by the assessee pursuant to an agreement between the parties for getting dealership/distributorship of LPG. Hence, the deposit made by the assessee was for the purpose of acquiring a profit-making asset to carry on business in LPG. Therefore, the said deposit made should not be treated as revenue in nature and the loss thereof must be treated as business loss. 9. The above-said view of ours is fortified by the Supreme Court in the case of Hasimara Industries Ltd. v. Co .....

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company ₹ 50,000 in consideration of an agreement. Thereunder, the assessee was appointed the organising agents of the oil company for a period of five years for a stated area. It was to recommend selling agents. Sales were to be conducted entirely by the oil company and the selling agents, but the assessee was to receive a certain commission on all goods sold by the selling agents within the stated area and also on all sales of oil effected in the stated area by the oil company. The depo .....

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t the aforesaid amount should be deducted from its other income as a business loss. The Privy Council did not accept the assessees case. It said (page 138): "When the deposit is considered in relation to the organising agency, the special terms of the agreement of December 17, 1930, are important since various suggestions have been made as to the true character of the deposit. One suggestion is that the deposit should be looked upon as the purchase price of goods paid to the company in adva .....

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f 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 assessees by the receipt of deposit from selling agents; so that if the ₹ 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 oth .....

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