TMI Blog1968 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 1917. In April, 1945, it obtained a licence from the erstwhile State of Kolhapur for the exclusive manufacture and supply of country spirit for a period of ten years commencing from April 1, 1945, in Kolhapur State territories and the jahagirs within the Kolhapur Darbar jurisdiction on terms and conditions mentioned in the licence agreement. Under the said terms the assessee was to be placed in possession of the Darbar distillery at Kolhapur at a monthly rent of Rs. 40 and was to manufacture spirit at the said distillery and issue 1,20,000 gallons every year in such quantities as may be required from time to time for the supply to retail vendors in the contract area of the assessee. Monies realised by the sale of the liquor, after deducting the cost, were to be apportioned between the Darbar and the assessee in the manner provided in the agreement. The agreement was made under the abkari laws, rules and regulations then in existence in the State. On the 1st March, 1949, the Kolhapur State merged with the then Bombay State and the Bombay Abkari Act was applied to the Kolhapur State on the 1st May, 1949. The Bombay Prohibition Act came to be applied to the territory with effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sit and a part of the claim in respect of the value of the stock-in-trade taken possession of by the excise department. The assessee appealed against the said decree but the appeal was also dismissed on the 12th April, 1956. In February, 1958, a bill for Rs. 34,656 was submitted to the assessee by its solicitors. The assessee claimed the amount of the said bill as a deduction in its assessment for the assessment year 1958-59. The Income-tax Officer disallowed the claim holding that, since the amount pertained to the legal expenses incurred in connection with the distillery case and the business of the distillery was closed, the expenditure could not be treated as incidental to business and was, therefore, a capital expenditure. The Appellate Assistant Commissioner upheld the disallowance holding that the expenditure was not incurred for the purpose of the business carried on by the assessee and the claim, therefore, could not be allowed. In further appeal to the Income-tax Appellate Tribunal it was contended on behalf of the assessee that the expenses were incurred for the maintenance of business or for the recovery of damages or loss of profits ; that the suit, if decreed, would h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment had made to the Tribunal for making certain corrections in its order and the order of the Tribunal made on the said application. Now, the reasons mentioned by the department as to why it wants these additional documents are as follows : In the order of the Income-tax Officer in disallowing the claim of the he has stated that he was disallowing the item for reasons given in his assessment orders in earlier years and the department claims that in order to understand the said reasons it is necessary to refer to the said earlier assessment orders. We find, however, from the agreed statement of the Tribunal that the assessment orders for the earlier years did not, in fact, contain any discussion or the reasons why the item was being disallowed. No further elucidation, therefore, can be provided by the said earlier orders. The Appellate Assistant Commissioner also, like the Income-tax Officer, relied on the reasons given by him in his earlier appellate order. In the agreed statement of the case, however, the Tribunal has reproduced the relevant part of the said earlier appellate order of the Appellate Assistant Commissioner. It is, therefore, not necessary to make the whole of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, to be considered is what is the nature of the claim which the assessee had made in the suit : whether it was capital or revenue. We have already pointed out earlier that the claim made in the suit consisted of five items. The first item of Rs. 84,787-13-0 was for damages for sterilisation of the plant, machinery, equipments, etc., of the distillery. The second item of Rs. 11,483-6-0 was in respect of the dead-stock. The third item of Rs. 13,102-4-8 was in respect of the stock-in-trade. The fourth item of Rs. 2,31,305-12-0 was in respect of the loss of profits for the unexpired period of the contract and the fifth item of Rs. 9,320-12-4 was claimed by the assessee by way of general damages suffered by it. There were two other items of comparatively small amounts : one of Rs. 2,000 and odd for unrealised dues from the Government under the licence and the other for Rs. 10,000 for the return of the deposit. It will thus be seen that the major items claimed by the assessee in the suit are the items of Rs. 2,31,305-12-0 for loss of profits and Rs. 84,797-13-0 for the damages caused to the assessee by rendering the plant, machinery and equipments as unsaleable and useless. The ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een rendered useless and unworkable. It is urged on behalf of the assessee that since the main claim of the assessee was for loss of profits, which it would have earned if it was allowed to run its business in accordance with the terms and conditions of the licence, by the premature termination of its licence, its claim was for the recovery of the profits lost to it by the cancellation of the agreement and the claim, therefore, was for revenue and not for capital. It is claimed, on the other hand, by the department that the mere circumstance that the damage is measured by the profits does not give the character of revenue to the amount claimed. What the assessee is claiming is for the sterilisation of its business and for the damage caused by the sterilisation or stoppage of its profit-making apparatus. The aim and object of the litigation undertaken by the assessee was not to maintain the running of its business, nor to avoid a threat to its existence or continuance but for the damages for its total destruction. The claim of the assessee, therefore, is not what may be termed as revenue and consequently the litigation expenses undertaken for the purpose cannot be business expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee, no question of profits taxable under section 10 arose. Mr. Joshi, for the revenue, has very strongly relied on this case in support of his submission that what was claimed by the assessee in the suit, if recovered, would have been a capital receipt and not an item of business income. He says that, as in this case, in the case before us also the licence had been cancelled not as a result of the voluntary act of the contracting party but as an inevitable result of the operation of the Prohibition Act. The cancellation of the licence, therefore, cannot be treated as adjustment of relations between the contracting parties. The result of the cancellation of the licence was the stoppage of the business of manufacture and sale of liquor and thus the stoppage of the source of income of the assessee and also the sterilisation of his assets in the shape of plant, machinery and equipments. It may be, he says, that on the finding of the Tribunal the assessee's entire business at Kolhapur might not have ceased to exist, but so far as the business activity of manufacture and sale of liquor, however, was concerned, there can be no doubt whatsoever that the said business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, vanished. The damage claimed in the suit was in respect of this source of income, and, consequently, the claim of the assessee was in respect of the capital and not revenue. In our opinion, on the facts of the case before us, Mr. Joshi, is right in his submission that the claim of the assessee in the suit was for, what may be termed " capital " and not " revenue ". The claim was based on the stoppage of the source of income by disabling him to work his profit-making apparatus, and earn profits. The cancellation of the licence was not as a result of the voluntary act on the part of the Government, but was the inevitable result of the operation of the Prohibition Act. The assessee, again, by the suit, which he had filed, was not attempting to see that his business should continue and he made profits therefrom. He was accepting the position that business had come to a stop and would not run. He was, however, holding the other party to the suit responsible for the wrongful stoppage of business and asking it to compensate him for the loss caused by the cancellation of the licence. Mr. Dwarkadas, the learned advocate appearing for the assessee, on the other hand, has contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter into such contracts, the cancellation of these agreements did not affect the structure of the assessee's business and the compensation paid was not so much for the stoppage of the assessee's business but was paid in lieu of the commission, which the assessee would have earned provided it had continued the agreements. In the case before us, however, the position is entirely different. The manufacture and sale of liquor at Kolhapur was carried on solely on the basis of the licence agreement. The licence agreement formed the very foundation of the business of manufacture and sale of liquor. The premature termination of the licence when it had six years more to run resulted in a complete stoppage of the business apparatus so far as the manufacture and sale of liquor was concerned. It may be that the assessee might have similar trade elsewhere. It may also be, on the findings of the Tribunal, that the business at Kolhapur may not have altogether stopped. However, so far as the activity of manufacture and sale of liquor was concerned, that activity, came to a complete standstill as a result of the cancellation of the said agreement. Moreover, the cancellation was not by the volunt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case before them was for cancellation of the explosives agency, which was terminable at will, and the appellant was to be paid an amount which was to be computed on the basis of the profits of the business. The Supreme Court further observed as follows : " The appellant was conducting business as selling or distributory agent of numerous principals. The agency which was terminated was one of many such agencies in which the appellant functioned as distributing agent of a foreign principal. There is not even a suggestion, that by the determination of the agency held by the appellant in explosives from the principal company, the trading structure of the assessee's business was impaired. . . . . It may reasonably he held, having regard to the vast array of business done by the appellant as agents, that the acquisition of agencies was in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure of the appellant. The appellant was compensated by payment to it for the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business. " Repelling the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agency lost ? What was its proportion in relation to the total income of the company? What was the impact of giving it up on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or, was the loss an ordinary incident in the course of the business? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt ; if it was the latter, it would be a capital receipt. We may point out that the case before the Supreme Court was one of cancellation of one of the many agencies of the assessee, whose business was carried on in innumerable lines including the acquisition of agencies and working them out. The termination of the agency was within the framework of the business of the assessee, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken and did not impair the profit-making apparat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business Mr. Dwarkadas has urged that the expenses incurred by the assessee were civil litigation expenses which he had incurred as a trader in connection with the trade and were, therefore, revenue expenditure. His argument was that irrespective of the character of the claim made in the suit and the nature of the amount, which the assessee would have recovered in the suit, the expenditure having been incurred in connection with the trade and in the capacity of a trader were entitled to be treated as revenue expenditure, and in that connection he has invited our attention to the decisions in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax and Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax. We do not think that expenses of any civil litigation incurred by a trader in connection with his business must always be regarded as revenue expenditure. It must, as observed by the Supreme Court in Commissioner of Income-tax v. Rai Bahadur Jairam Valji, depend upon the aim and object of the litigation as also the nature and character of the expenditure. The case in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax referred to by Mr. Dwarkadas, do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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