TMI Blog1972 (9) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... hether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee's claim was not entertainable under section 10(2Xxv) of the Indian Income-tax Act, 1922 ? " The assessee is a registered firm carrying on business in export of manganese and iron ore. It entered into for contracts with M/s. M. Golodetz Co, New York, undertaking to supply certain quantities of manganese ore of a specified quality with specified period. After supplying certain quantity of ore as per the agreement, due to the non-availability of the specified quality either in the mines or in the market, the assessee could not supply the balance of the quantity and quality of ore to the said American firm. The assessee-firm, therefore wrote to the American company expressing its inability to fulfil the contracts and requesting the company to cancel the contracts in respect of the balance of the quantity of ore yet to be supplied. The American firm declined to accede to the request, but instead proposed certain modifications in the terms of the original contracts, both with regard to the quality and quantity of the ore to be supplied and also offered to extend the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal was also of the view that the assessee's failure to fulfil these contracts was due to the non-availability of the quality of ore during the relevant period and was not mala fide, and that the assessee-firm acted wisely in accepting the modified terms and also in agreeing to execute the promissory notes. The Tribunal further held that the payment of $25,000 by the assesee to the American firm was in discharge of the legal obligations of the assessee under the contracts and that the payment did not come under the category of capital expenditure. The Tribunal then proceeded to consider the assessee's claim for allowance of this amount under section 10(2)(xv) of the Indian Income-tax Act, 1922, (hereinafter called "the Act"). In the view that the promissory note amounts were not paid by the assessee in order to earn any profits from the fulfilment of the contracts, but were paid,by way of damages for the breach of contract, the Tribunal held that the assessee's claim cannot be allowed under section 10(2)(xv) of the Act. The assessee's claim under section 10(1) of the Act for deduction of the amount was then considered. Relying on the decision in Narandas Mathuradas Co. v. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, reference may be made to the decision of the Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income-tax wherein their Lordships held that the expression "profits or gains" in section 10(1) of the Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom. In this decision, the following passage in Badridas Daga v. Commissioner of Income-tax has also been quoted : The result is that when a claim is made for deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. The argument of Thiru Balasubrahmanian, the learned counsel for the revenue, was that the three promissory notes in question were not executed by the assessee for the purpose of earning profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd findings of the Tribunal, we are of the view that the damages paid by the assessee is a revenue loss incurred in the course of carrying on of the business and, therefore, liable to be deducted under section 10(1) of the Act. Some of the decisions which considered similar claims under section 10(1) of the Act also support our conclusion. In Narandas Mathuradas Co. v. Commissioner of Income-tax the facts were these : The assessee-firm carried on business in several commodities and in the course of its business it submitted tenders to the B.B. C.I. Railway and undertook to supply certain commodities. In accordance with the terms of the tender, it had deposited a sum of Rs. 4,419 as security for carrying out the contract. This amount was forfeited, due to non-fulfilment of the contract, by the railways. The assessee claimed this sum as a trading loss. It was held that submitting of tenders was in the course of its business and that, therefore, the making of the deposit was incidental to the business which the assessee was carrying on. The forfeiture was, therefore, a trading loss deductible under section 10(1) of the Act. Hind Mercantile Corporation Ltd. v. Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of liability to pay damages, should at times be committed and payment of such damages as a result of the breach of warranty in the course of or as a consequence of earning profits and gains of the business is incidental to the carrying out of the assessee's business as a paddy procuring agent; it was an unavoidable loss arising as one of the consequences of carrying on such business. " In Commissioner of Income-tax v. Mysore Sugar Co. Ltd. it was held that when the assessee-company makes a forward arrangement for the next year's sugarcane crops and pays some amount in advance out of the price, there was no capital investment in making the advance and the loss incurred due to the sugarcane growers' inability to grow sugarcane due to drought was a loss incurred by the assessee on the revenue side and, therefore, was deductible. As observed by the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. a loss or payment is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Again, the question whether the loss was incidental to the operation of the business is a question to be decided on the facts of each ..... X X X X Extracts X X X X X X X X Extracts X X X X
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