TMI Blog1982 (11) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... the original appeal proceedings ?" The controversy relates to the quantum of deduction claimed by the assessee in respect of interest in a particular transaction. At the stage of assessment, the assessee claimed an allowance of interest in the sum of Rs. 37,132. The ITO disallowed the entire claim. The assessee appealed. The AAC allowed the appeal in part and restricted the deduction to one-fourth of the amount claimed, namely, Rs. 9,285. On further appeal by the assessee, the Tribunal remanded the matter to the AAC to go into the question once again. On remand, the AAC gave a different decision. This time he disallowed the entire claim for Rs. 37,132 and confirmed the order of assessment. The assessee once again appealed to the Tribunal. The Tribunal was inclined to allow the claim in toto. At this stage, the assessee moved an additional ground of appeal and put forward a claim for deduction not only in the sum of Rs. 37,132 which had so far figured in the discussion, but for Rs. 1,02,605.50 of which Rs. 37,132 formed part. This additional ground was opposed by the Department. The Tribunal, however, entertained this ground and once again remanded the case to the AAC directing hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment was addressed for the Department to the effect that when the Tribunal admitted the additional ground it tended to enlarge the subject-matter of the appeal. In the Mahalakshmi Textile Mills' case [1967] 66 ITR 710, the Supreme Court found that despite the change Of front which the assessee was permitted in that case by the Tribunal, the subject-matter of the appeal was not enlarged. Again, the new ground permitted to the assessee before the Tribunal in that case held out larger tax relief than the assessee had asked for during the assessment. Yet, the Supreme Court did not think this made for any change in the subject-matter of the appeal. The same principle must apply to the present case as well. A later decision of the Supreme Court in Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1, was cited by Mr. Jayaraman, learned standing counsel for the Department, as striking a different note. We do not, however, think so. In that case, exemption under s. 84 of the I.T. Act, 1961, was not claimed by the assessee before the ITO. The question before the Supreme Court was whether such a claim could be entertained by the Tribunal in appeal for the first time. The Supreme Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer one of the buses belonging to it, along with the route permit, for Rs. 1,30,000 to two joint purchasers. It received an advance of Rs. 1,00,000 from the purchasers. The delivery of the vehicle to the purchasers was to be on receipt of the balance of consideration. Till then and till the transfer of the route permit in the purchasers' name the assessee undertook to run the bus and hand over the daily collections to the purchasers. In point of fact, however, the assessee did not remit the daily collections for more than a week or so. Nor was the assessee ready and willing to deliver the bus on receiving the balance of sale consideration. The purchasers thereupon sued the assessee for damages for breach of contract The court decreed the suit for Rs. 1,02,605.50. The quantum of damages apparently included an element of interest, reckoned at Rs. 37,132. The assessee debited this amount in its interest account and claimed it as a deduction in the computation of its taxable profits from the bus transport business. The assessee's claim for deduction was put forward in various ways. Before the ITO, in the first instance, the contention was that Rs. 37,132 represented interest ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed unless it is shown that it was incidental to the assessee's trade or business. Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215 (HL), may be said to have established this principle at the earliest. It has been followed in this country for a long time. The Supreme Court has adopted it in two cases of trading losses resulting from embezzlement by employees : Badridas Daga [1958] 34 ITR 10 (SC) and Nainital Bank Ltd. [1965] 55 ITR 707 (SC). The principle of these decisions is that it is not enough that the loss is somehow connected with the assessee's business, but it must be incidental to the very carrying on of the business. Particular applications of this principle have yielded varying results. For instance, a businessman or trader, in the course of carrying on business, might be rendered liable for penalties, for damages, and such like payments. The question would be whether the payments of such kind could be allowed as business losses. The decisions of courts on this subject are marked by extreme sophistication. We are asked to make a distinction, broadly, between penalties for infractions of the law, and compensation or damages for breaches of contract. Some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an "honest " breach of contract and a "dishonest " breach of contract. Compensation or damages paid by the erring taxpayer was held to be deductible only in the former case, but not in the latter. Typical of this line of decisions is Mask Co. v. CIT [1943] 11 ITR 454 (Mad) decided by a Bench of this court. The learned judges who gave judgment in that case must have been quite aware that a distinction was usually drawn, in a broad manner, only between a breach of the law, on the one hand, and a breach of contract, on the other. Nevertheless, they thought that even in the case of a breach of contract, it might be necessary to equate it to a veritable violation of the law, if the assessee should commit the breach of contract with impunity. The following passage from the judgment in that case is oft quoted (p. 462): "In the present case, the assessee was not fined for a breach of law, but was made to pay damages for a breach of the contract entered into. The assessee's action in disregarding the undertaking given was palpably dishonest and we are of the opinion that the award of damages which followed did not constitute an expenditure falling within section 10(2)(xii). It was not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e signing of the agreement for sale of the bus in question, a new set of people took over the company. As might be expected, the new group which got into the management took stock of the affairs of the company. They apparently believed that the amount of Rs. 1,00,000 stated to have been paid by the purchasers as advance for the transfer of the bus did not find its way into the coffers of the company. They believed that the then managing director had helped himself to the money received from the purchasers. This was apparently the reason why the assessee under the new management repudiated the sale of the bus in question. It, however, subsequently turned out, on further examination, that a portion of the advance consideration paid by the purchasers had gone in discharge of a bank loan and thereby the vehicle was relieved from a hire purchase transaction to which it was earlier tied up. This discovery apparently should have led the new management to acquiesce in the decree for damages, even though they had resisted the suit in the first instance. These facts, which clearly emerge from the order under reference, do not support the valued judgment passed by the Tribunal to the effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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