TMI Blog1974 (1) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... t of facts submitted to this court, certain aspects of which, at least the underlined portions, are challenged before us as mere inferences without any supporting materials on record : " ...... 4(i) The Government of Orissa floated loan on 4th September, 1961, and persuaded the assessee to subscribe Rs. 50,00,000 (fifty lakhs) to such loan bearing interest of 4 1/4 per cent. (ii) The Government of Orissa while persuading the assessee to subscribe to the said loan gave an inkling of (sic) the assessee being accorded preferential treatment in placing orders for motor vehicles required for the various Government departments and also by granting an advance of 50 per cent. of the value of such orders placed with the assessee. (iii) The Government of Orissa pursuant to such concession on the assessee subscribing to the loan did, in fact, advance a sum of Rs. 18,37,062 and in addition a circular was issued to the various Government departments by the State Government to make purchases of the vehicles from the assessee-company. (iv) The assessee-company in order to gain preference for the sale of motor vehicles to Government departments agreed to the subscription of the loan an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The business of the assessee is to purchase and sell cars, jeeps, etc., but not to purchase and sell Government securities. That being so, any investment made by the assessee in the purchase of Government loans is foreign to its business. Consequently, loss, if any, sustained in sale of such loans is not trading loss but capital loss. (ii) The assessee had no such trading transaction in purchase and sale of Government bonds in the past, and so it was ex facie a new venture unconnected with its ordinary business-sale of automobile or spare parts. (iii) The investment of Rs. 50,00,000 (fifty lakhs) made on Government loan bond was not the basis of any contract-express or implied, written or unwritten, for securing the bulk orders of the Government of Orissa for supply of trucks, jeeps, etc. (iv) The said investment of Rs. 50,00,000 (fifty lakhs) by the assessee was not a dead capital or a deposit to obtain State Government orders, but it was yielding interest at 41 per cent. per annum and, therefore, it was at least an investment of a capital asset of an enduring, nature. (v) The assessee merely speculated that by acquiring this new venture it would better the prospects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Chief Engineers/Transport Controllers". (i.e., annexure E) According to Mr. Misra, the main judgment of the Accountant Member is lacking in discussion as to how the investment made by the assessee-company in the purchase of Government loan was ancillary and conducive to the business and, therefore, the loss sustained by it was a business loss. The independent judgment of the learned judicial Member also, according to him, has not improved the position in any way since it is only a bald dogmatic assertion, in the stereotyped legal jargon that-- "the purchase of securities was motivated by interests and dictated by grounds of commercial expediency." The gravamen of Mr. Misra's submission on the factual aspect of the case appears to be that the learned Tribunal has not endeavoured to make a deeper probe into the matter, as it ought to, when the assessee alleged contract between itself--a private party and Government. On the contrary, it assumed facts contended on behalf of the assessee, as if it was a domestic or family affair without document or without proof. Mr. Misra's contention on the legal aspect of the matter was that the learned Tribunal has not at all turned to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting or running business, then it is a gain or loss on the revenue side. Since both the parties rely on the same set of authorities it is unnecessary to deal with each one of them. We would, therefore, deal with a few of them to see if any guideline has been laid down which can be of any universal application. It is only in that light that we would now proceed to discuss some of the case law cited at the Bar. The first two authorities relied on are both decisions of the Privy Council, which still hold the field as good law. The first is Tata Hydro Electric Agencies Ltd. v. CIT [1937] 5 ITR 202 (PC) ; AIR 1937 PC 139. That was a case where under the purchase of a business undertaking one of the terms of purchase was to pay a certain sum annually to a third party irrespective of whether the business yields any profits or not and it was held (see Headnote in AIR 1937 PC 139) : "...it cannot be said that the annual payments are made solely for the purpose of earning the profits of the business. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of being permitted, to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature, and that the deposit cannot, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. They think that the view taken by the income-tax authorities is correct. " In this case, though the deposit was made under compulsion to obtain an agency, yet their Lordships of the Privy Council held that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature and that the deposit cannot, upon a true view of the terms of the agreement, be regarded as an expenditure made in the course of carrying on an existing agency. This case lays stress on two aspects, namely, whether it is an existing agency and whether an investment was made for securing an enduring benefit of a capital nature. Further, Sir George Rankin, who delivered the judgment of the Privy Council, observed that the deposit of Rs. 50,000 may be looked upon as a tempo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e normal course of business. (ii) that, on the facts, there was material to justify the finding of the Tribunal that the sale and purchase of the securities were not connected with the normal business of the company and that, therefore, the assessee was not entitled to have the loss in the transactions set off against its other income. " The ratio of this case also hardly supports the assessee. In the case of Catholic Bank of India Ltd. v. CIT [1967] 64 ITR 514 (Ker), it was held that loss incurred by a bank in obtaining repayment of amounts covered by Treasury Savings Certificates before the expiry of the period for which the certificates were issued is loss of a capital nature and not allowable. This also goes against the assessee. In the case of New Prahlad Mills (P.) Ltd. v. CIT [1972] 85 ITR 480 (Bom), the case of the assessee was that it purchased the shares of Jupiter for boosting up their prices and their selling them at a profit and not for acquiring control either of that company or of East and West and that was finally accepted. In that case, the revenue relied on the following circumstances, namely, (1) the business of the assessee is to manufacture and sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing passage appears : "........ the assessee contended that the transactions in question were not in the nature of trade and the profits arising therefrom cannot be taxed. This contention was negatived by the General Commissioners whereupon the assessee appealed. Lord President Clyde described the problem raised by the assessee as one of the most familiar problems under Case I of Schedule D and observed that 'a single plunge may be enough provided it is shown to the satisfaction of the court that the plunge is made in the waters of trade ; but the sale of a piece of property--if that is all that is involved in the plunge-may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it ; much depends on the circumstances ' ...... But finally the finding of the Commissioners was confirmed and the profit was held liable to tax. " On behalf of the assessee, in support of its contention that this court should not go into the questions of fact, the Appellate Tribunal being the final court of facts, the case of Rameshwar Prasad Bagla v. CIT [1973] 87 ITR 421 (SC) was relied on. Much emphasis, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have arrived at it. " To meet the objections raised on behalf of the assessee to disturb findings of fact we could do nothing better than refer to the famous case of CIT v. S. P. Jain [1973] 87 ITR 370 (SC). Therein it has been held thus : " (i) Though the questions referred to the High Court did not challenge the validity of the findings given by the Tribunal, as the Tribunal had failed to take into account the relevant material on record in arriving at its finding and had further acted on inadmissible evidence and misread the evidence and based its conclusion on conjectures and surmises, the court could ignore the findings of the Tribunal and re-examine the issues arising for decision on the basis of the material on record. (ii) That, on the facts, the only reasonable inference that could be drawn from the circumstances was that the Rana was a mere name-lender and that the income-tax authorities were fully justified in drawing an inference that the Rana was a name-lender for the assessee. The High Court and the Supreme Court have always the jurisdiction to interfere with the findings of the Appellate Tribunal if it appears that either (1) the Tribunal has misunderstood t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everlasting, for the assessee's business during the period of the lease ; the expenditure was neither, " rent " nor " premium " and the department was right in treating it as capital expenditure. " In tax cases, the courts cannot ignore the legal position represented by the form of the transaction and regard ' the substance of the matter '. " Several case-law in this case were reviewed and in that illuminating judgment, Bhagwati J. approved the principle laid down by Mr. Justice Mahajan on behalf of a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185 and summarised the law as follows in [1955] 27 ITR 34, 45 (SC) : In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her. In a recent decision of the Supreme Court in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, Sikri J., who spoke for the court, quoted the observations of Hidayatullah J. in Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) as follows (p. 724 of 59 ITR) : "............none of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases ... by matching the colour of one case against the colour of another. " The learned judge held that there was no necessity to review all the cases cited, as the Supreme Court has formulated certain tests in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) and the cases were reviewed again in Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC) and Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC). His Lordship Sikri J. held that it is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rd., Cuttack, held on 24th July, 1961. The Chairman stated that the Government of Orissa in the Finance Department had approached him to subscribe to the Orissa State Government loan to be floated in the coming month. He also stated that it was in the interest of the company to do so as good orders can be expected by this gesture. After some discussion the following resolution was adopted. Resolved that Sri G. C. Patnaik, the Managing, Director, is authorised to apply for the Orissa State Loan to the extent of Rs. 50 lakhs. " The next in point of time is : " Annexure ' E ' (30-8-61) Appendix " A " Government of Orissa Works Department No. 25797/7177A, Bhubaneswar the 30th August, 1961. Sri S. S. Misra, O.F.S., Dy. Secretary to Govt. To All Chief Engineers/Addl. Chief Engineers/Transport Controller. Sub : Advance payment to M/s. Patnaik and Co. (P.) Ltd., for supply of Jeep, Trucks, Chassis and Pick-up Vans against orders of the Chief Engineer/Transport Controller. Sir, I am directed to say that after careful consideration Government have been pleased to decide that for each order placed with M/s. Patnaik and Co. (P.) Ltd. for supply of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Financial Adviser-cum- Dy. Secy. to Government. Memo No. 25798. D/- 30-8-61. Copy forwarded to the Finance Department for information and communication to Accountant-General/Dy. Accountant-General, Orissa, Puri/ All District Magistrates for information. Memo No. 25799 dated 30-8-61: Copy forwarded to Managing Director, Patnaik and Co. (P.) Ltd. Copy forwarded to Managing Director, Patnaik and Co. (P.) Ltd. (sic). FORM NO. The only other material before the Tribunal to support its finding was the Khanna Commission report to which we may now advert. The Commission had been set up to probe into certain alleged administrative improprieties committed by fifteen named Ministers including Sri Biju Patnaik who was the Chief Minister from 23-6-1961 to 1-10-1963. Allegation No. 59 was confined to Sarvashri Patnaik, Tripathy, Mardaraj and Mallik. In substance, the allegation was that : " ......huge sums were advanced to Shri Patnaik and Company without verification of its assets and favouritism in realisation of advance .......... A meeting was held on August 30, 1961, within two months after the assumption of office by Shri Biju Patnaik in the room of the Addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 per cent. advance would be given for each order placed with Patnaik and company... The State Government did not honour the commitment with regard to purchase of 70 per cent. of the total requirements of vehicles for Orissa State Government Transport Organisation and Orissa Transport Co. Ltd. and the actual purchase orders placed with Patnaik and Company came to about 26.31 per cent........ Sri G.C. Patnaik had to pay higher rate of interest on the loan taken from the bank than is payable on Orissa Government Loan Bonds. In the case filed by the State Electricity Board it is stated a compromise decree has already been obtained. The business of Patnaik and Company is further stated to have been completely paralysed as a result of the Government action. " The finding of the Commissioner is : " In respect of this allegation I find that a meeting, attended by the Additional Development Commissioner and Chief Engineers, Irrigation Roads and Buildings and Express Highway, was held in the room of the Additional Development Commissioner on August 30, 1961, in connection with the purchase of ten jeeps and two trucks for Chief Engineer, Irrigation, four jeeps and six diesel trucks fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances. The advance should not be interest-free nor it should be a guarantee to enable him to get more and more contracts for supplies from Government for a future period and that too for long periods. This will be more or less a kind of monopoly to some selected suppliers. Send this to Finance Department soon. " Thus, finally, the Commission held, on a discussion of the matters placed before it and the affidavits and the counter-affidavits, that the charge of impropriety contained in this allegation had not been proved. It is evident that the Commission had been set up to enquire into the propriety of certain actions of the then Chief Minister, Sri Biju Patnaik, amongst others. In that Commission, the assessee had filed an affidavit obviously against Sri Biju Patnaik supporting his own stand " of persuasion " and subsequent betrayal or more appropriately " dishonouring the commitment ". Sri Biju Patnaik in his affidavit has not owned the allegations of persuasion or commitment of any sort as alleged by the assessee. Therefore, this affidavit of the assessee before the Commission was a selfserving document to suit his purpose, which can hardly be taken at its face value. Besid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance, however, therein also, without basis it is said " the Government of Orissa persuaded the assessee-company to subscribe rupees fifty lakhs on 30th of August, 1961 " ; and if it subscribed for Government loan preferential treatment would be shown to it Further down, it is said " in pursuance of such capitulation " with the Government of Orissa. This is another figment of imagination for, as is clear, there is no capitulation either oral or documentary from Government side. Again, the sequence of events as to when the company first resolved in its prudence to make investment has been altered which does not reflect the true state of affairs, for, the resolution dated July 24, 1961 (annexure " D "), is the orgin though otherwise represented in the statement of facts. Finally, it is said, " the assessee-company imperatively agreed to make the investment in the loan ". We do not find anything on record where any direction was given or pressure put on the assessee to make any such investment. We are constrained to observe all these just to show how tainted, if not faulty, is the impugned order as well as the statement of fact submitted to the court. We were at one stage thinking of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital loss, to be set off against capital gains. Rs. 53,650. The learned Assistant Commissioner held in this context thus : " Though business considerations might ultimately have resulted in purchase of Orissa Government loan such loan was held as capital asset by the company. Any profit or loss on sale or transfer or relinquishment of such assets was capital by nature and could not be considered as an expenditure incurred wholly and necessarily for the purpose of business or a loss sustained in the case of carrying on of the trade. In the above consideration of the facts of the case and the points of law at issue, the finding clearly emerges that the loss on sale of the capital asset was capital in nature and could not be allowed as deduction. The ITO's action is, therefore, upheld. " The learned Tribunal has not referred to any authorities on the point, but on the facts has decided the issue in favour of the assessee. Obviously, the business of the assessee is to deal with automobiles and not to go in for purchase or sale of Government loans. At least, the memorandum of association has not been filed to show that. As it appears, the assessee thought fit that if it purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. In it there is an element of volition, inasmuch as he makes the expenditure consciously with the expectation of some return-tangible or intangible. If one purchases a new machinery or pays certain allowance to its employees, it is an expenditure incurred which he has to pay from his pocket. But a loss is something different. It comes upon him in spite of his best efforts and wishes to avoid it. It is something inevitable. It visits though unwelcomed. As has been rightly said by Finlay J. in Allen v. Farquharson Brothers Co. [1932] 17 TC 59 (KB) : " That is a thing which, so to speak, comes upon him ab extra. " In the instant case, the initial laying out is neither an expenditure, far less a loss. It is an investment and of a capital nature, having no remote connection with its existing business, for the investment is not in the running business. The resulting loss is, therefore, the, consequence of the laying out in the new venture and referable to it only. In a venture, much less in an alien new venture, if a businessman loses, that cannot be invariably attributable to revenue on the ground of motive alone if of course the initial investment was of a capital nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10(2)(xv) of the Indian Income-tax Act, the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business, and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of the business. " In the case of Indian Steel and Wire Products Ltd. v. CIT [1968] 69 ITR 379 (Cal), their Lordships held thus : " Contribution of Rs. 1,50,000 to the Indian National Congress was not an expenditure incurred solely or exclusively for earning the profits within the meaning of section 10(2)(xv) of the Income-tax Act, and was not an allowable deduction. Assuming that there was some connection between this kind of expenditure and the earning of profits, the connection was too remote. " In that case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. Each case must, therefore, be decided on its own facts. " Finally, their Lordships answered the questions in the following manner : " Thus, the reasons given are not enough to show that the contribution to the Congress political fund was justified by the commercial expediency of the assessee-company or tended indirectly to facilitate the assessee's business. It may be that some such contributions at times facilitate business but then there is no presumption that all such contributions do so. There is nothing to show that the present contribution did so. " In another case their Lordships of the Allahabad High Court in J.K. Cotton Spg. and Wvg. Mills Co. Ltd. v. CIT [1966] 62 ITR 813 held in the same way. In that case, the assessee-company had donated a sum of Rs. 56,000 to the Congress Parliamentary Board for its expenditure in the general, elections and claimed it as a business expenditure on the ground that, with the changing pattern of the economic structure of society, it was in the interest of the company to keep the ruling party, in power. It was held that, as there was no direct nexus between the business of the company and the contribution, the amount of Rs. 56, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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