TMI Blog1973 (12) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... the surplus arising from the sale of shares was capital gain. Another controversy that arose relates to the forfeiture of security deposit of Rs. 77,290 by the Deputy Director (Food), Hyderabad. The assessee had entered into a contract with the Deputy Director (Food) for the purchase of rice and had deposited Rs. 77,290 as security for the due performance of the contract. The assessee was unable to perform the contract and the security was forfeited by the Deputy Director (Food). The assessee then started litigation for the recovery of the forfeited security. The matter finally went up to the Supreme Court which referred the matter to the arbitration, of the Regional Director (Food), who by his award dated September 6, 1965, upheld the forfeiture of the security. The assessee claimed a sum of Rs. 77,290 as a business loss in the assessment year in question. The claim was disallowed by the Income-tax Officer as also by the Appellate Assistant Commissioner of Income-tax on appeal. The Income-tax Tribunal, however, on second appeal accepted the assessee's claim and held that the loss was properly allowable in the assessment year in question. The Commissioner is aggrieved and at hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be said to have suffered loss in the relevant previous year. Under section 10(1) of the Indian Income-tax Act, 1922, which governs the present case, tax is payable by an assessee in respect of profits and gains of a business carried on by him. In computing such profits and gains the loss, if any, suffered in carrying on the business is to be deducted out of the profits and thereafter under sub-section (2) other overhead expenses incurred in carrying on the business are also deducted. The computation of the net profit is to be made on the basis of the method of accounting followed by an assessee. If he follows the mercantile system, the loss becomes deductible at the point when it accrues. Its allowance need not be postponed until it is paid. In order, however, that a loss may be allowed to be deducted, two conditions have to be satisfied : (i) that the loss or the liability should have accrued in the relevant previous year ; and (ii) It should be an ascertained liability. Contingent and unascertained liabilities or losses are not to be allowed. Now in the instant case the assessee had deposited security for the carrying out of the contract of purchase of rice. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year. " However, we must make it clear that we are not laying down the proposition that in every case where a claim is preferred by a third party against an assessee for loss or damage, the liability for such loss or damage accrues. In case where there is a dispute whether the loss or damage occurred, would depend upon the facts of each case. For instance, if a claim is preferred against an assessee which is wholly unjustified or is frivolous the assessee may not be said to have incurred a liability until the matter is finally decided by a competent court or authority or until the liability is accepted by the assessee. We have already indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax may be cited with advantage. In that case, the appellant-company had purchased some land and sold it in plots for building purposes with the undertaking that it would develop the land by laying out roads, drainage and lights. In the relevant accounting year while preparing its profit and loss account, the company took into account the entire price payable by the purchasers, even though only a part of it had been received and claimed to deduct the estimated expenditure which it was liable to incur on the development of the land. The Supreme Court held that the company was entitled to claim deduction on acccount of expenditure because the undertaking to carry out the developments within six months from the date of the sale was unconditional. The liability for the expenditure accrued on the date of the deeds of sale though the liability was to be discharged on future dates, and further, that, although the liability, even though not ascertained, was capable of ascertainment. Here was a case of a liability under a contract just as the case before us. In Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax , the Supreme Court does not lay down a contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in speculative transactions. The assessee-firm in that case disputed its liability and the matter was referred to arbitration as provided under the contract. It was held that the loss resulted on the date when the arbitrators gave the award. On facts, this court held that it was clearly in the contemplation of the parties that in the first instance their only right would be to get a determination by the arbitrator as to whether or not liability to loss had accrued and it was only after such ascertainment that a liability could be said to have accrued, which previously was merely a claim. There the dispute was referred to arbitration at the instance of both the parties while in the instant case the dispute was raised only by the assessee, the other party having already forfeited the amount. The matter was referred to arbitration not by the parties but by the Supreme Court. We are, therefore, clearly of the opinion that the Tribunal was right in allowing the deduction claimed by the assessee. Turning now to the second question, the only facts which are available on the record are that the assessee is not a dealer in shares in the sense that he does not carry on a regular business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into consideration irrelevant circumstances or had failed to take into consideration the relevant circumstances. In that case the assessee-company, whose main activity was manufacturing biscuits, purchased preference shares from another company at the latter's initial expansion. Both the companies belonged to the Dalmia group. That was the only occasion on which it dealt with shares. The assessee-company incurred a loss as a result of resale of those shares and the Tribunal held that the activity of the assessee was not a trading activity but was merely investment and, therefore, the loss was not a trading loss. In the opinion of the Supreme Court the finding of the Tribunal was not vitiated in any manner. Same principle has been reiterated by the Supreme Court in Commissioner of Income-tax v. Dalmia Jain Co. Pvt. Ltd. That was also a case of loss arising from the sale of shares. The Supreme Court held that the question whether a particular loss is a trading loss or a capital loss is primarily a question of fact. If the Tribunal has come to the conclusion that the loss incurred by the assessee was a trading loss and it is not the case of the department that in arriving at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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