1965 (4) TMI 119 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee was entitled to claim a sum of Rs. 75,000 paid to Shaw Wallace & Co. as a deduction under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act.

Detailed Analysis:

1. Nature of the Payment:
The assessee, a registered partnership firm, was engaged in banianship business with Shaw Wallace & Co. As per their agreement, the assessee guaranteed the fulfillment of contracts and indemnified Shaw Wallace & Co. against any losses. Upon deciding to wind up the business, the assessee paid Rs. 75,000 to Shaw Wallace & Co. to settle its obligations. The assessee claimed this amount as a deductible expense.

2. Income-tax Officer's Decision:
The Income-tax Officer disallowed the deduction, reasoning that the payment was not a trading liability but a settlement to absolve the partners from future liability due to the firm's dissolution.

3. Appellate Assistant Commissioner's Decision:
On appeal, the Appellate Assistant Commissioner upheld the disallowance, stating that the payment was not made wholly and exclusively for business purposes.

4. Income-tax Appellate Tribunal's Decision:
The Tribunal also disallowed the deduction, concluding that the payment was a lump sum settlement during the business termination and was not expended for earning profits.

5. Legal Question Referred to High Court:
The Tribunal referred the legal question to the High Court: "Whether the assessee was entitled to claim a sum of Rs. 75,000 paid to Shaw Wallace & Co. as a deduction under section 10(1) or section 10(2)(xv) of the Act?"

6. High Court's Analysis:
- Nature of Business and Agreement: The assessee's business involved securing buyers for Shaw Wallace & Co. and guaranteeing payments. The agreement included several clauses imposing liability on the assessee for any defaults by the buyers.
- Settlement Context: At the time of settlement, the total outstanding amount guaranteed by the assessee was Rs. 5,54,105. Shaw Wallace & Co. agreed to accept Rs. 75,000 as a probable bad debt and release the assessee from further obligations.
- Counsel's Argument: The assessee's counsel argued that the payment was a revenue expenditure incurred during the business and should be deductible.
- Comparison with Precedents:
- Mysore Sugar Co. Ltd. Case: The Supreme Court allowed deduction for advances made to sugarcane growers as they were current expenditures for business purposes.
- Calcutta Co. Ltd. Case: The Supreme Court allowed deduction for estimated expenses for land development as they were accrued liabilities.
- Distinguishing Factors: The High Court distinguished the present case from the cited precedents, noting that the payment of Rs. 75,000 was neither an advance in the course of business nor a legal obligation at the time of the agreement.

7. Contingent vs. Accrued Liability:
- The court emphasized the distinction between actual liabilities and contingent liabilities. The Rs. 75,000 payment was for a contingent liability, as the actual default by buyers had not occurred.
- Relevant Case Law:
- Edward Collins and Sons Ltd. Case: Contingent liabilities cannot be deducted from current profits.
- Peter Merchant Ltd. Case: Deductions for contingent liabilities are not permissible.
- Indian Molasses Co. (P.) Ltd. Case: The Supreme Court held that setting aside money for contingent liabilities is not deductible as expenditure.
- Indian Metal and Metallurgical Corporation Case: This court held that provisions for contingent liabilities are not allowable as business expenditure.

8. Conclusion:
The High Court concluded that the Rs. 75,000 payment was not an allowable deduction as it was made towards a contingent liability, not an accrued liability. The assessee's claim was disallowed, and the Tribunal's decision was upheld.

Judgment:
The question was answered in the negative, against the assessee. The assessee was ordered to pay the costs of the department.