1989 (2) TMI 7 - HC - Income Tax

Summary

Issues:
Interpretation of agreement for deduction of business loss in assessment year 1961-62.

Analysis:
The case involved a question of law under section 256(1) of the Income-tax Act, 1961 regarding the deduction of a loss of Rs. 72,141 as a business loss in the assessment year 1961-62. The assessee, acting as a principal broker for the supply of jute to jute mills, entered into agreements with jute mills, including one with New Central Jute Mills Co. Ltd. The assessee agreed to bear 50% of the losses suffered by the jute mills due to the failure of suppliers to provide raw jute. The Income-tax Officer initially disallowed the deduction, but the Tribunal held that the assessee was entitled to the deduction. The Tribunal remanded the case to the Appellate Assistant Commissioner for reconsideration.

Upon remand, the Appellate Assistant Commissioner allowed the claim, stating that the payment of damages to the jute mills was a direct consequence of the assessee's business activities. The Income-tax Officer appealed to the Tribunal, arguing that the payment was ex gratia and not a liability of the assessee. The Tribunal, after considering the agreements, held that the liability of the assessee to bear the losses arose when the suppliers failed to perform their agreements. The Tribunal affirmed the order of the Appellate Assistant Commissioner, stating that the losses were incurred in the year under consideration and the liability of the assessee was valid.

The High Court further analyzed the nature of the transactions, stating that the amount spent by the assessee in the course of brokerage business was a commercial transaction and the loss incurred must be allowed as a deduction. Even if the payment was considered a capital receipt by the jute mills, for the assessee, it was revenue expenditure in the course of business. The Court answered the question in favor of the assessee, allowing the deduction of the business loss.

The judgment was delivered by Judge Suhas Chandra Sen, with agreement from Judge Baboolal Jain.