1985 (5) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Whether the difference between the guaranteed amount and the actual purchase of country liquor is allowable as a trading loss.
2. Whether the expenditure in question is of a capital or revenue nature.

Summary:

Issue 1: Allowability of Trading Loss
The Tribunal referred the question: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the difference of Rs. 20,967 between the guaranteed amount and the actual purchase of country liquor was allowable as a trading loss in the computation of the assessee's total income for the assessment year 1968-69?"

The assessee, a Hindu undivided family, claimed a trading loss of Rs. 23,608 due to the deficiency between the minimum guaranteed amount of Rs. 80,400 and the actual purchase of Rs. 56,901. The Income-tax Officer and the Appellate Assistant Commissioner initially rejected this claim, considering it a capital expenditure. However, the Tribunal allowed the claim, stating that the liability arose directly from the terms of the licence during the previous year and was, therefore, a business loss.

Issue 2: Nature of Expenditure
According to section 37(1) of the Income-tax Act, 1961, the expenditure must be laid out wholly and exclusively for the purposes of the business and must not be capital in nature. The court noted that the liability to make good the loss to the Government of Rajasthan arose from carrying on the assessee's business. The court cited several cases, including Addl. CIT v. Rustam Jehangir Vakil Mills Ltd., CIT v. Tarun Commercial Mills Co. Ltd., and CIT v. Surya Prabha Mills (P.) Ltd., to support the view that such payments are allowable as business expenditure.

The court distinguished the cases cited by the Revenue, such as Assam Bengal Cement Co. Ltd. v. CIT and Behari Lal Beni Parshad v. CIT, on the grounds that those cases involved capital expenditure for acquiring a right or benefit of an enduring nature.

Conclusion:
The court concluded that the difference of Rs. 20,967 between the guaranteed amount and the actual purchase of country liquor was allowable as a trading loss. The question referred by the Tribunal was answered in the affirmative, in favor of the assessee and against the Revenue. The parties were directed to bear their own costs of the reference.