1979 (2) TMI 73 - HC - Income Tax

Summary

Issues involved:
The judgment involves the following issues:
1. Deduction of loss for the assessment year 1968-69.
2. Acquisition and subsequent extinguishment of a capital asset.
3. Validity of holding the alleged loss as suffered by a third party on behalf of the assessee-firm.

Issue 1: Deduction of Loss
The assessee, a partnership firm, claimed a capital loss of Rs. 23,394 due to a failed industrial project. The Income Tax Officer (ITO) initially disallowed the loss, deeming it as personal loss of a partner. However, the Appellate Authority Commission (AAC) allowed the loss as a capital loss of the firm. Upon appeal, the Tribunal also upheld the allowance of the loss as a capital loss incurred by the firm. The High Court affirmed this decision, considering the loss as a capital loss allowable under the Income Tax Act.

Issue 2: Capital Asset - Land
Regarding the land acquired by Damodara Mudaliar, it was initially unclear whether it was a lease or purchase. However, the Tribunal accepted it as a relinquishment of rights over the plot, constituting a transfer of a capital asset. The High Court agreed that the relinquishment amounted to a transfer under the Act, making the loss eligible for allowance as a capital loss.

Issue 2: Capital Asset - Licence
The licence obtained for the industrial project was considered a capital asset. The High Court analyzed various expenses related to the licence. While some expenses were not considered part of the acquisition cost, the cost of the licence itself was allowed as a capital loss. The cancellation of the licence was deemed an extinguishment of rights in a capital asset, making the cost of the cancelled licence eligible for allowance as a capital loss.

Issue 3: Loss Incurred by the Firm
The revenue argued that the licence was intended for a public limited company, not the assessee-firm. However, based on the account books and an affidavit, the Tribunal concluded that the loss was incurred by the firm. The High Court upheld this finding, stating that there were sufficient materials to support the conclusion that the loss was indeed incurred by the assessee-firm.

In conclusion, the High Court answered all three questions in favor of the assessee, allowing the deduction of the capital loss incurred in the failed industrial project.