1997 (9) TMI 5 - SC - Income Tax

Whether on a proper interpretation of the terms and conditions of the 'leave and licence agreement' executed on October 19, 1963, the Tribunal was right in holding that the loss of ₹ 20 lakhs which had been deposited by the assessee with S pursuant to clause 17 of the said agreement, arose in the carrying on of the assessee's business and was incidental to it and was accordingly allowable as a business loss - Held, no

Summary

Issues:
Interpretation of terms in a 'leave and licence agreement' for business loss deduction.

Analysis:
The case involved a dispute over the deduction of a loss amounting to Rs. 20 lakhs deposited by the assessee with a company pursuant to a 'leave and licence agreement.' The High Court disagreed with the Tribunal's decision, ruling that the loss was on capital account and not allowable as a business loss. The High Court emphasized that the deposit was made to acquire a profit-making apparatus, not as part of the day-to-day business operations of the assessee. The agreement's clause required the deposit for the licensee to work the licensor's cotton mills, indicating a capital investment for a profit-making asset.

The assessee argued that the loss should be considered a business loss as it was incurred due to the winding up of the licensor company, affecting its cotton business. The counsel referred to legal precedents highlighting the distinction between capital and revenue expenditure. The judgment cited various cases where the nature of the expenditure and the enduring benefit to the trade were crucial in determining the deductibility of the amount as a business loss.

The High Court's decision was supported by a comparison with a similar case involving a deposit for an organising agency, where the Privy Council ruled that the deposit was made to secure an enduring benefit of a capital nature, not as part of the existing business operations. The court concluded that the Rs. 20 lakhs deposit in this case was made to acquire a profit-making asset for the cotton business, indicating a capital investment rather than a revenue expense. Therefore, the loss incurred could not be treated as a business loss and was rightly disallowed for deduction.

In light of the above analysis, the Supreme Court upheld the High Court's decision, dismissing the appeal and affirming that the loss of Rs. 20 lakhs was on capital account and not allowable as a business loss.