2008 (3) TMI 429 - HC - Income Tax

Capital or Revenue Expenditure- The assesese a company engaged in plantation and construction activity. It deposited amount of 10 lakhs to Calcutta based company for appointing the assessee as a distributor of the company. Company at Calcutta never started the business thus after 10 years, the assessee agreed to abandon Rs. 3 lakhs on condition of payment of Rs. 7 lakhs by the Calcutta company. The assessee claim these 3 lakhs as deduction of business expenditure. Lower authorities and Tribunal reject the claim. Held that- the expenditure incurred was for acquiring the capital asset, that was an advantage of enduring nature in the form of distribution rights, when part of such capital asset is written off to retrieve the balance, obviously the written off part represented the capital outlay and therefore the assessee was not entitled to the deduction under section 37.

Summary

Issues:
Disallowance of loss claimed by the assessee for part of a deposit made with another company for distribution rights.

Analysis:
The judgment delivered by the High Court of Kerala pertains to a reference at the instance of the assessee regarding the disallowance of a loss claimed by the assessee amounting to Rs. 3 lakhs. The assessee, a company engaged in plantation and construction activities, had deposited Rs. 10 lakhs with a company in Calcutta to acquire distribution rights of their products. However, the Calcutta-based company failed to commence production, leading to the non-payment of interest and refund of the advance by the assessee. After around 10 years, the assessee agreed to abandon Rs. 3 lakhs in exchange for a payment of Rs. 7 lakhs by the other company. The assessee claimed this Rs. 3 lakhs as a deduction of business expenditure, which was rejected by the Assessing Officer, the first appellate authority, and the Tribunal in the second appeal. The Tribunal held that the amount deposited was for acquiring a capital asset in the form of distribution rights, and writing off a part of it to recover the balance did not entitle the assessee to a deduction under section 37(1) of the Income-tax Act, 1961.

The High Court, after hearing arguments from both senior counsels representing the assessee and the Revenue, upheld the Tribunal's decision. It was noted that the expenditure incurred by the assessee was for acquiring an enduring advantage in the form of distribution rights, which constituted a capital asset. The act of writing off a part of this capital asset to recover the balance did not qualify for a deduction under the Income-tax Act. Despite the assessee citing precedents from the Supreme Court, the High Court found that those decisions did not support the case of the assessee, as it involved writing off a part of the deposit after 10 years to acquire distribution rights. Therefore, the High Court ruled in favor of the Revenue, upholding the Tribunal's decision to disallow the claim for deduction of the Rs. 3 lakhs.

In conclusion, the High Court answered the reference question against the assessee and in favor of the Revenue. The judgment will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, Cochin for further action.