1972 (9) TMI 28 - HC - Income Tax

Security deposit forfeited for failure to wholesale contract - Whether Tribunal was right in law in holding that the sum of Rs. 1, 18, 875 was a trading loss deductible under section 10(1) of the Indian Income-tax Act 1922 in order to arrive at the profits of the assessee s business for the assessment year 1957-58 ? - Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the assessee s claim was not entertainable under section 10(2Xxv) of the Indian Income-tax Act 1922

Issues Involved:
1. Deductibility of Rs. 1,18,875 as a trading loss under section 10(1) of the Indian Income-tax Act, 1922.
2. Applicability of section 10(2)(xv) of the Indian Income-tax Act, 1922, in denying the assessee's claim.

Issue-Wise Detailed Analysis:

1. Deductibility of Rs. 1,18,875 as a Trading Loss under Section 10(1):

The court examined whether the amount of Rs. 1,18,875 paid by the assessee to the American firm constituted a trading loss deductible under section 10(1) of the Indian Income-tax Act, 1922. The assessee, a registered firm engaged in the export of manganese and iron ore, had entered into contracts with an American company but failed to supply the agreed quantity and quality of ore due to non-availability. The American firm modified the contract terms and required promissory notes as security. Despite the modifications, the assessee could not fulfill the contract, leading to the forfeiture of $25,000 (Rs. 1,18,875).

The Income-tax Officer initially denied the deduction, arguing that the payment was made to maintain business relations, resulting in an enduring benefit, and thus could not be considered a business loss. The Appellate Assistant Commissioner upheld this view, questioning the genuineness of the contracts. However, the Tribunal found the contracts bona fide and the payment a legal obligation arising in the normal course of business. The Tribunal concluded that the payment represented a trading loss deductible under section 10(1), relying on precedents like *Narandas Mathuradas & Co. v. Commissioner of Income-tax* and *Hind Mercantile Corporation Ltd. v. Commissioner of Income-tax*.

The court upheld the Tribunal's decision, emphasizing that the loss was bona fide and incidental to the business, and thus deductible under section 10(1). The court referenced the Supreme Court's interpretation in *Calcutta Co. Ltd. v. Commissioner of Income-tax* and *Badridas Daga v. Commissioner of Income-tax*, which recognized that trading losses, even if not explicitly mentioned in section 10(2), should be deducted if they arise from the business operations and are commercially recognized.

2. Applicability of Section 10(2)(xv):

The second issue involved the Tribunal's decision that the assessee's claim was not entertainable under section 10(2)(xv) of the Act. The Tribunal reasoned that the promissory notes were not executed to earn profits but as damages for breach of contract, disqualifying the claim under section 10(2)(xv).

The court, however, did not answer this question, citing procedural grounds. It referenced *Commissioner of Income-tax v. Rathnam Nadar*, which established that a party must file a separate application under section 66(1) for a reference to the High Court. Since the assessee did not independently seek a reference under section 66(1), the court deemed the reference incompetent and returned it unanswered.

Conclusion:

The court affirmed the Tribunal's decision that the forfeited amount of Rs. 1,18,875 was a trading loss deductible under section 10(1) of the Indian Income-tax Act, 1922. The second question regarding section 10(2)(xv) was returned unanswered due to procedural inadequacies. The judgment emphasized the commercial nature of trading losses and their deductibility when incurred in the normal course of business.

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