1973 (1) TMI 3 - HC - Income Tax

Adventure in the Nature of Trade - agreement for buying 2 lakhs feet of disposal pipes within stipulated period by paying cash on delivery but delivery was not taken - vendor sold goods incurring loss. The assessee reimbursed the loss. Whether this reimbursement is a business loss and whether the interest on borrowing to pay the loss and the expenses incurred in connection with the loss are allowable

Issues Involved
1. Whether the loss of Rs. 75,000 could be allowed as a revenue deduction during the year in question.
2. Whether the interest paid on borrowings for paying the above loss is a permissible deduction.
3. Whether the travelling expenses and bank commission in connection with the above loss are permissible deductions.

Issue-wise Detailed Analysis

1. Revenue Deduction of Rs. 75,000 Loss
The primary issue was whether the loss of Rs. 75,000 incurred by the assessee in a business transaction could be allowed as a revenue deduction. The assessee had entered into a contract with M/s. Laxmi Iron Stores to purchase two lakhs feet of disposal pipes at Rs. 2.25 per foot. Due to a market downturn, the assessee failed to take delivery, resulting in the pipes being sold at a loss of Rs. 75,000, which was claimed as a business loss.

The Income-tax Officer disallowed the loss as speculative, and the Appellate Assistant Commissioner treated it as a capital loss, stating no business in pipes was started. The Tribunal upheld this view, asserting there was only a proposal to start a business, which never materialized.

However, the court held that the transaction was an adventure in the nature of trade. The large quantity of pipes indicated the transaction's sole purpose was to make a profit. The court referenced cases like Regent Estates Ltd. and Rutledge v. Commissioners of Inland Revenue, where similar transactions were deemed adventures in the nature of trade. The court concluded that the loss was a business loss, as it would have been considered a business profit if the market had been favorable. Therefore, the loss of Rs. 75,000 was allowable as a revenue deduction.

2. Deduction of Interest Paid on Borrowings
The second issue was whether the interest paid on borrowings for paying the loss was a permissible deduction. Since the court determined that the loss was a business loss, it logically followed that the interest on borrowings used to pay this loss was also a business expense. Therefore, the interest paid on borrowings was deemed a permissible deduction.

3. Deduction of Travelling Expenses and Bank Commission
The third issue concerned whether the travelling expenses and bank commission related to the transaction were permissible deductions. Given the court's determination that the transaction was an adventure in the nature of trade, the expenses incurred in connection with this transaction were considered business expenses. Thus, the travelling expenses and bank commission were allowable deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Conclusion
The court answered all three questions in favor of the assessee and against the department. The loss of Rs. 75,000 was allowed as a revenue deduction, the interest on borrowings for paying the loss was deemed a permissible deduction, and the travelling expenses and bank commission were also allowed as deductions. The assessee was entitled to costs, with counsel's fee set at Rs. 250.

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