2012 (8) TMI 160 - HC - Income Tax

Denial of claim of loss - advance given for supply of chlorine gas cylinders - supplier went into liquidation - Held that - To allow the claim of loss as desired by assessee it is required to whether an expenditure is on the capital account or on revenue - whether the unrecoverable advances given to Supplier were in order to secure a capital advantage and thereby create an asset of enduring nature or if it was in the normal course of business for acquiring stock in trade no factual material about the life of the cylinders, the number of times they are used, and the average time they are held before their replacement by the assessee has been given - Undoubtedly, they are necessary to supply the finished product to the assessee s customers yet, these facts by themselves are insufficient and not helpful for discerning a complete picture, essential to decide the main issue - matter is remanded back to the appropriate AO to ensure a just ascertainment of the nature of the expenditure incurred.

Issues Involved:
1. Justification of the Tribunal in deleting the loss claimed in respect of the advance given for supply of chlorine gas cylinders.
2. Determination of whether the loss was of capital or revenue nature.
3. Applicability of relevant case law in determining the nature of the loss.
4. Assessment of the factual circumstances surrounding the advances and their treatment in the assessee's books.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal in Deleting the Loss Claimed:
The primary question of law framed was whether the Tribunal was justified in deleting the loss claimed by the assessee concerning the advance given to M/s Kaveri Engineering Industries Ltd. for the supply of chlorine gas cylinders. The Tribunal had allowed the assessee's appeal, reasoning that the loss incurred was a revenue loss and should be allowed as a deduction while computing the profits and gains of business. The Tribunal's decision was based on the fact that the assessee had been regularly purchasing chlorine cylinders from the supplier and the advances were made in the course of its business to ensure timely supply.

2. Determination of Whether the Loss Was of Capital or Revenue Nature:
The Assessing Officer (AO) had initially held that the outstanding amount had the character of an investment, thus constituting a capital loss, which could not be allowed as a revenue loss. The AO's decision was influenced by the Supreme Court's observations in C.I.T. v Mysore Sugar Co. Ltd., which distinguished between capital and revenue expenditure based on the purpose of the expenditure and its relation to the business. The AO argued that the advance was for acquiring an asset of enduring nature, thus not qualifying as revenue expenditure.

3. Applicability of Relevant Case Law:
The assessee relied on several Supreme Court decisions, including Badridas Daga Vs. CIT and Calcutta Discount Company Vs. CIT, to argue that the loss should be considered a revenue loss. The Tribunal agreed with this contention, citing that the containers used for storing chlorine were necessary for the assessee's business operations and did not constitute a capital asset. The Tribunal emphasized that the loss incurred was in the course of business and should be allowed as a deduction.

4. Assessment of the Factual Circumstances:
The AO's order revealed that the assessee had issued a letter of intent and a purchase order for the supply of chlorine cylinders, but the supplier defaulted, leading to the write-off of the advances. The AO questioned whether the chlorine cylinders were treated as store items or assets eligible for depreciation in the assessee's books. The assessee had claimed 100% depreciation on the cylinders, indicating they were treated as store items and not capital assets.

Court's Analysis and Conclusion:
The Court noted that the determination of whether an expenditure is capital or revenue depends on the facts and circumstances of each case. The Court referenced the governing test from Mysore Sugars and other relevant case law, including Empire Jute Co Ltd and Alembic Chemical Works, which emphasized the importance of the nature of the advantage in a commercial sense and the larger context of business necessity or expediency.

The Court found that there was insufficient factual material to conclusively determine whether the advances were for securing a capital advantage or were in the normal course of business. Specifically, the Court highlighted the lack of information about the life of the cylinders, their usage, and the average time they were held before replacement.

Remand for Further Fact-Finding:
Due to the lack of complete factual information, the Court remanded the matter back to the appropriate Assessing Officer for a just ascertainment of the nature of the expenditure incurred. The Court directed a thorough examination of the factual circumstances to determine whether the loss was indeed of a capital or revenue nature.

Disposition:
The appeal was disposed of with the matter remanded to the Assessing Officer for further examination and determination based on the detailed factual context.

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