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TMI Blog2014 (5) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... -lease, which would need consent of the principal leaseholder as well, and for all we know the arrangement sought to be entered into may have failed for that reason - there is no assignment deed, bearing reference to the relevant clause of the agreement (or the proposed agreement), i.e., where-under the advance was made - as far as the assessee is concerned, the advance was made to acquire a capital asset - If anything, it puts the assessee's claim of the loss as a revenue loss on an even weaker footing – thus, there is no infirmity in the Revenue's action in disallowing the loss as a capital loss, and not a loss arising to the assessee in the ordinary course of and in carrying out its business - the loss as only on capital account and not on revenue account – thus, it was rightly disallowed in computing the assessee's business income u/s 28 of the Act – Decided against Assessee. - ITA No.3097/Mum/2011 - - - Dated:- 31-12-2013 - Sanjay Arora And S T M Pavalan, JJ. For the Appellant : Shri N M Porwal For the Respondent : Shri S S Rana ORDER:- PER : Sanjay Arora This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income on the temporary renting of the excess space was confirmed by the tribunal as assessable as business income. On the Bench drawing reference to the decisions by the hon'ble apex court in the case of Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927 (SC) and Hasimara Industries Ltd vs. CIT [1998] 231 ITR 842 (SC) in the matter, wherein the loss sustained by the assessee on an advance becoming bad was held non-deductible on account of being a capital loss, the ld. Authorized Representative (AR) sought time to reply. A compilation of 51 pages, containing several judgments was placed on record. Pages 38-51 thereof contain pgs. 4347 to 4361 of the Commentary from Sampath Iyengar's Law of Income-tax 11th Edition Volume III. Our attention was drawn by him to para 156 (at pg.4359), which reads as under: '156. Fixed capital versus circulating capital - As already explained fixed capital is what the owner turns to profit by keeping it in his own possession and circulating or floating capital is what he makes profits of by parting with it and letting it change masters. The following excerpt from Adam Smith's Wealth of Nations eloquently describes the distinction: "H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material on record. 4.1 The issue before us, as we discern, lies in a very narrow compass, i.e., whether the sum advanced by the assessee was toward a fixed or capital asset of its business, or, on the contrary, a current asset, as for example stock-in-trade, considering that the assessee is, apart from its other activity/s, also engaged in letting or leasing out its premises. If as such, it is toward acquiring or acquisition of a capital asset, for an enduring advantage to the business, the loss would be on capital account, and if on revenue account, deductible as business loss u/s.28 of the Act. We state the case in terms of a business loss for, as is apparent, the assessee's claim qua the said loss u/s.36(1)(vii), i.e., under which provision it is made, is ex facie not maintainable inasmuch as there is without doubt nonsatisfaction of the essential pre-condition of section 36(2)(i). It is nevertheless incumbent on the Revenue as well as on the appellate authorities, including us, to examine the deductibility of the claim in the alternative as a business loss. Rather, as apparent from the foregoing, enlisting the proceedings before the Revenue authorities as well as before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the textile mill. The project of promoting the textile mill failed. The private company paid back to the assessee on December 7, 1951 the sum of Rs.2,00,000. The assessee wrote off the balance on December 31, 1951, which was the date on which its accounting year ended, and claimed the balance as a bad debt or alternatively as a business expenditure for the assessment year 1952-53. There was evidence to show that the assessee expected to obtain the selling agency of the goods to be produced by the textile mill: Held, (i) that the assessee company, in making the large payments, intended to acquire a capital asset for itself. In any event the amounts were spent in 1948 and not in the year of account ending December 31, 1951. They could not, therefore, be allowed as business expenditure under section 10(2)(xv) of the Income-tax Act, 1922. (ii) That as the assessee company was neither a banker nor a money-lender, the advances paid by the assessee company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purposes of section 10(2)(xi), was something more than a mere advance and mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquire a capital asset, a source of income. As explained in the case of Seth Shiv Prasad vs. CIT [1972] 84 ITR 15 (All.), with reference to the decisions in the case of Rhodesia Metals Ltd. (Liquidator) vs. CIT [1941] 9 ITR (Suppl.) 45 (PC) and Rani Amrit Kunwar vs. CIT [1946] 14 ITR 56 (All.) (FB), a source of income may be described as a spring or fount from which a clearly defined channel of income flows. The same is to be considered not as a legal concept, but something which a practical man would regard as a real source of income. It is therefore that which by its very nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, including the assessee's manner of dealing therewith (at pg.18). The sub-lease being sought to be acquired by the assessee, which it contends to be so for further letting, is thus clearly a source of income. Further, clauses 16 17 of the assessee's MOA (PB pgs.70-109) read as under: "16. To purchase, take on lease or exchange, or otherwise acquire in any part of the world any land, buildings and any estate or interest therein and any rights over or connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a change of its masters, or that, therefore, the said property becomes a circulating capital of its owner, and no longer a capital asset, is ludicrous. Going by the said argument, all buildings of landlords, where let; all hotel rooms where given on license; all vehicles of taxi and tour operators given on hire or for rent, would be no longer their capital assets but part of the circulating capital. It may be relevant to note that the hon'ble jurisdictional high court in CIT vs. Khimline Pumps Ltd. [2002] 258 ITR 459 (Bom) held the payment of lease premium as toward the capital cost thereof, i.e., a capital expenditure. Further, it may be argued that the loss arises in the instant case not on its write off as irrecoverable, but on its transfer to another. The argument would be to no effect as it would not alter the character of the loss incurred, which would continue to be in the capital field. In fact, it is not known if the original agreement contains a right to transfer the sub-lease, which would need consent of the principal leaseholder as well, and for all we know the arrangement sought to be entered into may have failed for that reason. We say so as such arrangements are ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pilation), the loss on sale of securities being held as stock-in-trade and carried over in books was held as allowable as a revenue loss; the description of the same in the balance-sheet as investment being not decisive of their nature. ii. In CIT vs. Karam Chand Thapar Bros. Pvt. Ltd. [1989] 176 ITR 535 (SC) (pgs. 6-11 of the compilation), the apex court clarified that the question whether the capital loss was a trading loss or a capital loss is to be determined on appreciation of facts. It further found that the loss on sale of shares was based on the cumulative effect of the circumstances, and not perverse. Unless it is so, or based on irrelevant material, or by failing to take into consideration relevant material, no interference could be made. iii. In CIT vs. New Delhi Hotels Ltd. (supra) (pgs.12-19 of the compilation), as afore-noted, the amount was advanced for purchase of property, which did not materialize and neither was the amount repaid. The same was explained to be a business loss inasmuch as the same was toward acquisition of stock-in-trade of his business by the assessee, being in real estate business. iv. In Madnani Development Corpn. (P) Ltd. vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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