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TMI Blog1970 (7) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Shri Vikram Cotton Mills Ltd. (hereinafter referred to as " the manufacturers "). The agreement was, substantially, to the effect that the company would sell and the assessee would purchase the entire output of the manufacturers, namely, piece-goods, yarn, hosiery, etc , and, in return, the assessee would be entitled to a rebate in price at the rate of Re. 1-8-0 per hundred rupees. The clauses of the agreement relevant to this case are set out below : Clause (1) : The company agrees and undertakes to sell to the said firm the entire output of Shri Vikram Cotton Mills Ltd. that may be manufactured., i.e., all piece goods, yarn and hosiery, etc. Clause (5) : The firm has agreed to deposit a sum of rupees one lakh with Shri Vikram Cotton Mills Ltd. on the request of the selling agents as a security against sales effected through firm and the mills shall pay to the firm interest at the rate of 6% per annum and such interest shall be paid half yearly on the 30th June and 31st December in each year. The company may call upon the firm to pay another one lakh or up to one lakh of rupees as and when it is required by the company and the firm shall deposit the same upon request ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecoverable in the accounting year under reference. The Tribunal then considered the question as to whether the entire amount of Rs. 1,64,087 written off was a revenue loss or a capital loss. This sum included not only the amount of security but also commission or rebate and interest due to the assessee. The Tribunal took the view that to the extent that the amount represented loss of security it was loss of a capital nature while the amount of commission and interest included in this sum represented loss of a revenue nature. The Tribunal was of the view that by the agreement dated March 1, 1951, the assessee acquired the sole selling agency in respect of the goods manufactured by Shri Vikram Cotton Mills Ltd. This, according to the Tribunal, was a new venture undertaken by the assessee and as payment of the security was a " pre-requisite " to the acquisition of the selling agency, the loss of security money was loss of a capital outlay. At the material time the security paid by the assessee amounted to Rs. 1,25,000 and this, according to the Tribunal, was included in the sum of Rs. 2,29,837 debited to the manufacturer. The Tribunal found that the proportionate amount of the securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney was deposited. This would appear from the account of the manufacturers maintained in the books of the assessee for the Samvat year 2007-2008 extracted at page 20 of the paper book. The account shows that in that year the assessee received supply of goods worth Rs. 2,40,204-15-9 against which he had made a payment of Rs. 2,92,941-7-3. On the excess of Rs. 43,628-8-6 paid by the assessee as the price of the goods, a sum of Rs. 892-1-0 was debited to the account as interest payable by the manufacturers. Subsequently, there was further supply of goods to the assessee amounting to Rs. 7,18,799-5-0 which was credited to the manufacturers. As against this there was a debit of the sum of Rs. 43,628-8-6 paid in excess for the first lot of supplies as mentioned above. The assessee then paid Rs. 1,05,850-5-0 being the amount of security money by transferring the amount from M/s. Sheo Narain Sheo Prasad. A sum of Rs. 28,415-12-6 was receivable by the assessee as commission from the manufacturers. The assessee also paid Rs. 7,54,745-9-9 against the price of the second lot of supplies. Thus, at the end of the year 2007-2008, there was a debit in the account of the manufacturers to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business expenditure in section 10 of the Act, there is no express reference to business loss therein. On the other hand, section 341 (I) of the English Income Tax Act, 1952, specifically provides for allowance of a loss sustained in any trade carried on by a person solely or in partnership. The distinction between loss and expenditure has been indicated by Finlay J. in Alln v. Farquharson Bros. Co. in the following words : " ... none the less, I do think that there is a distinction to be drawn between the two. Rule 3(a) relates to disbursements : that means something or other which the trader pays out ; I think some sort of volition is, indicated. He chooses to pay out some disbursement ; it is an expense ; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra." It is, however, well recognized that loss which occurs an extra as an unavoidable and unpredictable incident connected with the conduct of the business is allowable as a trading loss under section 10(1) in computing the commercial profits. Apart from other cases, the decision of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the agreement and earning profits thereby. The payment of the security money cannot, therefore, be regarded as a capital expenditure as contended on behalf of the revenue. It was, in fact, not an expenditure at all, much less a capital expenditure. " Expenditure ", as defined by the Supreme Court in Indian Molasses Co. (P.) Ltd. v. Commissioner of Income-tax, means money which goes out irretrievably. But here, the assessee was entitled to get back the amount of the security deposit, with interest, on the termination of the agency. The loss of the security is, thus, a loss incidental to the business of the assessee and it is allowable under section 10(1) of the Act. In my opinion the present case falls squarely within the rule laid down by Chagla C.J. (sitting with S. T. Desai J.) in Narandas Mathuradas Co. v. Commissioner of Income-tax. In that case, the assessee was a firm which submitted tenders to the then B. B. and C. I. Railway, undertaking to supply certain goods. The assessee had deposited a sum of Rs. 4,419 as security for proper execution of the contract. Eventually, the assessee could not carry out the contract with the result that the amount of the deposit was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the aforesaid case is not distinguishable on the ground mentioined by the Tribunal. Sri R. K. Gulati, for the assessee, has referred to a decision of the Supreme Court in B. D. Bharucha v. Commissioner of Income-tax. In that case the assessee had income from financing producers and distributors of films and it entered into an agreement with a firm of film distributors in pursuance of which the assessee advanced a total sum of Rs. one lakh to the firm for distribution, exploitation and exhibition of a picture called shaheb. The firm agreed to pay a lump sum of Rs. 1,750 a interest and also two-thirds of the profit and loss frorn the exhibition of the said picture in lieu of interest. The firm also agreed that if the picture were not released in Bombay within 15 months from the date of the agreement, the firm would be liable to return the advance with interest at 9 per cent. The picture was not released before the stipulated date and the assessee obtained a money decree in the civil court against the firm. Eventually, a sum of Rs. 89,759 became irrecoverable and the assessee wrote it off as a bad debt and claimed deduction of that amount in its assessment. The Tribunal held that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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