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TMI Blog1981 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agent of Mettur Chemicals for a fresh term of years. The consideration for the agreement between the assessee and the Dayaram Firm was that the assessee should pay to the Dayaram Firm one-eighth of the managing agency commission which it would be receiving every year from Mettur Chemicals. This sharing agreement was duly given effect to by the assessee. Every year, soon after the assessee got its managing agency commission from Mettur Chemicals, it would remit one-eighth part thereof to the Dayaram Firm at Calcutta. This went on systematically year after year. There is a special provision in the income-tax statute which allows deduction to a managing agent who parts with either the whole or a share in the managing agency remuneration to a third party although, strictly speaking, the sharing of the managing agency commission is only an appropriation out of income and not a proper charge against it. Such a provision has been there in the taxing statute for more than 40 years now. In the present I.T. Act, 1961, the enabling provision is s. 39. It lays down certain requirements as so many conditions to be fulfilled for the grant of the deduction. In the present case, all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the legal position of changes in the constitution of the firm of Dayaram, the assessee, for its part, was quite unaware of the changes in that firm's personnel. It was further submitted that the assessee was going on making payments of one-eighth share of the managing agency remuneration bona fide to the firm as such. What is more, the assessee's remittances were also being accepted, in the same way, at the other end. If under the technicalities of partnership law the last two payments to Dayarams were to be construed as payments to a non contracting firm, still according to the assessee, the fact remained that the money had gone out from the coffers of the assessee. In other words, the assessee's payments had been made either under ignorance or under mistake. What is more, the present partners of Dayaram had appropriated the payments to themselves without any question. Their stand was that they were entitled to the share even under the agreement dated August 26, 1940. It was in these circumstances that the assessee claimed the outgoings as trading losses, contending that they should be allowed in the computation of its taxable income from business. The Tribunal accepted these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a trade but are really incidental to the trade itself." The question in the present case, therefore, is whether the payment by the assessee of one-eighth share of the managing agency commission either out of ignorance or out of mistake or out of negligence can be regarded as a loss incidental to the assessee's business. The Department's learned counsel, Mr. Jayaraman, urged that the decision of the Tribunal is erroneous in point of law. He submitted that while the parting of the money, for good, by the assessee might be regarded as a loss, it cannot be regarded as a loss incidental to the trade. We do not accept this contention as well founded. The Tribunal in this case had recorded a finding that the payment made by the assessee to the Dayaram Firm was the result of a genuine, mistake. The kind of changes which had taken place in the Dayaram Firm were not known to the assessee. Changes in partnership personnel are often kept secret, and in any case they are not published. Only " insiders " have up-to-date knowledge of these things. No doubt, the ITO came to know about the altered constitution of the firm. But that was because the I.T. Dept. has powerful antenna with which to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenditure. There is, for instance, the well known case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL) which brings out the distinction by laying down that capital expenditure is that which, ordinarily, results in enduring benefit to the taxpayer's trade. We do not, however, think that this doctrine of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd. can be applied to determine the capital character of a loss. For, while capital expenditure begets an asset of tangible nature or begets an advantage of an intangible character, a loss begets nothing, whether it is capital loss or revenue loss. We sometimes refer to a " dead " loss, which aptly brings out the emptiness which a loss leaves behind. In one sense, all losses of a businessman are capital losses. But this is only in the sense that all losses eat into a trader's capital, in much the reverse way that all profits augment his capital. It must still be necessary to make a sophisticated distinction between a revenue loss and capital loss for purposes of arriving at a trader's net profit. This is because nothing which smacks of a capital element can go into the reckoning of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mistake committed by a businessman in the course of his transacting business, or owing to a mistake of his servants or agents in the course of their employment must be regarded as an allowable business loss, since it would be very much incidental to the business. No other conclusion would be reasonable. A bad business judgment leading to loss in business cannot be visited with refusal to grant deduction in the computation for tax purposes. For income-tax is not a tax on business inefficiency any more than it is a tax on business efficiency. To get an allowance for such a loss, however, it must be shown that the loss had arisen in the kind of transaction which, if it had come out aright, would have qualified the outgoing for a deduction as an item of revenue expenditure. In this case, as we earlier observed, this test is fulfilled. The Tribunal's approach to this aspect of the question was also more or less the same. Their conclusion was as follows: " We, therefore, hold that these payments, had they been made to the right party, could have had to be taken into account in arriving at the profits of the assessee from the business of managing agency. The fact that they were paid ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 39 will not have any application to the payment of share of commission ?" The answer to this question is already plain to see. As we earlier indicated, the assessee has not chosen to argue for the allowance of the amount as being qualified for deduction under s. 39. The assessee has preferred to rest its claim on the basis that it is an item of revenue loss in its business. That being so, there is no question of applying s. 39 to this kind of consideration of the deduction claimed. Yet another question for our opinion in this reference is: " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of share of commission is not a capital expenditure and is also not an application of profits after they were earned ?" The first part of the question refers to the Tribunal's determination that payment by the assessee of one-eighth of the managing agency commission is not capital expenditure. In our judgment, the controversy as to capital or revenue, expenditure can hardly arise in this case, because the payment is not properly considered as an item of expenditure at all. The second part of the question does ..... X X X X Extracts X X X X X X X X Extracts X X X X
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