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TMI Blog1972 (5) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... , the travelling and conveyance expense of Rs. 63 was a permissible deduction ? 4. Whether, on the facts and in the circumstances of the case, the amount of Rs. 16,000 and Rs. 42,957 received by the assessee from the receiver constitute his income ? 5. Whether, on the facts and in the circumstances of the case, the carried forward loss of Rs. 78,084 was liable to be set off against the share of the rent received by the assessee from the receiver ? 6. Whether, on the facts and in the circumstances of the case, the interest amount of Rs. 1,52,764 was a permissible deduction. 7. Whether, on the facts and in the circumstances of the case, Seth Banarsi Das acquired 1/6th share in the factory under the deed of exchange dated July 16, 1948? 8. Whether, on the facts and in the circumstances of the case, the assessee's claim for determining the written down value of the alleged 1/6th interest acquired by Banarsi Das in the factory under the deed of exchange dated July 16, 1948, at Rs. 4,50,000, for the purpose of allowance of depreciation, is tenable ? " The assessee is a Hindu undivided family of which Seth Banarsi Das is the karta. It carried on a business in forward transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement, there is a no serious dispute that the expenditure was incurred by the assessee in its capacity as a trader. The litigation related to business loss, which the assessee was trying to avoid. There was some controversy as to whether the business of Mohanlal and Company, in which the loss was suffered, was continued in the relevant accounting year or not. The Income-tax Officer held that the business of Mohan Lal and Company had been discontinued. The Income-tax Appellate Tribunal, on second appeal, did not record any finding on this question as in its opinion such a finding was not necessary, the loss being of a capital nature. The only question, therefore, which we have been called upon to decide, is whether the loss is of a capital nature ? A capital expenditure ordinarily means an expenditure incurred on the acquisition of a capital asset or an advantage of an enduring nature to the business. It also means the expenditure incurred in the acquisition of a business or a source of income. However, an expenditure incurred on the preservation of a business asset, whether of capital or floating nature, is a revenue expenditure and not a capital expenditure. Likewise, any expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he had incurred in litigation, should be deducted in calculating his income from money-lending business. The Privy Council held that the expenditure was incurred by the assessee solely for the purpose of earning profits and gains of the money-lending business and he was, therefore, entitled to the deduction claimed. In Commissioner of Income-tax v. Mathuradas Mannalal [1942] 10 ITR 95 (Nag) the assessee suffered a loss in certain forward contracts. He was unable to pay the loss and a suit was instituted against him. The litigation continued for some years and was eventually terminated by a compromise for a certain amount. The assessee paid that amount and claimed that a sum of Rs. 2,382, which he had incurred as legal expenses in defending the suit should be allowed as a business expense. The Nagpur High Court held that the expenditure incurred by the assessee in avoiding business liability was an allowable expenditure. In Hind Mercantile Corporation Ltd. v. Commissioner of Income-tax [1963] 49 ITR 23 (Mad), the assessee entered into a contract with a Belgian company for export of groundnut oil. The assessee was not able to fulfil the contract with the result that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has disallowed the claim on the ground that the loan was taken not for running the business but for meeting a capital liability. Section 10(2)(iii) is a specific provision, which provides for the deduction of interest in respect of capital borrowed for the purpose of the business. The expression " for the purpose of the business " is a wide term. The purpose may be to acquire capital asset or stock-in-trade, as also to pay off a trading debt. The loss suffered by the assessee was a trading debt and the capital borrowed to pay off such a debt would be capital borrowed for the purpose of the business. Even if section 10(2)(iii) is not strictly applicable, the amount in question is allowable under the residuary head contained in section 10(2)(xv). The payment of interest would be an expenditure laid out wholly and exclusively for the purpose of the business. We have already held that the payment of loss was not a capital expenditure, and, as such, interest paid on capital borrowed to meet that loss would be a revenue expenditure. In State of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC) the Supreme Court held that the interest paid on the acquisition of a capital asset was an allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a similar sum was also received by the assessee in the previous year relevant to the assessment year in question. The assessee claimed that it was not liable to tax on this amount on the ground that the amount was either a casual income or a receipt of capital nature. Now, a similar question arose in respect of the first instalment of Rs. 16,000 received by the assessee in the preceding year. The matter came up before this court in ITR No. 461 of 1964, decided by a Division Bench of this court on September 3, 1970 [Seth Banarsi Das Gupta v. Commissioner of Income-tax [1971] 81 ITR 170 (All)]. The Bench held that the sum of Rs. 16,000 was the income of the assessee liable to tax. Following that decision we hold that the sum of Rs. 16,000 was the assessee's income. The other amount of Rs. 42,957 was received by the assessee from another partner, Devi Chand, whose 1/6th share in the sugar mills was obtained by the assessee on lease. There also the agreement was repudiated and it was terminated under a compromise, according to which the assessee was to be paid a sum of Rs. 42,957 by Devi Chand, as compensation. In similar circumstances the assessee had received a sum of Rs. 39,26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his contention. The main case upon which reliance is placed is Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). There the Supreme Court held that the income from the letting out of a commercial asset would be income from business. That was a case under the Excess Profits Tax Act. The assessee in that case was a company engaged in the manufacture of silk cloth and as part of its business it had installed a plant for dyeing silk yarn. During the chargeable accounting period, 1st January, 1943, to 31st December, 1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to a person on a monthly rent. The assessee's contention was that the rent was income from other sources and not income from business and, as such, was not liable to excess profits tax. The Supreme Court held that, as the plant was a commercial asset, the letting out of such a commercial asset amounted to a business. It cannot be disputed that a commercial asset may be used by an assessee in its own business or may be let out to others and the income arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the income received by the respondent-company in the chargeable accounting period by way of rent was income from business and assessable to excess profits tax. It should be noted that in that case the respondent-company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. In such a situation, this court held that that part of the assets did not cease to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the company. This court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own cirumstances according to ordinary common sense principles. In the case before us the assessee-firm's business had entirely closed. It no longer manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward loss is, therefore, wanting and the assessee is not entitled to the set-off claimed by it. Now, let us notice briefly the cases cited at the bar. The case of Commissioner of Income-tax V. National Mills Company Ltd. [1958] 34 ITR 155 (Bom.) was a case where the company, which was carrying on the business of manufacturing textiles, got into financial difficulties and ceased manufacturing textiles. The company went into liquidation. The liquidator let out the plant and machinery of the company on a monthly rent for a period of 3 years and the question arose as to whether the loss suffered by the assessee in its manufacturing business in the preceding year could be set off against its income from lease money under section 24(2) of the Income-tax Act. The Bombay High Court, following the decision of the Supreme Court in the case of Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) held that the lease money was income from business. In that case, the Bombay High Court recognised at page 160 that if the assessee stopped doing business altogether, the assets ceased to have the character of commercial assets. The case of Shri Ram Mahadeo Prasad v. Commissioner of Income-tax [1 ..... 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