IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN MONDAY, THE 14TH JUNE 2010 / 24TH JYAISTHA 1932 ITA.No. 110 of 2007() --------------------- ITA.423/COCH/1998 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR IT RESPONDENT/APPELLANT ------------------------ M/S.SOUTHERN GAS LTD., UDYOGAMANDAL. BY ADV. SRI.P.BALAKRISHNAN (E) SRI.MOHAN PULIKKAL SRI.K.C.KIRAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 14/06/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... I.T. Appeal No.110 of 2007 .................................................................... Dated this the 14th day of June, 2010. JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the Revenue is whether the Tribunal was justified in allowing deduction of Rs.10 lakhs being advance paid by the assessee for contracting acquisition of Oxygen Plant of a liquidated company at Goa. We have heard Senior Standing Counsel appearing for the appellant and Adv. Sri.P.Balakrishnan appearing for the respondent-assessee. 2. The facts leading to the controversy are as follows. The respondent-assessee entered into a transaction with Central Bank of India for purchase of Oxygen Plant at Goa for a consideration of Rs.70 lakhs vide it's confirmation letter dated 29.4.1989. The transaction involved purchase of 6007 sq. meters of land, Oxygen plant, 3000 oxygen cylinders, office buildings, stores, plant etc. Advance of Rs.10 lakhs was paid vide cheque dated 20.11.1985. The Central Bank on I.T.A. 110/2007 2 24.6.1985 stated that in the event of breach of terms and conditions, the sum of Rs.10 lakhs will be forfeited by the Bank. Later, the respondent-assessee gave up the deal leading to forfeiture of the amount by the Central Bank. Even though assessee wrote to the Central Bank on 14.3.1986 informing that they are not able to pursue the deal and requesting for refund, the Central Bank vide letter dated 18.3.1987 informed the assesee that it may not be possible for them to refund the amount of Rs.10 lakhs which stands forfeited. The matter remained as such for nearly six years and on 12.8.1993 the respondent- assessee is stated to have taken legal opinion, wherein it was advised that there is no chance of respondent recovering the amount from Central Bank. Based on the legal advice, the assessee claimed the amount as a business loss for the assessment year 1993-94. The Assessing Officer disallowed the claim on the ground that it was a capital loss which was confirmed by the C.I.T.(Appeals). However, in second appeal filed by the assessee, the Tribunal held that the claim is I.T.A. 110/2007 3 allowable as a business expenditure under Section 37(1) of the Income Tax Act. It is against this order the Revenue has filed this appeal. 3. On facts we notice that the expenditure incurred was towards advance paid for acquisition of plant for manufacture of Oxygen at Goa. If the transaction was proceeded with, respondent-assessee would have acquired the asset in the form of a factory with land, building, plant, stores etc. i.e. a capital investment which would have entitled the assessee for depreciation and other benefits. However, the records show that assessee later found that 3000 gas cylinders were missing and, therefore, they backed out of the contract. The advance was forfeited by the Bank in terms of the contract. The question, therefore, to be considered is whether it is a business expenditure or a business loss that entitles the assessee for deduction. While counsel for the Revenue contended that it is a capital loss and not a business loss or business expenditure and in any case it is not relatable to the assessment year 1993-94, counsel for the assessee contended that I.T.A. 110/2007 4 assessee could write off the amount only in the year in which legal advice was received to the effect that the amount is irrecoverable. We are unable to uphold the order of the Tribunal because in the first place, it is an amount paid towards advance for acquisition of factory building with land, equipment, stores and plant and is not a revenue expenditure. On the other hand, it is a capital outlay for acquisition of a capital asset. Further, it cannot be treated as a business loss as claimed by the assessee because purchase and sale of plant and machinery is not a business of the assessee. Therefore, the advance paid for acquisition of plant and machinery cannot be treated as a business expenditure or a business loss. Apart from this, we find that the communication issued by the Central Bank at the time of making advance itself was very clear that if the assessee commits breach in the contract, advance amount will be forfeited, which was also communicated by the Central Bank to the assessee vide their letter dated 18.3.1987. If at all the claim is allowable as a business loss, we I.T.A. 110/2007 5 do not know on what ground assessee can sleep over the matter for another six years and claim the deduction in the assessment for the year 1993-94 based on legal advice stated to have been received on 12.8.1993. In our view, the loss is a pure capital loss which is neither allowable as a business expenditure or a trading loss. We, therefore, allow the appeal by reversing the order of the Tribunal and by restoring the disallowance confirmed in first appeal. C.N.RAMACHANDRAN NAIR Judge P.S.GOPINATHAN Judge pms