Case: Hasimara Industries Limited Vs. Commissioner of Income Tax, W. B. and Another

Lord Radcliffe, in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. ((PC)) had observed that what was material to consider was the nature of the advantage in a commercial sense and it was only where the advantage was in the capital field that the expenditure would be disallowable. Lord Reid, in IRC v. Carron Co. ((1967) 45 TC 18, HL) had noted that expenditure had been incurred to remove antiquated restrictions which were preventing profits from being earned and, on that account, held the expenditure to be of a revenue character. In the case before it, this Court found, on a parity of reasoning, that the expenditure incurred by the assessee for the purpose of removing a restriction on the number of working hours for which it could operate looms, with a view to increasing its profits, was a revenue expenditure 8. Learned counsel for the Revenue drew our attention to the judgment of the Privy Council in CIT v. Motiram Nandram ((PC) upon which the High Court had relied 9. It must be said at once that the case of Motiram Nandram ((PC)) bears considerable similarity to the case that is before us. The assessee therein carried on business in cloth, yam and moneylending. In 1930 it deposited with an oil company Rs. 50, 000 in consideration of an agreement. Thereunder, the assessee was appointed the organising agent of the oil company for a period of five years for a stated area. It was to recommend selling agents. Sales were to be conducted entirely by the oil company and the selling agents, but the assessee was to receive a certain commission on all goods sold by the selling agents within the slated area and also on an sales of oil effected in the stated area by the oil company. The deposit was to remain at the disposal of the oil company for the purpose of the oil companys business and was to carry interest at the rate of 7 per cent per annum until it was repaid out of deposits made by the selling agents. After the assessee had recovered a part of its deposit, the oil company went into liquidation and, though the assessee obtained a decree for Rs. 39, 500 against the oil company, it was unable to realise the decretal amount. The assessee claimed in the year 1932-33 that the aforesaid amount should be deducted from its other income as a business loss. The Privy Council did not accept the assessees case. It said"When the deposit is considered in relation to the organising agency, the special terms of the agreement of 17-12-1930, are important since various suggestions have been made as to the true character of the deposit. One suggestion is that the deposit should be looked upon as the purchase price of goods paid to the company in advance and thus a mere trading expense; but this cannot be accepted. It would be a highly inaccurate statement of the effect of the agreement. The Rs. 50, 000 was doubtless laid out with a view to earning profits in the business of organising agents in addition to the interest of 7 per cent, but it was not so laid out with reference to any particular transaction carried out in the course of such business. It was in one aspect a loan made to the company but it was not a loan made in the course of carrying on the business of organising agents or in the course of the business of a moneylender. It was not a recurring expenditure. On the other hand, it was contemplated that in whole or in part the deposit should be returned to the assessees by the receipt of deposit from selling agents; so that if the Rs. 50, 000 does fall to be regarded as invested in a business of organising agents, it was invested with a prospect that it might be a temporary investment and not a permanent one - in other words that the capital might later be withdrawn from the business. The question in such a case as the present must be what is the object of the expenditure ? and it must be answered from the standpoint of the assessees at the time they made it - that is, when they were embarking upon the business of organising agents for the company. The deposit was clearly exacted by the company as a condition of the assessees being given an agency which they hoped to manage profitably. Their Lordships think that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature, and that the deposit cannot, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business." 10. We are in no doubt whatever that the High Court was right in concluding that the amount of Rs. 20 lakhs had been deposited by the assessee with the licensor company for the purpose of securing the licence under which the assessee had acquired the right to work the licensors cotton mills. This is clear from the fact that the deposit was made pursuant to a clause in the leave and licence agreement. Had a deposit as required by that clause not been made, the assessee would not have secured the licence of the cotton mill. At that time the assessee was doing no business in cotton. The deposit was, clearly, made for the purpose of acquiring a profit-making asset to carry on business in cotton. It cannot, therefore, be held that the deposit was made on the revenue account or that the loss thereof must be treated as a business loss. The loss thereof was a loss suffered on the capital account and could not be deducted on the basis that it was a business loss

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]10. We are in no doubt whatever that the High Court was right in concluding that the amount of Rs. 20 lakhs had been deposited by the assessee with the licensor company for the purpose of securing the licence under which the assessee had acquired the right to work the licensors cotton mills. This is clear from the fact that the deposit was made pursuant to a clause in the leave and licence agreement. Had a deposit as required by that clause not been made, the assessee would not have secured the licence of the cotton mill. At that time the assessee was doing no business in cotton. The deposit was, clearly, made for the purpose of acquiring ag asset to carry on business in cotton. It cannot, therefore, be held that the deposit was made on the revenue account or that the loss thereof must be treated as a business loss. The loss thereof was a loss suffered on the capital account and could not be deducted on the basis that it was a business loss6. On behalf of the assessee it was submitted that the assessee did not commence the cotton business as a new venture for the first time in 1963 when the said leave and licence agreement was entered into, for it was an admitted fact that the assessee had, as far back as 1960, and with the approval of the High Court at Calcutta, amended its memorandum of association for the purposes of carrying on the cotton business. It had entered into a partnership with one Bajoria and that partnership had run the said cotton mills on lease for a period of nine months. The High Court was, therefore, in error in taking the view that the cotton business had commenced with the taking on leave and licence of the said cotton mills. In counsels submission, the deposit of Rs. 20 lakhs made as aforestated had been lost to the assessee by reason of the winding up of the licensor company and it had rightly claimed that loss as a business loss, for its business in cotton had suffered that loss