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

2. The High Court noted the facts found by the Tribunal, as under"The assessee is a public limited company. It owned several tea estates and its main income was from sale of tea. Davenport and Co. (P) Ltd. are the managing agents of the assessee. In 1960, the assessee altered its memorandum of association with the approval of the Calcutta High Court for the purpose of diversifying its activities and it took cotton business in addition to its business in tea. Saksaria Cotton Mills Ltd. was also a public limited company and in 1957, it was in the process of liquidation. The assessee, along with one Shri S. L. Bajoria, a shareholder of Davenport and Co. (P) Ltd., produced a scheme which was approved by the High Court and liquidation proceedings came to an end. The assessee and Shri S. L. Bajoria entered into an agreement for the lease of the mills from Saksaria Cotton Mills Ltd. There was a partnership in the lease between the assessee and Shri S. L. Bajoria in a certain ratio. That lease was for the period from1 to. After the expiry of the period of lease, the assessee alone entered into a financing agreement with Saksaria Cotton Mills Ltd. and that agreement remained in force from1 to. After the expiry of the financial agreement the assessee entered into another agreement with Saksaria Cotton Mills Ltd., on, for a period of three years from3 to. This agreement was described as a leave and licence agreement. In accordance with clause 17 of the agreement, the assessee deposited Rs. 20 lakhs on, with Saksaria Cotton Mills Ltd. and Saksaria Cotton Mills Ltd. handed over its properties to the assessee. The assessee ran the mills. The leave and licence agreement, after expiry of the period stipulated in that agreement, was extended up to. The Tribunal was informed by the counsel for the assessee that the extension was on the same terms and conditions on which the leave and licence agreement had been made. The assessee made a credit entry of Rs. 1, 40, 000 being the interest receivable by it from Saksaria Cotton Mills Ltd. on the deposit of Rs. 20 lakhs at the rate of 7% per annum. This entry was reversed in the year under consideration. During the extended period of three months, the assessee paid insurance premium, rates and taxes and other expenses for the whole of the year though the extended period was only for three months. The assessee debited these expenses for the remaining nine months to the account of Saksaria Cotton Mills Ltd. The amounts debited were Rs. 1, 48, 470 for insurance premium and Rs. 1, 42, 882 for rates and taxes and other expenses. The interest amount of Rs. 1, 40, 000 and these expenses aggregated to Rs. 4, 31, 352. The amount of Rs. 20 lakhs of the deposit and the expenses of Rs. 4, 31, 352 remained unpaid by Saksaria Cotton Mills Ltd. Saksaria Cotton Mills Ltd. had its own business after, but suffered loss and was ultimately closed down on, and went into liquidation on. The assessee wrote off the above amounts of Rs. 20 lakhs of deposit and Rs. 4, 31, 352 as having become irrecoverable on account of incapacity of Saksaria Cotton Mills Ltd. to pay the same. The assessee claimed these amounts as deductions by way of bad debts."3. The Income Tax Officer disallowed the assessees claim for deduction of the said amount of Rs. 20 lakhs holding that it was a capital expenditure. The Appellate Assistant Commissioner reversed that view and the Income Tax Appellate Tribunal affirmed the decision in first appeal. The High Court, in reference, in the judgment under appeal before us, disagreed with the Tribunal. The High Court said that there could "be little doubt, having regard to the nature of the agreement, that the amount of Rs. 20 lakhs was deposited for the purpose of securing the contract under which the assessee had acquired the right to work the mills belonging to the licensor company. In other words, the assessee acquired ag apparatus. The deposit was made for the purpose of acquisition of ag apparatus. It did not make the assessee a trade creditor of the Cotton Mills Company"; also, that it found it "difficult to accept the contention that the deposit was made in the course of they business of the assessee". The assessee was not engaged in the business of reviving sick cotton mills. The assesseesy business did not include taking lease of cotton mills or entering into licensing agreements with other cotton mill companies. The assessees usual business was manufacture and sale of tea. It wanted to enter into cotton manufacturing business. To effectuate this purpose, it did not set up a cotton mill of its own but preferred to merely acquire the right to operate mill belonging to another company under a leave and licence agreement. The deposit was not made in the course ofg but was made for purpose of acquiring ag apparatus for a period of three years4. Under these circumstances, it must be held that the loss suffered by the assessee was on capital account and the amount could not be deducted from the assessees income as business loss5. The agreement of leave and licence contains the clause (clause 17) under which the deposit of Rs. 20 lakhs was made by the assessee with the licensor company. That clause reads thus"For the due observance and performance of the terms and conditions herein contained, the licensee shall deposit and keep deposited with the licensor during the subsistence of this licence a sum of Rs. 20, 00, 000 (Rupees twenty lakhs only). The said deposit shall carry interest at the rate of 7% per annum. The amount of deposit shall be repaid to the licensee on termination or expiry of the licence after deducting therefrom any monies that may have become due to the licensor at the time of such termination or expiry of the licence."

Court's reasoning:
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