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PETITIONER: M/S HASIMARA INDUSTRIES LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX WEST BENGAL-IX AND ANOTHER

DATE OF JUDGMENT:       13/05/1998

BENCH: SUJATA V. MANOHAR, S. RAJENDRA BABU

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T Rajendra Babu, J.      This appeal  by special  leave under Article 136 of the Constitution of  India is preferred by an assessee under the Income Tax Act against an order made on 29th August, 1986 by the High  Court of  Calcutta in Income Tax Reference No. 683 of 1979.  The question  that fell  for consideration  of the High Court  is as to deductibility of a sum of Rupees twenty lakhs out  of the assessee’s profits as sum was given by way of  advance   to  M/s   Saksaria  Cotton   Mills  Ltd.   for modernisation of its plants.      When Saksaria  Cotton Mills  Limited was in the process of Liquidation  the assessee-company which owned tea estates filed a scheme in those proceedings and entered into a leave and licence  agreement with  that  company.  Originally  the agreement was  for a  period of  three years from 1st April. 19*63 to  31st March.  1966 which  was  extended  by  mutual agreement upto  30th June, 1966. Clause 13 which is relevant for our purpose in the agreement reads as follows:-       "  In the  event of  any  new  and      complete  unit   or  plant   and/or      machinery and/or  reequipment being      installed by  the  licence  at  the      licensee’s  own  costs  within  the      licensed premises  no  depreciation      will be paid by the licensee to the      licenser in respect there of and on      the expiry  of the  period  of  the      licence     or      its     earlier      determination by  the licensee, the      licensee will be entitled to remove      and take away at the licensee’s own      cost such  new plant, machinery and      equipment   provided    that    the      licensee will in that event restore      the  licensed   premises   to   the      contention in  which they  were  at      the time  of  commencement  of  the      license and  make good  the damage,      if any,  caused to  the license and

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    make  good   the  damage,  if  any,      caused to  the licensed premises by      removal   of    such   new   plant,      machinery  and   equipment.   Mills      machinery,    plant,     equipment,      fittings   and    fixtures    being      provided   by   the   licensee   in      replacement of any existing part or      parts  of   such   machinery,   the      licensed will  be entitled  in lieu      thereof to retain such sold part or      parts of such machinery so replaced      and to  deal with  the same in such      manner as  the licensee  deems fit.      If the  licensee desires  that  the      licensor shall bring any new plant,      machinery or  equipment or  unit it      will  be   in  the   absolute   and      uncontrolled  discretion  of    the      licensor whether  to do  so or  not      and on  such terms as may be agreed      to at that time." The amount of Rupees twenty lakhs is said to have been given by way of advance in terms of the said clause.      Before the  Assessing Officer  the assessee claimed the advance of  Rupees twenty  lakhs as deductible on the ground that it became irrecoverable on account of the incapacity of M/s Saksaria  Cotton Mills  Limited to  repay the  same. The Assessing Officer  disallowed the  claim  stating  that  the amount represented  as advance  to M/s Saksaria Cotter Mills Limited for modernisation of its factory and the said amount was not  taken into consideration in computing the income of the assessee  in any  assessment year. he also held that the said sum  did not  represent the  money lent in the ordinary course of  business. He  further noticed that even otherwise the said  sum was  not entitled  to deduction because it had not become  a bad  debt in  the relevant year of account and the assessee  made no  effort to recover the same. On appeal against  the   assessment  order,  the  Appellate  Assistant Commissioner held  that the  advance given  by the  assessee Company could  not be  recovered from  M/s  Saksaria  Cotton Mills Limited  and had  to be  allowed  as  a  deduction  as revenue expenditure.  He was  of  the  view  that  assessee- Company could  not have  removed the plant and machinery and the debenture  holders of  M/s Saksaria Cotton Mills Limited had lien over the entire plant and machinery. Thus, the said amount represented  loss incurred  by the  assessee  in  the course of  carrying on of its business and should be allowed as deduction  on account  of ordinary commercial principles. The matter  was carried  in appeal  by the Department to the Income Tax Appellate Tribunal. The Tribunal noticed that the said amount of Rupees twenty lakhs which was advanced was to be treated  as capital  investment as per the resolutions of the Board  of Directors  of the  assessee Company. Thus, the assessee had  acquired an  advantage of  enduring nature and the claim  of the  assessee was  not allowable  as  business loss. The amount having been spent on the improvement of the mill was  not advance  in the  ordinary course  of  assessee business nor was it incidental to such business.      Aggrieved by  the order  of the Tribunal on a reference made to  the High Court at the instance of the assessee, the High Court  at the  instance of the assessee, the High Court held that  it is a settled principle that loss of money lent or advanced would be a capital loss unless the loan was made by a  money lender for whom money was his stock-in-trade and

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such a  situation would  arise in case of a banking or money leading business  where money  is treated as stock-in-trade. It was also noticed by the High Court that although assessee had some money lending business, the amount of Rupees twenty lakhs was not lent to M/s Saksaria Cotton Mills Limited as a loan  transaction,   but  pursuant   to  clause  13  of  the Agreement. It was also noticed by the High Court that it was not a  trade dept  and the assessee advanced a sum of Rupees Twenty lakhs  so that  new plants  and  machinery  could  be bought by  M/s Saksaria Cotton Mills Limited for the benefit of the  assessee during  the period  of the agreement. Thus, the assessee  had the  advantage of  using a  new  and  more modern profit-making  aparatus. When  the Company itself had not treated  the advance  of  Rupees  twenty  lakhs  to  M/s Saksaria  Cotton   Mills  Limited   as  by  way  of  a  loan transaction and  the amount had been treated by the assessee as the capital advance as evidenced by the resolutions based by the  Board of  Directors at the time of granting of loan, the High Court held that the findings of the Tribunal should be affirmed  and answered  the  question  referred  for  its opinion against  the assessee.  It is against this order the present appeal is filed by special leave.      Ms. Radha Rangaswami, learned counsel for the appellant submitted that  though  the  assessee  had  made  a  lumpsum payment not  in order  to gain an anduring benefit, out only to augment income in the course of its ordinary business and sought exemption  was not  capital in nature being allowable as revenue  expenditure and  in terms  of Section  37 of the Income Tax Act.      The learned  counsel for  the Department contended that the  view   of  the  decision  of  this  Court  in  Hasimara Industries Limited  vs.  Commissioner  of  west  Bengal  and Another (1998)  1 SCC  503 in  the very case of the assessee there was  hardly any  thing left  for decision  by  us.  He submitted that  the agreement  which is  subject  matter  of consideration in  these proceedings  was also  considered in that decision  and in the context of another transaction had been interpreted.      Undaunted by  the submission of the learned counsel for the  Department,  Ms.  Radha  Rangaswami  persisted  in  her argument. She  relied on Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat 177 I.T.R. 377. That was the case  where the  assessee who was engaged in manufacture of antibiotics  including  penicillin  acquired  knowhow  to produce  higher   yield  and   sub-culture  of   strains  of penicillin and  there was  no evidence to indicate that this was not  in the  line of  existing manufacturing  operations and, therefore this Court took the view that the payment was made in  the course  of carrying on an existing business and the butlay  was incurred  for the  purpose of  acquiring the technical  knownow   in  relation   to  its   business   and considering the  rapid strides  in science and technology is to pigeonholing  an outlay, such as in this case as capital. It was  on that  basis the  Court held  that though  lumpsum payment had  been made  once for  all it  was not capital in nature and  attracted the  deduction under Section 37 of the Income Tax Act.      Again, the learned counsel for the assessee relied upon the decision  in Commissioner  of  Income  Tax,  Kerala  vs. Malayalam plantations Ltd. 53 I.T.R. 140 wherein estate duty was paid  on the death of non-domiciled shareholders and was "for the  purpose of  the business"  and "for the purpose of earning  profits"   and  therefore,  allowable  as  business expenditure. However that is not the position in the present case wherein  the assessee  has given an advance in a sum of

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Rupees twenty  lakhs for  a purpose  not in  the line of its business as  found by  the Tribunal  which is  the last fact finding authority.  In Empire Jute Co. Ltd. Vs. Commissioner of Income  Tax 124 I.T.R.1 certain loom hours were purchased by one  member of  an assessee  from another  member and the members in  the Association  had bound  themselves  to  work their  mills  for  limited  hours  per  week  and  in  those circumstances the price paid was held to be in the nature of revenue expenditure  in terms  of Section 10(2) (xv)  of the Indian Income  Tax Act,  1952 and  not deductible.  The test adopted in  that case  is the  nature of  the advantage in a commercial sense  and where  it is only the advantage in the capital field, the expenditure cannot be allowed, but if the advantage consists  merely in  facilitating  the  assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried or more efficiently or more profitable  while leaving  the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may  endure for an indefinite future. The purchase of loom  hours did not create any new asset and there was no addition to  or expansion  of the profit-making apparatus of the assessee nor the permanent structure of which the Income was the  product remained  the same. It was not enlarged nor did the  assessee acquire  a source of profit of income when it purchased the looms in question. The expenditure incurred was primary  and essentially  related to  the  operation  or working of  the looms  which constituted  the profit  making apparatus of  the assessee  and was  expenditure laid out as part of  the process of profit earning. It was on that basis the claim was allowed. Therefore that decision will not help the assessee in the present case.      In Commissioner  of Income Tax vs. Hashimara Industries Limited. 175 I.T.R. 477 the very agreement with which we are concerned itself  was subject matter of consideration by the High Court.  Pursuant to  the agreement amount was deposited with the cotton mills for acquiring profit making apparatus. Then there  was closing  down of the cotton mill and loss of deposit constituted  capital loss.  It was held in that case that the  assessee’s ordinary  business was  manufacture and sale or the tea and it started cotton manufacturing business acquiring the right to operate the mill belonging to another company for  a specified  period under  a leave  and licence agreement after  depositing certain  sum  in  terms  of  the agreements. After  the expiry of the agreements M/s Saksaria Cotton Mills  Limited itself  managed the  cotton mills  out suffered loss  and went  into liquidation. consequently, the sum deposited  by the  assessee remained  unpaid.  In  those circumstances, it  was held that the loss of the deposit was in the  capital account  and  not  business  expenditure  of assessee. That matter was carried in appeal to this Court in Hasimara Industries  Limited. vs.  Commissioner  this  Court upheld the view taken by the High Court.      It is  clear from the findings recorded by the Tribunal and  the   High  Court   that  the  assessee’s  business  is manufacture and  sale of  tea and  is not  engaged in cotton manufacturing business  at all;  that while  it intended  to enter into  cotton manufacturing  purposes did  not set up a cotton mill,  but obtained  operating  rights  from  another company under  the  leave  and  licence  agreement  for  the purpose of  acquiring the  profit  making  apparatus  for  a duration of  three years or a little more; that the business of running  a cotton  mill was  not its  own, but  was  only operating the  said mill  under leave and licence agreement; that the  amount of  advance in  a sum  of Rupees  of twenty lakhs was  given not  for its own purpose by way of business

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expenditure for modernishing the mill, but as capital to the lessor who  in turn  had  to  modernise  the  mill.  In  the resolutions made by the Board of Directors it was clear that the transaction entered into was not in the nature of a loan transaction or a money lending transaction and thus the loss suffered by  the assess  was a  capital loss  and hence  the amount could  not be  deducted from the assessee a income as business lose.      In the  results, the  view  taken  by  the  High  Court affirming the  view of  the Tribunal  appears to  us  to  be correct and  we  dismiss  this  appeal.  In  the  facts  and circumstances of  the case,  there shall  be no  order as to costs.