MOHAMMAD RAFI Vs. STATE OF UTTAR PRADESH

JUDGEMENT

(1.) This appeal by special leave under Art. 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.

(2.) 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, 1963 to 31st March, 1966 which was extended by mutual agreement up to 30th June, 1966. Clause 13 which is relevant for our purpose in the agreement reads as follows :-

(3.) 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 Cotton 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's business nor was it incidental to such business.