PATEL BRASS WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The Income Tax Appellate Tribunal, Ahmedabad Bench "A" has referred the following two questions under Section 256(1) of the Income Tax Act, 1961 (the Act) at the instance of the assessee:

(2.) The assessment year is 1986-87, the relevant accounting period being Samvat Year 2041. The assessee, a registered firm, is engaged in the business of manufacturing spare-parts of diesel engines. In the profit & loss account, a sum of Rs.80,000/- had been debited as capital loss on machinery. The facts in relation to the said entry are that the assessee entered into a contract for purchase of machinery worth Rs.10,09,000/- with M/s Godrej Boyce Mfg. Co. P. Ltd., Bombay vide letter dated 17/7/1984. The order was confirmed by the suppliers vide their letter dated 24/7/1984 calling upon the assessee to pay earnest money amounting to Rs.1,16,000/- for confirmation of the order. The assessee paid the amount as claimed. It is the case of the assessee that, as per terms of the contract, the machinery was to be supplied within a period of 12 months. Subsequently, the assessee gave up its plan to expand the business and cancelled the order for supply of machinery as per telex message dated 18/4/1985. The assessee simultaneously requested supplier to return earnest money of Rs.1,16,000/-. It appears that the assessee and the suppliers entered into correspondence on this aspect and ultimately, the suppliers decided to return Rs.36,000/- after deducting Rs.80,000/- as cancellation charges. It is this amount of Rs.80,000/-, which is the bone of contention between the parties.

(3.) The assessee claimed the said amount as a business loss, and in the alternative, as a short term capital loss. The assessing officer negatived the claim of the assessee on both the counts. The assessee did not succeed in appeal either before Commissioner (Appeals) or the Tribunal.