JUDGMENT T.P. Mukerjee, J.
1. The present reference raises the question of the admissibility of a sum of Rs. 89,241 as an outgoing against the profits earned by the firm of M/s. Jwala Prasad Radha Kishan (hereinafter referred to as " the assessee "), for the accounting year ending on July 8, 1956, relevant to the assessment year 1957-58. The material facts are as follows :
The assessee is a registered firm carrying on business in cloth, share dealings, etc. On the 1st of March, 1951, the assessee had entered into an agreement with M/s. Ranjeet Singh & Sons Ltd. (hereinafter referred to as " the company ") who were the sole selling agents of yarn and piece goods manufactured by Shri Vikram Cotton Mills Ltd. (hereinafter referred to as " the manufacturers "). The agreement was, substantially, to the effect that the company would sell and the assessee would purchase the entire output of the manufacturers, namely, piece-goods, yarn, hosiery, etc , and, in return, the assessee would be entitled to a rebate in price at the rate of Re. 1-8-0 per hundred rupees. The clauses of the agreement relevant to this case are set out below :
Clause (1) :
The company agrees and undertakes to sell to the said firm the entire output of Shri Vikram Cotton Mills Ltd. that may be manufactured., i.e., all piece goods, yarn and hosiery, etc. Clause (5):
The firm has agreed to deposit a sum of rupees one lakh with Shri Vikram Cotton Mills Ltd. on the request of the selling agents as a security against sales effected through firm and the mills shall pay to the firm interest at the rate of 6% per annum and such interest shall be paid half yearly on the 30th June and 31st December in each year. The company may call upon the firm to pay another one lakh or up to one lakh of rupees as and when it is required by the company and the firm shall deposit the same upon request if so required. Upon the termination of this agreement the mills shall return the above deposit or if any deductions shall have been made from the said sum in pursuance of this agreement then the balance due to the firm.
Clause (6): "
The firm guarantees to make payment for all goods sold through them after the actual delivery of the same from the manufacturer's premises provided that if the payment is made by the firm before the date of delivery the firm will be entitled to receive from the company interest at 6% on any sum so remained unpaid for the number of days.
2. The agreement was to remain in force for a period of five years certain commencing from the 10th May, 1950, and it was to continue thereafter until determined by six months' notice in writing by either party.
3. The statement of the case prepared by the Tribunal states that the transactions were carried on between the assessee and the manufacturers in accordance with the agreement for a period of about two years but there were no transactions for the next three years. In the year 2012 Samvat, the books of the assessee disclosed a sum of Rs. 2,29,837 due from the manufacturers in terms of the above agreement. In the accounting year relevant to the assessment year under reference a sum of Rs. 1,64,087 was written off by the assessee as irrecoverable out of the aforesaid debit of Rs. 2,29,837 and the balance of Rs. 65,750 was carried over to the following year.
4. In the assessment for the relevant year, the assessee claimed deduction in respect of the sum of Rs. 1,64,087 as bad and irrevocable debt but the claim was disallowed by the Income-tax Officer. The disallowance was based mainly on the grounds, viz., (1) that the assessee was not prompt in collecting its dues from the manufacturers and the large balance was allowed to remain outstanding for extra commercial considerations; (ii) the amount written off included the security deposit of Rs. 1 lakh and as it was paid by the assessee with a view to secure the selling agency business it was a capital loss pro tanto. The Appellate Assistant Commissioner substantially agreed with the view taken by the Income-tax Officer. The Appellate Assistant Commissioner also found that the debt due by the manufacturer to the assessee had become irrecoverable before the relevant year of account.
5. The Appellate Tribunal took the view that the debt became irrecoverable in the accounting year under reference. The Tribunal then considered the question as to whether the entire amount of Rs. 1,64,087 written off was a revenue loss or a capital loss. This sum included not only the amount of security but also commission or rebate and interest due to the assessee. The Tribunal took the view that to the extent that the amount represented loss of security it was loss of a capital nature while the amount of commission and interest included in this sum represented loss of a revenue nature. The Tribunal was of the view that by the agreement dated March 1, 1951, the assessee acquired the sole selling agency in respect of the goods manufactured by Shri Vikram Cotton Mills Ltd. This, according to the Tribunal, was a new venture undertaken by the assessee and as payment of the security was a "pre-requisite" to the acquisition of the selling agency, the loss of security money was loss of a capital outlay. At the material time the security paid by the assessee amounted to Rs. 1,25,000 and this, according to the Tribunal, was included in the sum of Rs. 2,29,837 debited to the manufacturer. The Tribunal found that the proportionate amount of the security included in the sum of Rs. 1,64,087, written off by the assessee, was Rs. 89,241. The Tribunal held that this part of the debt was inadmissible being capital loss. The Tribunal, however, allowed the balance as a bad debt under Section 10(2)(xi).
6. At the request of the assessee the Tribunal has referred the following question to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that a sum of Rs. 89,241 out of the total amount of Rs. 1,64,087 written off in the account of Shri Vikram Cotton Mills Ltd. was a capital loss ? "
7. The view taken by the Tribunal that the deposit of the security money was a "pre-requisite to the acquisition of the sole selling agency " from the manufacturers is not borne out by the terms of the agreement dated March 1, 1951. In point of fact, what the assessee acquired was sole selling sub-agency from the company who were the sole selling agents of the goods produced by the manufacturers. The agreement of March 1, 1951, (annexure " A ") was executed by the representatives of the company and the assessee. The manufacturers were not a party to this agreement. It cannot, therefore, be contended that the assessee acquired selling agency rights from the manufacturers by depositing the amount of the security money with them. Moreover, there is nothing in the deed of agreement, annexure " A ", to suggest that payment of security was a condition precedent to the execution of the agreement. In fact, Clause (5) of the agreement, quoted above, shows that the assessee had " agreed to deposit " a sum of Rs. one lakh with the manufacturers and it also agreed to deposit such further amounts from time to time, not exceeding Rs. one lakh, as and when it might be called upon by the company to do so. Thus, payment of the security deposit was a condition subsequent and not a condition precedent to the execution of the agreement. As the assessee was required to pay for all goods actually delivered, the condition for deposit of the security was a condition to safeguard the interest of the company against any loss which it might suffer in the course of the carrying on of the business and not for the acquisition of the right to carry it on.
8. In point of fact, the business had already been started and transactions were going on between the parties when the security money was deposited. This would appear from the account of the manufacturers maintained in the books of the assessee for the Samvat year 2007-2008 extracted at page 20 of the paper book. The account shows that in that year the assessee received supply of goods worth Rs. 2,40,204-15-9 against which he had made a payment of Rs. 2,92,941-7-3. On the excess of Rs. 43,628-8-6 paid by the assessee as the price of the goods, a sum of Rs. 892-1-0 was debited to the account as interest payable by the manufacturers. Subsequently, there was further supply of goods to the assessee amounting to Rs. 7,18,799-5-0 which was credited to the manufacturers. As against this there was a debit of the sum of Rs. 43,628-8-6 paid in excess for the first lot of supplies as mentioned above. The assessee then paid Rs. 1,05,850-5-0 being the amount of security money by transferring the amount from M/s. Sheo Narain Sheo Prasad. A sum of Rs. 28,415-12-6 was receivable by the assessee as commission from the manufacturers. The assessee also paid Rs. 7,54,745-9-9 against the price of the second lot of supplies. Thus, at the end of the year 2007-2008, there was a debit in the account of the manufacturers to the extent of Rs. 2,13.847-14-9 which was carried over to the next year (Samvat 2008-2009) as the opening debit balance in the account.
9. In the year 2008-2009 Samvat there was only one supply of the value of Rs. 4,53,240-5-6 against which there appears to have been a cash payment of Rs 5,74,964-3-3 which was debited to the account. In addition, a sum of Rs. 86,734-1-3 was payable as commission or rebate and another sum of Rs. 14,394-1-9 was payable as interest by the manufacturers to the assessee. The total debit in the account of the manufacturers thus amounted to Rs. 8,89,940-0-0 as against the value of supplies amounting to Rs. 6,53,240-8-6 which was credited to the manufacturers in the account. There was thus a debit of Rs. 2,36,699-1-6 which was due to the assessee from the manufacturers at the end of the second year of business. It appears that there was no further business transactions between the manufacturers and the assessee thereafter, except that a sum of Rs. 6,862-9-6 was paid to the assessee by the manufacturers by transfer from its Kanpur depot. This payment reduced the existing debit balance of Rs. 2,36,699-15-6 to Rs, 2,29,837-6-0 out of which a sum of Rs. 1,64,087 was written off in the year Samvat 2012-13 as irrecoverable.
10. It would appear that in the account of Shri Vikram Cotton Mills Ltd., the assessee not only included, on the debit side, the price of the supplies paid by it and the amounts of commission and interest earned by it but also the amount of security money. It also appears that the payment of the security money was a payment made in the course of the sub-agency business which the assessee was carrying on.
11. The question which has been raised for decision is whether the amount in question, viz., Rs. 89,241 which, as already stated, forms part of the sum of Rs. 1,64,087, written off by the assessee, can be regarded as a loss incurred by it and, if so, whether it is a trading loss. This takes us to the broader question, what is a loss ? The word "loss", like profit, has not been defined in the Act, but it must be understood "in its rational and proper sense in a sense which no commercial man would misunderstand," as Lord Halsbury L.C. said with reference to the connotation of the word "profit" in Graham Life Assurance Society v. Styles, [1892] 3 T.C. 185, 188, 189 (H.L.). In the Indian Income-tax Act, 1972, while there is provision for allowability or otherwise of business expenditure in Section 10 of the Act, there is no express reference to business loss therein. On the other hand, Section 341(1) of the English Income Tax Act, 1952, specifically provides for allowance of a loss sustained in any trade carried on by a person solely or in partnership. The distinction between loss and expenditure has been indicated by Finlay J. in Alien v. Farquharson Bros. & Co., [1932] 17 T.C. 59, 64 (K.B.) in the following words:
"... none the less, I do think that there is a distinction to be drawn between the two. Rule 3(a) relates to disbursements: that means something or other which the trader pays out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket, A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra."
12. It is, however, well recognized that loss which occurs ab extra as an unavoidable and unpredictable incident connected with the conduct of the business is allowable as a trading loss under Section 10(1) in computing the commercial profits. Apart from other cases, the decision of the Supreme Court in Badridas Daga v. Commissioner of Income-tax, [1958J 34 I.T.R. 10; [1959] S.C.R. 690 (S.C.). supports this view. Under Section 10(1) of the Act tax is payable on profits and game of a business computed on ordinary commercial principles and deductions must be allowed in respect of losses so connected with and incidental to the business that if they are not allowed, the accounts would show illusory profits which are not to be found in the pocket of the businessman. This has been made clear by the Privy Council in Commissioner of Income-tax v. S.M. Chitnavis, [1932] L.R. 59 I.A. 290 ; [1932] 2 Comp. Cas. 464; A.I.R. 1932 P.C. 178. In that case a bad trading debt was regarded as a loss of that category and and was held to be an admissible deduction, though there was no special provision in the Act, as it then stood, analogous to Section 10(2)(xi) of the Act of 1922, Allowing bad debts of the business. The Privy Council observed (at page 297 of the report):
"What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains."
13. To the same effect is the observation of Chagla C.J. in Lord's Dairy Farm v. Commissioner of Income-tax, [1955] 27 I.T.R. 700, 705, 706 (Bom.)..
" As has been often pointed out, the object of Section 10 is to ascertain the true profits and gains of an assessee. The profits must be ascertained from a commercial point of view. The Sub-section (2) of Section 10 deals with certain specific cases of permissible deductions. But even apart from these permissible deductions, if there is any loss which from the commercial point of view can be considered to be a trading loss, then that loss must be deducted before the true profits can be ascertained. " (Underlining ours)
14. In this case, the amount in question is not claimed by the assessee as an expenditure of the business but as a trading loss and it is contended that the true profits of the agency business, which the assessee carried on for a period of two years only, cannot be ascertained unless the loss of the security deposit is deducted from the gross receipts.
15. I think the contention of the assessee should prevail. I have already stated that the assessee did not pay the security money to acquire the right to carry on the business of selling agency; it was paid by him for the purpose of carrying on the business in terms' of the agreement and earning profits thereby. The payment of the security money cannot, therefore, be regarded as a capital expenditure as contended on behalf of the revenue. It was, in fact, not an expenditure at all, much less a capital expenditure. " Expenditure ", as defined by the Supreme Court in Indian Molasses Co. (P.) Ltd. v. Commissioner of Income-tax, [1959] 37 I.T.R. 66 ; [1959] Supp. 2 S.C.R. 964 (S.C.). means money which goes out irretrievably. But here, the assessee was entitled to get back the amount of the security deposit, with interest, on the termination of the agency. The loss of the security is, thus, a loss incidental to the business of the assessee and it is allowable under Section 10(1) of the Act.
16. In my opinion the present case falls squarely within the rule laid down by Chagla C. J. (sitting with S. T. Desai J.) in Narandas Mathuradas & Co. v. Commissioner of Income-tax, [1959] 35 I.T.R. 461 (Bom.). In that case, the assessee was a firm which submitted tenders to the then B.B, and C.I. Railway, undertaking to supply certain goods. The assessee had deposited a sum of Rs. 4,419 as security for proper execution of the contract. Eventually, the assessee could not carry out the contract with the result that the amount of the deposit was forfeited by the Railway. The question before the Bombay High Court was whether the amount of security forfeited by the Railway was in the nature of a capital loss or a trading loss. The learned Chief Justice observed, referring to a decision of the Privy Council in Commissioner of Income-tax v. Motiram Nandram, [1940] 8 I.T.R. 132 (P.C.). that the loss of a security deposit must be considered in relation to the business of the assessee and that, in that case, there was not the slightest doubt that the deposit was made pot for the purpose of acquiring any capital asset or acquiring a new business, but it was made solely for the purpose of earning profits in the course of the business and if the deposit was forfeited it was a business loss.
17. The decision of the Bombay High Court, it appears, was also cited before the Tribunal by the learned counsel appearing for the assessee. The Tribunal, however, distinguished that decision. The Tribunal observed that in the cited case the assessee-firm was carrying on business of the supply of several commodities and in the regular course of such business it had deposited the, amount of security which was, eventually, forfeited. In the present case, the Tribunal observed, the assessee-firm had entered into a new venture by accepting the selling agency of the products of the textile mills, i.e., the manufacturers. Therefore, according to the Tribunal, the decision of the Bombay High Court is inapplicable. The Tribunal is not correct in drawing the line of distinction. The Income-tax Officer has noted that the assessee-firm " derives income in the capacity of selling agents of various groups of mills ". The Tribunal appears to have overlooked this finding of fact by the Income-tax Officer. The Tribunal observed on the basis of certain admissions made by the assessee's counsel that "the assessee was a sole selling agent only for Shri Vikram Cotton Mills; in all other cases', the firm was only a commission agent". It may be that the assessee was the sole selling agent only in respect of the Shri Vikram Cotton Mills and that it was a commission agent in respect of other concerns but the nature of these businesses is substantially the same. In either case the assessee earns commission on sales. The necessity for depositing a security would depend on the stipulations between the principal and the agent in each case. The decision of the Bombay High Court in the aforesaid case is not distinguishable on the ground mentioned by the Tribunal.
18. Sri R. K. Gulati, for the assessee, has referred to a decision of the Supreme Court in B.D. Bharucha v. Commissioner of Income-tax, [1967] 65 I.T.R. 403; [1967] 3 3 S.C.R. 238 (S.C.). In that case the assessee had income from financing producers and distributors of films and it entered into an agreement with a firm of film distributors in pursuance of which the assessee advanced a total sum of Rs. one lakh to the firm for distribution, exploitation and exhibition of a picture called Shahab, The firm agreed to pay a lump sum of Rs. 1,750 as interest and also two-thirds of the profit and loss from the exhibition of the said picture in lieu of interest. The firm also agreed that if the picture were not released in Bombay within 15 months from the date of the agreement, the firm would be liable to return the advance with interest at 9 per cent. The picture was not released before the stipulated date and the assessee obtained a money decree in the civil court against the firm. Eventually, a sum of Rs. 89,759 became irrecoverable and the assessee wrote it off as a bad debt and claimed deduction of that amount in its assessment. The Tribunal held that the true nature of a transaction was an investment of capital for a return in the shape of profits and the loss suffered by the assessee was a capital loss not allowable under any of the provisions of the Act. The Bombay High Court affirmed the view taken by the Tribunal. The Supreme Court, however, reversed the decision of the High Court and held that the loss was allowable under Section 10(2)(xi) of the Act as a bad debt in respect of and incidental to the business carried on by the assessee. The Supreme Court observed, referring to Reid's Brewery Co. Ltd. v. Male, [1891] 3 T.C. 279 (Q.B.). that losses incurred in the running of a business is not capital.
19. On similar facts, the Mysore High Court had come to the same conclusion before the pronouncement of the decision of the Supreme Court in Bharucha's case. The decision of the Mysore High Court cited by Sri Gulati is reported as Commissioner of. Income-tax v. Y.V. Sreenivasa Murthy, [1967] 63 I.T.R. 306 (Mys.).
20. In view of the principles discussed above and the authorities referred to herein, I would answer the question posed by the Tribunal in the negative and in favour of the assessee. The assessee is entitled to its costs which we assess at Rs. 200. Counsel's fee is assessed at the same amount.
Pathak, J.
21. I agree with my brother Mukerjee that the question referred by the Tribunal must be answered in the negative and in favour of the assessee.
22. The assessee was obliged to deposit the amount described as a security under the agreement of March 1, 1951, and that deposit was -made by it in accordance with the agreement for the purpose of earning profits. Strictly speaking, the deposit was not made to acquire the selling agency business. Regard must be had to the circumstance that it was open to the company to call for further deposits of the nature from time to time. Had the deposit been made for the purpose of acquiring the selling agency business, ordinarily it would have been an obligation to be discharged once and for all. It would not have been an obligation to be met by the assessee from time to time as and when the company called upon it to do so. It has also been rightly pointed out by my learned brother that the deposit made by the assessee by way of security was treated in the accounts along with the price of supplies and the amounts of commission and interest, demonstrating that it was treated as a payment made in the course of carrying on the business.
23. The assessee is entitled to its costs, which I would assess at Rs. 200.
Counsel's fee is assessed at the same figure.
BY THE COURT
24. We answer the Question referred by the Tribunal in the negative and in favour of the assessee. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee. is assessed in the same figure.