JUDGMENT R.L. Gulati, J.
2. The assessee is a Hindu undivided family of which Seth Banarsi Das is the karta. It carried on a business in forward transactions in gur in the name and style of Mohanlal and Company at Muzaffarnagar. The business was done through a company called the Grain Syndicate Ltd. In that business the assessee incurred a loss of over Rs. 12,00,000 in the accounting year relevant to the assessment year 1951-52. The assessee, however, disputed its liability for the loss and ultimately filed a suit against the Grain Syndicate for the refund of the amounts which had been paid by the assessee from time to time as advances against various contracts. As a result of a compromise entered into between the assessee and the Income-tax department, the entire loss was allowed as a deduction in the assessment year 1951-52, subject to the condition that the assessee would offer for assessment as its income any portion of such loss as the assessee would be able to recover from the Grain Syndicate. In the assessment year in dispute, the assessee claimed to deduct a loss of Rs. 25,437 relating to the business of Mohanlal and Company. This amount is made up as follows :
Rs.
20,664 expenditure on legal charges.
4,413 interest.
travelling and conveyance.
depreciation.
25,347
3. This claim of the assessee has been rejected by the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal. The first of the eight questions, set out above, relates to the litigation expenses amounting to Rs. 20,664.
4. Section 10 of the Income-tax Act (hereinafter referred to as "the Act") deals with the computation of income from business. Sub-section (2) of that section enumerates the various deductions permissible in the computation of business income. Clause (xv) of Sub-section (2) is a residuary clause, which provides for deduction of any expenditure laid out or expended wholly or exclusively for the purposes of business, if the expenditure is not of a capital or personal nature. It is under this provision that the claim of the assessee for the allowance of the litigation expenses amounting to Rs. 20,664 falls to be considered.
5. There are two broad requirements which must be satisfied before any deduction can be allowed under this provision :
(i) the expenditure must be expended or laid out wholly and exclusively for the purpose of the business ; and
(ii) the expenditure must not be of a personal or capital nature. As regards the first requirement, there is a no serious dispute that the expenditure was incurred by the assessee in its capacity as a trader. The litigation related to business loss, which the assessee was trying to avoid. There was some controversy as to whether the business of Mohanlal and Company, in which the loss was suffered, was continued in the relevant accounting year or not. The Income-tax Officer held that the business of Mohan Lal and Company had been discontinued. The Income-tax Appellate Tribunal, on second appeal, did not record any finding on this question as in its opinion such a finding was not necessary, the loss being of a capital nature. The only question, therefore, which we have been called upon to decide, is whether the loss is of a capital nature ?
6. A capital expenditure ordinarily means an expenditure incurred on the acquisition of a capital asset or an advantage of an enduring nature to the business. It also means the expenditure incurred in the acquisition of a business or a source of income. However, an expenditure incurred on the preservation of a business asset, whether of capital or floating nature, is a revenue expenditure and not a capital expenditure. Likewise, any expenditure incurred for the purposes of avoiding a loss of the business is also of a revenue nature.
7. Now, in the instant case, the assessee was not seeking to secure any capital asset or any advantage of enduring nature to the business nor indeed was the expenditure incurred on securing a source of income. The assessee was trying to avoid a loss, which was admittedly a business loss. According to the Income-tax Appellate Tribunal, the loss which, though a business loss to begin with, became a capital loss after the assessee had paid off the loss and the same had been allowed by the income-tax department as a deduction. We find no justification for such a view either on authority or on principle. The fact that the department allowed the loss as a deduction only shows that the department treated it as a loss of revenue nature. It is difficult to understand as to how a loss becomes a capital loss when it is allowed as a deduction by the department. Similarly, the fact that the assessee had paid off the loss would not alter its character. It is clear from the facts of the case that the assessee was disputing its liability for the loss. It was open to the assessee to withhold the payment of the loss and to dispute its liability. It was equally open to it to pay off the loss and then to dispute the liability. There is no difference between the two positions so far as the nature of the loss is concerned. If the assessee had not made the payment the loss might have been disallowed by the income-tax department on the plea that it was merely a contingent liability. In the circumstances, we are of the opinion that the loss was a, revenue loss to begin with and continued to be so even after it had been paid off and allowed by the income-tax department as a deduction.
8. In Commissioner of Income-tax v. Kameshwar Singh of Darbhanga [1942] 10 ITR 214 (PC), the assessee's father who had been carrying on a money-lending business had lent a sum of Rs. 10,00,000 to a company of which he was a shareholder. Some of the shareholders of the company brought a suit against him alleging that he had agreed to take over the management of the mills and to finance it but in breach of this agreement had failed to furnish the necessary finance with the result that the company suffered heavy losses. The suit was ultimately dismissed and the assessee claimed that a sum of Rs. 2,00,000 and odd, which he had incurred in litigation, should be deducted in calculating his income from money-lending business. The Privy Council held that the expenditure was incurred by the assessee solely for the purpose of earning profits and gains of the money-lending business and he was, therefore, entitled to the deduction claimed.
9. In Commissioner of Income-tax v. Mathuradas Mannalal [1942] 10 ITR 95 (Nag) the assessee suffered a loss in certain forward contracts. He was unable to pay the loss and a suit was instituted against him. The litigation continued for some years and was eventually terminated by a compromise for a certain amount. The assessee paid that amount and claimed that a sum of Rs. 2,382, which he had incurred as legal expenses in defending the suit should be allowed as a business expense. The Nagpur High Court held that the expenditure incurred by the assessee in avoiding business liability was an allowable expenditure.
10. In Hind Mercantile Corporation Ltd. v. Commissioner of Income-tax [1963] 49 ITR 23 (Mad), the assessee entered into a contract with a Belgian company for export of groundnut oil. The assessee was not able to fulfil the contract with the result that there was action against the assessee for damages for breach of contract. The assessee had to pay a sum of over Rs. 2 lakhs as damages and incurred a sum of Rs. 10,000 as legal expenses. These expenses were claimed by the assessee as deduction in computing its business income. The High Court held that the loss as well as expenses were both allowable.
11. The view taken by the Tribunal that the expenses should not only be made in the course of business but they should also be made for the purposes of earning the profits is not sound. Before Section 10(2)(xv) was amended in 1939, an expenditure could be allowed only if "it was incurred solely for the purpose of earning such profits and gains". After the amendment, the only requirement is that the expenditure should be "wholly and exclusively for the purpose of such business". In Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the Supreme Court has observed that the expression "for the purpose of the business" is wider in scope than the expression for the purpose of earning the profits". So long as the expenditure is incurred for the purpose of carrying on the business and the assessee incurs it in its capacity as the person carrying on that business, it is not necessary that the expenditure must produce profit in the year in which the expenditure is incurred.
12. There is another aspect of the matter which may be noticed. From the order of the Income-tax Appellate Tribunal, it appears that the assessee did not write off the loss in its account books. Payment of the loss was shown as a debit balance against the Grain Syndicate. This means that so far as the assessee was concerned, it treated the payment as an asset of the business recoverable from the Grain Syndicate. Any expenditure incurred by the assessee for preserving or retrieving that asset would be a revenue expenditure. It is true that an entry of this nature in the assessee's books of accounts would not be conclusive. But it clearly shows the intention of the assessee not to treat the loss as a capital expenditure incurred once for all. We, accordingly, answer the first question in the affirmative, in favour of the assessee and against the department.
13. The next question relates to the amount of Rs. 4,413 paid by way of interest on loans taken by the assessee from banks in order to pay off a part of the loss. The Tribunal has disallowed the claim on the ground that the loan was taken not for running the business but for meeting a capital liability. Section 10(2)(iii) is a specific provision, which provides for the deduction of interest in respect of capital borrowed for the purpose of the business. The expression "for the purpose of the business" is a wide term. The purpose may be to acquire capital asset or stock-in-trade, as also to pay off a trading debt. The loss suffered by the assessee was a trading debt and the capital borrowed to pay off such a debt would be capital borrowed for the purpose of the business. Even if Section 10(2)(iii) is not strictly applicable, the amount in question is allowable under the residuary head contained in Section 10(2)(xv) The payment of interest would be an expenditure laid out wholly and exclusively for the purpose of the business. We have already held that the payment of loss was not a capital expenditure, and, as such, interest paid on capital borrowed to meet that loss would be a revenue expenditure. In State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC) the Supreme Court held that the interest paid on the acquisition of a capital asset was an allowable expenditure. In Bombay Steam Navigation Co. P. Ltd. v. Commissioner of Income-tax [1965] 56 ITR 52 (SC), the Supreme Court held that interest paid by an assessee on the acquisition of an asset was allowable under Section 10(2)(xv). We accordingly answer question No. 2 in the affirmative.
14. The next question relates to a small amount of Rs. 63, which has been incurred by the assessee on travelling and conveyance in connection with the aforesaid litigation, relating to the loss incurred in the speculative business. The Tribunal has rejected the claim on the ground that, as the payment of loss itself was a capital expenditure, the travelling expenses would also be regarded as capital expenditure. We, on the other hand, have held that the payment of loss was a revenue expenditure and hence the travelling expenses would also be revenue expenses. We accordingly answer question No. 3 also in the affirmative.
15. Now, we take up question No. 4. In order to answer this question it is necessary to set out briefly certain facts. Seth Banarsi Das, along with his 5 brothers, formed a partnership, which owned and ran a sugar mill at Bijnor, known as S. B. Sugar Mills. In 1944 litigation started between the partners, when one of them filed a suit for the dissolution of the partnership and accounts in the Lahore High Court. After the partition of the country in the year 1947, the litigation was resumed at Bijnor. During the pendency of the litigation, the sugar mills was in the custody of a receiver under the orders of the court. The receiver was letting out the sugar mills for a period of 5 years at a time to one of the partners who gave the highest bid for it. One of the partners was Seth Kashi Ram, who had 1/6th share in the sugar mills. Under an agreement dated July 13, 1950, the assessee acquired the 1/6th share of Kashi Ram on a lease for a period of 5 years on a rent of Rs. 50,000. Later on Kashi Ram repudiated the agreement and filed a suit for its cancellation. The suit was compromised. The lease agreement was terminated in consideration of Kashi Ram paying to the assessee a total sum of Rs. 68,000. Oat of that amount a sum of Rs. 16,000 per year was to be paid for the first three years and Rs. 10,000 per year for the remaining two years. The assessee received a sum of Rs. 16,000 from the receiver in the accounting period relevant to the assessment year 1953-54 and a similar sum was also received by the assessee in the previous year relevant to the assessment year in question. The assessee claimed that it was not liable to tax on this amount on the ground that the amount was either a casual income or a receipt of capital nature. Now, a similar question arose in respect of the first instalment of Rs. 16,000 received by the assessee in the preceding year. The matter came up before this court in ITR No. 461 of 1964, decided by a Division Bench of this court on September 3, 1970 [Seth Banarsi Das Gupta v. Commissioner of Income-tax [1971] 81 ITR 170 (All)]. The Bench held that the sum of Rs. 16,000 was the income of the assessee liable to tax. Following that decision we hold that the sum of Rs. 16,000 was the assessee's income.
16. The other amount of Rs. 42,957 was received by the assessee from another partner, Devi Chand, whose 1/6th share in the sugar mills was obtained by the assessee on lease. There also the agreement was repudiated and it was terminated under a compromise, according to which the assessee was to be paid a sura of Rs. 42,957 by Devi Chand, as compensation. In similar circumstances the assessee had received a sum of Rs. 39,262 from Seth Devi Chand in the immediately preceding year. This court in I.T.R. No. 461 of 1964 [Seth Banarsi Das Gupta v. Commissioner of Income-tax [1971] 81 ITR 170 (All)] held that the amount was income of the assessee liable to tax. We, respectfully, follow that decision. We accordingly answer question No. 4 in the affirmative.
17. Now we come to question No. 5, which is an important and difficult question. During the previous year relevant to the assessment year 1953-54, the assessee had suffered a loss in sugar business. After setting off the loss against other heads of income there remained an unabsorbed loss of Rs. 78,084. In the assessment year in dispute the assessee claimed that the unabsorbed loss of the preceding year should be brought forward and set off against its share in lease money received from the receiver in respect of S. B. Sugar Mills. This claim of the assessee has been disallowed and the question arises as to whether the assessee was entitled to carry forward and set off the loss as claimed by it.
18. Section 24 of the Income-tax Act deals with set-off and carry-forward of losses. Under Sub-section (1), where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. Sub-section (2) provides that, where an assessee suffers a loss in any business and the loss cannot be wholly set off under Sub-section (1), the unabsorbed loss shall be carried forward to the succeeding year and shall be set off against the income from the same business.
19. There are thus two conditions which must be fulfilled before the carried forward loss can be set off. Firstly, the income against which the loss has to be set off should be income from business and, secondly, the business must be the same in which the loss was suffered. The first question, therefore, that we have to answer is as to whether the income of the assessee from its share in the lease money from S. B. Sugar Mills is income from business ?
20. The contention of the learned counsel for the assessee is that the plant and machinery of S. B. Sugar Mills is a commercial asset and any income derived from the letting out of such an asset would be business income. The learned counsel has cited a large number of cases in support of his contention. The main case upon which reliance is placed is Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). There the Supreme Court held that the income from the letting out of a commercial asset would be income from business. That was a case under the Excess Profits Tax Act. The assessee in that case was a company engaged in the manufacture of silk cloth and as part of its business it had installed a plant for dyeing silk yarn. During the chargeable accounting period, 1st January, 1943, to 31st December, 1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to a person on a monthly rent. The assessee's contention was that the rent was income from other sources and not income from business and, as such, was not liable to excess profits tax. The Supreme Court held that, as the plant was a commercial asset, the letting out of such a commercial asset amounted to a business.
21. It cannot be disputed that a commercial asset may be used by an assessee in its own business or may be let out to others and the income arising from such an asset in either case would be income arising from business. But what is a commercial asset ? Every asset, which is once used as a business asset or which is capable of being so used cannot be regarded as a commercial asset. We are of the opinion that, in order that an asset may be regarded as a commercial asset, it must be the asset of a running business. If the business is stopped, then the assets employed in such business cease to be commercial assets. In the case of Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), the business of manufacture of silk was continued in the relevant chargeable accounting period. Dyeing plant was a part of the business outfit. The assessee had not suspended the activity of dyeing. It had only been suspended temporarily because of the non-availability of the raw material due to the war. The assessee had every intention to resume that activity as soon as the condition became normal. It is in these circumstances that the Supreme Court held that the dyeing plant was a commercial asset.
22. In Narain Swadeshi Weaving Mills v. Commissioner o] Excess Profits Tax [1954] 26 ITR 765, 773 (SC), the Supreme Court has clearly brought out this distinction. In that case the assessee-firm carried on a business of manufacturing. In April, 1948, a public limited company was incorporated to take over the business of the assessee-firm. The company purchased the building and the lease-hold rights from the assessee-firm and took over on lease from the assessee the plant and machinery. The assessee-firm did not thereafter manufacture anything and it had accordingly no further trading or commercial activity. The Supreme Court held that in such circumstances the letting out of the plant and machinery could not be held to be a business. While distinguishing the case of Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), the Supreme Court observed :
"The case of Commissioner of Income-tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) decided by this court is clearly distinguishable. There, the respondent-company which was formed for the purpose of manufacturing silk cloth installed a plant for dyeing silk yarn as part of its business. During the relevant chargeable accounting period, owing to difficulty in obtaining silk yarn on account of the war, it could not make any use of this plant and it remained idle for some time. In August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the income received by the respondent-company in the chargeable accounting period by way of rent was income from business and assessable to excess profits tax. It should be noted that in that case the respondent-company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. In such a situation, this court held that that part of the assets did not cease to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the company. This court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles. In the case before us the assessee-firm's business had entirely closed. It no longer manufactured any ribbons and laces. It had accordingly no further trading or commercial activity. It could not in fact use the plant, machinery, etc., after the land and the buildings where they were installed had been sold to the company."
23. The view that we have taken finds support from Section 12 of the Income-tax Act. That is a provision which provides for the assessment of income arising from "other sources". Sub-section (3) of that section provides that where an assessee lets on hire any plant, machinery or building, he shall be entitled to depreciation, etc., in accordance with the provisions of Clauses (iv), (v), (vi) and (vii) of Sub-section (2) of Section 10, which deals with the computation of business income. Sub-section (4) similarly provides that, where an assessee lets on hire machinery, plant or furniture and also buildings and the letting of the building is inseparable from the letting of the said machinery, plant or furniture, he shall be entitled to allowance in accordance with Clauses (iv), (v), (vi) and (vii) of Sub-section (2) of Section 10, in respect of such building. These two provisions very clearly indicate that income derived from letting out of machinery and plant along with the building in which it is installed is assessable under Section 12 as income from other sources. It follows, therefore, that when a factory is let out on hire, the rent received would be income from other sources unless the factory can be regarded as a commercial asset, in which case it will be assessed as income from business under Section 10.
24. Now, turning to the facts of the present case, we find that, so far as the partnership is concerned, to which the sugar mill belonged, it had stopped carrying on the business since 1944, when the litigation started between the partners. Since then, the sugar mill was in the custody of a receiver. The receiver did not carry on the business of running the sugar mill nor indeed he was permitted to do so by the court. He was letting out the sugar mills from time to time in order to keep it in a serviceable condition so as to realise a proper price for it when it came to be sold. In these circumstances, we are satisfied that the income received from letting out the mills was not a business income and a portion of it, which went to the assessee, was likewise not a business income. The first condition for set-off of a carried forward loss is, therefore, wanting and the assessee is not entitled to the set-off claimed by it.
25. Now, let us notice briefly the cases cited at the bar. The case of Commissioner of Income-tax v. National Mills Company Ltd. [1958] 34 ITR 155 (Bom.) was a case where the company, which was carrying on the business of manufacturing textiles, got into financial difficulties and ceased manufacturing textiles. The company went into liquidation. The liquidator let out the plant and machinery of the company on a monthly rent for a period of 3 years and the question arose as to whether the loss suffered by the assessee in its manufacturing business in the preceding year could be set off against its income from lease money under Section 24(2) of the Income-tax Act. The Bombay High Court, following the decision of the Supreme Court in the case of Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) held that the lease money was income from business. In that case, the Bombay High Court recognised at page 160 that if the assessee stopped doing business altogether, the assets ceased to have the character of commercial assets.
26. The case of Shri Ram Mahadeo Prasad v. Commissioner of Income-tax [1961] 42 ITR 211 (All) is a case decided by this court. There the assessee, who ran a flour mill, constructed an oil mill by utilising funds out of the flour mill business and received rent during the relevant accounting period from letting out the oil mill. Thereafter, the assessee himself ran the oil mill. This court on a reference held that there was material for the Tribunal to hold that the oil mill was a commercial asset.
27. The other cases cited at the bar are not relevant because they relate to the question as to in what circumstances the business can be regarded the same business in which the loss was suffered. This question does not arise in this case because of our finding that the letting out of the sugar mill did not amount to a business at all. The question No. 5 is accordingly answered in the negative.
28. Now we pass on to question No. 6. The assessee had raised loans from various banks for purchasing the shares of Jaswant Sugar Mills and had paid a sum of Rs. 1,52,764 as interest on such borrowings. The assessee claimed to deduct this amount in the computation of its net income. The claim was disallowed by the Income-tax Officer and the Assistant Commissioner of Income-tax but was accepted by the Income-tax Appellate Tribunal. Question No. 6 is at the instance of the Commissioner.
29. This question is also covered by the decision of the Division Bench in I.T.R. No. 461 of 1964 [Seth Banarsi Das Gupta v. Commissioner of Income-tax--[1971] 81 ITR 170 (All)] decided on 3rd September, 1970, relating to the preceding assessment year. For the reasons stated in that judgment we hold that the interest was an allowable deduction, We, accordingly, answer question No. 6 in the affirmative, in favour of the assessee and against the department.
30. Now we are left with questions Nos. 7 and 8. The assessee under a deed of exchange acquired from Seth Sheo Prasad, one of the partners of the firm, his 1/6th share in the S. B. Sugar Mills in exchange for 9,600 ordinary shares of Lord Krishna Sugar Mills valued at Rs. 4,60,000. The assessee claimed that it was entitled to claim depreciation at Rs. 4,60,000, representing the cost of 1/6th share of the sugar mills. The claim had been disallowed by the Income-tax Appellate Tribunal. A similar claim was made in the assessment year 1953-54, and on a reference in I.T.R. No. 461 of 1970 [Seth Banarsi Das Gupta v. Commissioner of Income-tax [1971] 81 ITR 170 (All)] this court held that the assessee was not entitled to any depreciation as claimed by it. Questions Nos. 2 and 3 in that case correspond to questions Nos. 7 and 8 in the instant case. Following that decision we answer question No. 7 in the affirmative and question No. 8 in the negative.
31. In the circumstances, we make no order as to costs.