- (1.) Under appeal is the judgment and order of a division bench of the high court at Calcutta answering the following question raised in a reference under Section 256 of the Income Tax Act in the negative and against the assessee: "1.Whether, on the facts and in the circumstances of the case and on a proper interpretation of the terms and conditions of the leave and licence agreement' executed on 19-10-1963, the tribunal was right in holding that the loss of Rs 20 lakhs which had been deposited by the assessee with Saksaria Cotton Mills Ltd. , pursuant to clause 17 of the said agreement, arose in the carrying on of the assessee's business and was incidental to it and was accordingly allowable as a business loss -
(2.) The High court noted the facts found by the tribunal, as under: "The assessee is a public limited company. It owned several tea estates and its main income was from sale of tea. Davenport and Co. (P) Ltd. are the managing agents of the assessee. In 1960, the assessee altered its memorandum of association with the approval of the Calcutta High court for the purpose of diversifying its activities and it took cotton business in addition to its business in tea. Saksaria Cotton Mills Ltd. was also a public limited company and in 1957, it was in the process of liquidation. The assessee, along with one Shri S. L. Bajoria, a shareholder of Davenport and Co. (P) Ltd. , produced a scheme which was approved by the High court and liquidation proceedings came to an end. The assessee and Shri S. L. Bajoria entered into an agreement for the lease of the mills from Saksaria Cotton Mills Ltd. There was a partnership in the lease between the assessee and Shri S. L. Bajoria in a certain ratio. That lease was for the period from 28/1/1961 to 30-10- 1961. After the expiry of the period of lease, the assessee alone entered into a financing agreement with Saksaria Cotton Mills Ltd. and that agreement remained in force from 1/11/1961 to 31/3/1963. After the expiry of the financial agreement the assessee entered into another 505 agreement with Saksaria Cotton Mills Ltd. , on 19-10-1963, for a period of three years from 1/4/1963 to 31/3/1966. This agreement was described as a leave and licence agreement. In accordance with clause 17 of the agreement, the assessee deposited Rs 20 lakhs on 3/4/1963, with Saksaria Cotton Mills Ltd. and Saksaria Cotton Mills Ltd. handed over its properties to the assessee. The assessee ran the mills. The leave and licence agreement, after expiry of the period stipulated in that agreement, was extended up to 30/6/1966. The tribunal was informed by the counsel for the assessee that the extension was on the same terms and conditions on which the leave and licence agreement had been made. The assessee made a credit entry of Rs 1,40,000. 00 being the interest receivable by it from Saksaria Cotton Mills Ltd. on the deposit of Rs 20 lakhs at the rate of 7% per annum. This entry was reversed in the year under consideration. During the extended period of three months, the assessee paid insurance premium, rates and taxes and other expenses for the whole of the year though the extended period was only for three months. The assessee debited these expenses for the remaining nine months to the account of Saksaria Cotton Mills Ltd. The amounts debited were Rs 1,48,470. 00 for insurance premium and Rs 1,42,882. 00 for rates and taxes and other expenses. The interest amount of Rs 1,40,000. 00 and these expenses aggregated to Rs 4,31,352. 00. The amount of rs 20 lakhs of the deposit and the expenses of Rs 4,31,352. 00 remained unpaid by Saksaria Cotton Mills Ltd. Saksaria Cotton Mills Ltd. had its own business after 30/6/1966, but suffered loss and was ultimately closed down on 18/10/1967, and went into liquidation on 12/3/1968. The assessee wrote off the above amounts of Rs 20 lakhs of deposit and Rs 4,31,352. 00 as having become irrecoverable on account of incapacity of Saksaria Cotton Mills Ltd. to pay the same. The assessee claimed these amounts as deductions by way of bad debts. "
(3.) The Income Tax Officer disallowed the assessee's claim for deduction of the said amount of Rs 20 lakhs holding that it was a capital expenditure. The Appellate Assistant Commissioner reversed that view and the Income Tax Appellate tribunal affirmed the decision in first appeal. The High court, in reference, in the judgment under appeal before us, disagreed with the tribunal. The High court said that there could "be little doubt, having regard to the nature of the agreement, that the amount of Rs 20 lakhs was deposited for the purpose of securing the contract under which the assessee had acquired the right to work the mills belonging to the licensor company. In other words, the assessee acquired a profit-making apparatus. The deposit was made for the purpose of acquisition of a profit-making apparatus. It did not make the assessee a trade creditor of the Cotton Mills Company"; also, that it found it "difficult to accept the contention that the deposit was made in the course of the day-to-day business of the assessee". The assessee was not engaged in the business of reviving sick cotton mills. The assessee's day- to-day business did not include taking lease of cotton mills or entering into licensing agreements with other cotton mill companies. The assessee's usualbusiness was manufacture and sale of tea. It wanted to enter into cotton- manufacturing business. To effectuate this purpose, it did not set up a cotton mill of its own but preferred to merely acquire the right to operate mills belonging to another company under a leave and licence agreement. The deposit was not made in the course of profit-making but was made for the purpose of acquiring a profit-making apparatus for a period of three years.;