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 and 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. 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. 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.
(3.) 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). 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 ? " ;