DIPAK KUMAR SEN, J. - (1.) THE material facts on record and the proceedings leading up to this reference are, inter alia, that Darjeeling Dooars Plantations Ltd., the assessee, carries on the business of cultivation and manufacture of tea. At the material time, it owned and ran a tea estate known as Zurrantee Tea Estate. On March 19, 1975, an agreement in writing was entered into between the assessee, the United Bank of India and one Ramjhora Tea Company Ltd., whereby the said Ramjhora Tea Company Ltd. agreed to sell to the assessee a tea estate known as Bundapani Tea Estate (hereafter referred to as the said 'tea estate') owned by the said Ramjhora Tea Company Ltd. at a price of Rs. 25 lakhs on, inter alia, the following terms and conditions : (a) The sale would be effective as from January 1, 1975. (b) It was recorded that at the date of the execution of the agreement, the United Bank of India had received from the assessee a sum of Rs. 4 lakhs on behalf of Ramjhora Tea Company Ltd. as earnest money and in part payment of the price of the said tea estate. (c) At the time of the execution of the conveyance of the said tea estate, the assessee would pay to the Ramjhora Tea Company Ltd. the balance of the purchase price through the United Bank of India. (d) If the title of the Ramjhora Tea Company Ltd. in the said tea estate was not marketable, then the assessee would be at liberty to rescind the agreement and the United Bank of India would thereupon refund to the assessee the said earnest money of Rs. 4 lakhs. (e) The management, possession and operational control of the said tea estate and the disposal of the crop thereof would, until the date of the conveyance, be in the hands of the assessee who would have absolute control over the same. (f) The assessee would be responsible for purchase of stores and other items necessary for the running of the said tea estate from January 1, 1975, including the wages of the labourers and the employees as also bonus, gratuity, pension and compensation. (g) All tea manufactured in the said tea estate on and from January 1, 1975, and the sale proceeds thereof as also the income arising from the said tea estate otherwise and compensation, if any, received from the State or Central Government or any other authority in respect of acquisition or requisition of the land in the said tea estate would, subject to other provisions of the agreement, belong to the assessee. (h) The assessee would be solely liable for payment of sales tax, income -tax and all other taxes imposed on taxable profits earned after December 31, 1974, in respect of the ownership or occupation of the said tea estate. (i) In the event the taxing authorities decided to assess the Ramjhora Tea Company Ltd. in respect of the aforesaid taxes, the assessee would, without any objection, pay to the Ramjhora Tea Company Ltd. the full amount of such taxes as demanded, whether such taxes would be assessed on the Ramjhora Tea Co. Ltd. or on the assessee or on both. (j) If, for any reason, Ramjhora Tea Company Ltd. was compelled to pay and paid any such tax, then the assessee would, on demand, reimburse the Ramjhora Tea Company Ltd. to the extent of such payment including all costs and charges incurred by the Ramjhora Tea Company Ltd. in respect of the same. (k) The purchase by the assessee would be completed by a registered deed of conveyance to be executed by the Ramjhora Tea Company Ltd. in favour of the assessee within 12 months from the date of the agreement. The assessee would, however, have the right to extend such time for a further period of 12 months.
(2.) SUBSEQUENT to the aforesaid, disputes arose between the assessee and the said Ramjhora Tea Company Ltd. which led to several proceedings in this court. Some of the shareholders of Ramjhora Tea Company Ltd. and the latter company disputed the agreement of sale of the said tea estate and a suit was filed in this court for setting aside the same. As the Ramjhora Tea Company Ltd. failed to execute the conveyance of its said tea estate in favour of the assessee within the stipulated time, the assessee also instituted a suit against the Ramjhora Tea Company Ltd. for specific performance of the contract. The matter remained pending during the relevant assessment year and the assessee remained in possession of the said tea estate. The assessee was assessed to income -tax in the assessment year 1979 -80, the relevant accounting year ending on March 31, 1979. In the said assessment, the assessee claimed deduction of a sum of Rs. 1,14,015 which was claimed to have been spent by the assessee by way of legal expenses in the said legal proceedings by and between the assessee and the said Ramjhora Tea Company Ltd. and its shareholders. The Income -tax Officer noted that in its return the assessee had stated that the income from the said tea estate was not taxable in its hands as the conveyance for the said tea estate had not been executed in favour of the assessee and disputes between the parties were pending adjudication in court. The Income -tax Officer held that the legal expenses incurred in connection with the acquisition of any investment were capital expenditure. The Income -tax Officer held further that to sustain a claim for deduction of any amount on account of business expenditure, the same was required to be shown to have been incurred for the purposes of an existing business in the year of accounting, the profits of which would be under assessment. The Income -tax Officer found that there was no business of the assessee in respect of the said tea estate, disallowed the deduction claimed and added back the said amount to the taxable income of the assessee.
(3.) THE Income -tax Officer noted the said amount of Rs. 4 lakhs advanced by the assessee to the Ramjhora Tea Company Ltd. by way of earnest money for acquiring the said tea estate. He held that the advance of the said Rs. 4 lakhs towards acquisition of the said tea estate was not for the purpose of, nor necessary for the working of, the existing tea estate of the assessee, the income of which was taxable. The Income -tax Officer noted further that the assessee had paid over Rs. 5 lakhs by way of interest to the bank on an overdraft amount. He held that an amount of Rs. 60,000, being interest calculated at the rate of 15% on the said advance of Rs. 4 lakhs, could have been avoided if the said payment was either withdrawn or not incurred and he added a further sum of Rs. 60,000 to the taxable income of the assessee.;