S. K. MAL LODHA, J. - (1.) : The Tribunal, Jaipur Bench, Jaipur, has referred to the following question for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the difference of Rs. 20,967 between the guaranteed amount and the actual purchase of country liquor was allowable as a trading loss in the computation of the assessee's total income for the asst. yr. 1968-69 ?"
(2.) WE may succinctly state the facts. The non-petitioner is a HUF. The source of income of the assessee, amongst others, is from purchase and sale of country liquor. It did not maintain accounts for its business. It declared purchases of 7,556 litres of country liquor of the value of Rs. 56,791. The assessee worked out its profit by adopting a rate of Rs. 1.50 per gallon, which came to Rs. 2,550. Against the amount of the net profit, the assessee claimed a sum of Rs. 23,608 as a trading loss on account of the deficiency between the minimum guaranteed amount of Rs. 80,400 and the actual purchase of Rs. 56,901. The assessee claimed this deficiency in accordance with the stipulations contained in the licence issued to the assessee, enabling it to sell the country liquor during the accounting period which commenced from 1st April, 1967, and ended on 31st March, 1968. The ITO in his order dt. 30th March, 1972, did not accept the assessee's claim of deficiency as a trading loss, for, according to him, the minimum guarantee was given by the assessee to acquire the right of carrying on business in a particular area and as such it constituted capital expenditure. The ITO has observed as under : ``First of all, regarding the loss, the position is that the shortfall in guarantee which is not a revenue loss cannot be allowed. Assessee agrees to pay the minimum guarantee amount for acquisition of a right to carry on the business in a particular area and, therefore, in fact, the amount agreed to be paid as guarantee money or in other words to lift the goods worth a certain minimum amount is for securing of this valuable right and the actual business started only after that and thus the shortfall in guarantee has no bearing on the business as such so far as its income is concerned." On appeal, the AAC, vide his order dt. 26th Nov., 1973, agreed with the view taken by the ITO. A further appeal was lodged by the assessee. The Tribunal did not agree with the view taken by the AAC and held, as is clear form its order dt. 5th May, 1975, that the liability arose directly from the terms of the licence during the previous year and, therefore, the corresponding loss of the assessee on account of the deficiency also arose during the accounting period and so whether or not the assessee had maintained the accounts, the loss is claimable by it as its business loss. It allowed a sum of Rs. 20,967 as loss against the income of the assessee from business during the asst. yr. 1968-69. An application under s. 256(1) of the Act was filed by the Commissioner. The Tribuanl has referred the aforesaid question for the opinion of this Court. A copy of the licence has been filed by the assessee marked annexure ``A''. The licence is for the retail sale of country liquor from 1st April, 1967, to 31st March, 1968. The licence guaranteed the minimum sale of country liquor. The important conditions in the licence are contained in cl. 2, which is as under : It will be relevant here to read the material part of s. 37 of the IT Act, 1961 (for short "the Act") : ``37. (1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and s. 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head `Profits and gains of business or profession'.'' It is well settled by a catena of cases that the criteria for capital expenditure can be grouped under four headings : (1) Expenditure for acquisition of a capital asset; (2) Expenditure once and for all; (3) Expenditure to acquire an enduring benefit; and (4) Expenditure relating to fixed capital. Thus, according to s. 37, the conditions for allowance are : (1) The expenditure must not be governed by the provisions of ss. 30 to 36 and s. 80VV. (2) the expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee. (3) the expenditure must not be personal in nature. (4) the expenditure must not be capital in nature.
(3.) ACCORDING to the stipulations contained in the licence- deed, the assessee in case of failure to lift the country liquor of the minimum amount of guarantee, was liable to make good the loss to the State Government. The liability to make good the loss to the Government of Rajasthan arose from carrying on of the assessee's business. It is not disputed by the learned counsel for the Revenue that the assessee was under an obligation to make good the deficiency if it fails to lift the country liquor of the minimum amount of guarantee and to make good the loss to the Government of Rajasthan in regard to the deficiency. This arose directly from the stipulations contained in the licence. ACCORDING to s. 37(1) of the Act, this amount has been laid out wholly and exclusively for the purpose of business of the assessee, namely, the sale of the country liquor of the amount of guarantee stipulated in the licence-deed from 1st April, 1967, to 31st March, 1968, and so such loss is an allowable deduction being a trading loss. In this connection, we may notice the authorities relied on by the learned counsel for the assessee non-petitioner. In Addl. CIT vs. Rustam Jehangir Vakil Mills Ltd. 1976 CTR (Guj) 131 : (1976) 103 ITR 298 (Guj), the question arose whether the payment of Rs. 91,387 made to the Textile Commissioner under the provisions of cl. 21C(1)(b) of the Cotton Textile (Control) Order, 1948, was business expenditure allowable under s. 28 or under s. 37 of the Act. The Textile Commissioner, in that case, issued directions to the assessee to pack a minimum of the particular types of cloth as mentioned therein. This was not done and hence by different orders, the Textile Commissioner directed the assessee to pay certain amounts in respect of the relevant assessment years under cl. 21C(l)(b) and the amounts were paid by the assessee. The assessee claimed these amounts in the relevant assessment years as deductible expenses. It was observed by the Gujarat High Court as under (headnote) : It is well settled that in arriving at the figure of profits and gains, what is to be considered is the net profits and gains in the commercial sense and not only receipts, and all amounts which are proper items of expenditure can be deducted at the stage of arriving at the figure of profits and gains of business. Sec. 37, on the other hand, is a specific provision where deduction is provided by the Act itself and under that action, any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, is allowed as a deductible expenditure in computing the income chargeable under the head `Profits and gains of business or profession'.'' In CIT vs. Tarun Commercial Mills Co. Ltd. 1977 CTR (Guj) 21 : (1977) 107 ITR 172 (Guj), the question was whether the penalty of Rs. 18,247 paid to the Textile Commissioner for non-fulfilment of the assessee's export obligation was business expenditure incurred wholly and exclusively for the purpose of the assessee's business? The learned judges observed as under : ``In the interest of business, textile manufacturers opt for payment of compensation or damages to cover up the shortfall in the export obligations. It is no doubt true that the word used in the scheme which we have set out above for the sum to be paid in default of fulfilling the export obligation has been described as a penalty but, in the ultimate analysis, it is the substance of the transaction between the parties which has to be considered for purposes of determining what is the nature and import of the scheme and the bond executed in pursuance thereof. The exercise of option, as stated above, may be the result of commercial expediency as well as certain extraneous factors over which the manufacturers might not have control and, therefore, in view of the scheme and the bond with which we are concerned here, it cannot be said that there is a breach of a public policy which may render the payment, agreed to be made for the default arising as a result of the breach, as one akin to penalty. Under no circumstances, without violence to the language, it can be said to be infraction of the law. In that view of the matter, therefore, we do not find any reasons to interfere with the order of the Tribunal when it viewed the payment in question as expenses wholly and exclusively laid out for the business.'' ;