SWADESHI COTTON MILLS COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under section 66(1) of the Income-tax Act. The question which has been referred to this court for opinion is :

(2.) THE facts giving rise to the reference are : THE assessee is public limited company carrying on the business of manufacturing and selling cloth and other textile goods. THE assessment year in question is 1949-50 corresponding to the accounting period ending December 31, 1948. THE assessee contracted to purchase textile machinery from M/s. Lang Bridge Ltd. through their suppliers, M/s. W.H. Barady & Co. Ltd. (the machinery being called Lang Bridge Bleaching and Finishing Machinery) at an approximate value of Rs. 4,25,000. Similarly, the assessee contracted to purchase other sundry textile machinery from M/s. A.N. Sanyal & Sons of New Delhi. Subsequently having regard, however, to changed circumstances the assessee decided to cancel the contracts as in its opinion these machineries would not be required for its business. Accordingly, the assessee sought cancellation of the contracts whereupon M/s. Barady & Co. demanded a sum of Rs. 15,000, as compensation and M/s. A.N. Sanyal & Sons demanded a sum of Rs. 20,000 for cancellation of the contracts. THE assessee paid both these sums of monies and claimed the total amount of Rs. 35,000 as an admissible deduction under section 10(2)(xv). THE claim was disallowed by the income-tax authorities and the disallowance was confirmed by the Income-tax Appellate Tribunal. THE Tribunal, in disposing of the claim, held :

(3.) FROM the two cases the principle deducible is that where a receipt or an expenditure is related to the actual carrying on of the business of an assessee, it nature is that of income or revenue; whereas if it is related not to the actual carrying on of the business but to the means of carrying on a business it may partake of the nature of capital.