Ita/110/2007 Of Commissioner Of Income Tax Cochin v. M/S.southern Gas Ltd,Udyogamandal

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN MONDAY, THE 14TH JUNE 2010 / 24TH JYAISTHA 1932 ITA.No. 110 of 2007() --------------------- ITA.423/COCH/1998 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR IT RESPONDENT/APPELLANT ------------------------ M/S.SOUTHERN GAS LTD., UDYOGAMANDAL. BY ADV. SRI.P.BALAKRISHNAN (E) SRI.MOHAN PULIKKAL SRI.K.C.KIRAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 14/06/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &P.S.GOPINATHAN, JJ. .................................................................... I.T. Appeal No.110 of 2007 .................................................................... Dated this the 14th day of June, 2010. C.R. JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the Revenue is whetherthe Tribunal was justified in allowing deduction of Rs.10 lakhs beingadvance paid by the assessee for contracting acquisition of OxygenPlant of a liquidated company at Goa. We have heard Senior StandingCounsel appearing for the appellant and Adv. Sri.P.Balakrishnanappearing for the respondent-assessee. 2. The facts leading to the controversy are as follows. Therespondent-assessee entered into a transaction with Central Bank ofIndia for purchase of Oxygen Plant at Goa for a consideration of Rs.70lakhs vide it's confirmation letter dated 29.4.1989. The transactioninvolved purchase of 6007 sq. meters of land, Oxygen plant, 3000oxygen cylinders, office buildings, stores, plant etc. Advance of Rs.10lakhs was paid vide cheque dated 20.11.1985. The Central Bank on I.T.A. 110/2007 24.6.1985 stated that in the event of breach of terms and conditions, thesum of Rs.10 lakhs will be forfeited by the Bank. Later, therespondent-assessee gave up the deal leading to forfeiture of theamount by the Central Bank. Even though assessee wrote to theCentral Bank on 14.3.1986 informing that they are not able to pursuethe deal and requesting for refund, the Central Bank vide letter dated18.3.1987 informed the assesee that it may not be possible for them torefund the amount of Rs.10 lakhs which stands forfeited. The matterremained as such for nearly six years and on 12.8.1993 the respondent-assessee is stated to have taken legal opinion, wherein it was advisedthat there is no chance of respondent recovering the amount fromCentral Bank. Based on the legal advice, the assessee claimed theamount as a business loss for the assessment year 1993-94. TheAssessing Officer disallowed the claim on the ground that it was acapital loss which was confirmed by the C.I.T.(Appeals). However, insecond appeal filed by the assessee, the Tribunal held that the claim is I.T.A. 110/2007 allowable as a business expenditure under Section 37(1) of the IncomeTax Act. It is against this order the Revenue has filed this appeal. I.T.A. 110/2007 allowable as a business expenditure under Section 37(1) of the IncomeTax Act. It is against this order the Revenue has filed this appeal. 3. On facts we notice that the expenditure incurred was towardsadvance paid for acquisition of plant for manufacture of Oxygen atGoa. If the transaction was proceeded with, respondent-assessee wouldhave acquired the asset in the form of a factory with land, building,plant, stores etc. i.e. a capital investment which would have entitled theassessee for depreciation and other benefits. However, the recordsshow that assessee later found that 3000 gas cylinders were missingand, therefore, they backed out of the contract. The advance wasforfeited by the Bank in terms of the contract. The question, therefore,to be considered is whether it is a business expenditure or a businessloss that entitles the assessee for deduction. While counsel for theRevenue contended that it is a capital loss and not a business loss orbusiness expenditure and in any case it is not relatable to theassessment year 1993-94, counsel for the assessee contended that I.T.A. 110/2007 assessee could write off the amount only in the year in which legaladvice was received to the effect that the amount is irrecoverable. Weare unable to uphold the order of the Tribunal because in the first place,it is an amount paid towards advance for acquisition of factory buildingwith land, equipment, stores and plant and is not a revenueexpenditure. On the other hand, it is a capital outlay for acquisition ofa capital asset. Further, it cannot be treated as a business loss asclaimed by the assessee because purchase and sale of plant andmachinery is not a business of the assessee. Therefore, the advancepaid for acquisition of plant and machinery cannot be treated as abusiness expenditure or a business loss. Apart from this, we find thatthe communication issued by the Central Bank at the time of makingadvance itself was very clear that if the assessee commits breach in thecontract, advance amount will be forfeited, which was alsocommunicated by the Central Bank to the assessee vide their letterdated 18.3.1987. If at all the claim is allowable as a business loss, we do not know on what ground assessee can sleep over the matter foranother six years and claim the deduction in the assessment for the year1993-94 based on legal advice stated to have been received on12.8.1993. In our view, the loss is a pure capital loss which is neitherallowable as a business expenditure or a trading loss. We, therefore,allow the appeal by reversing the order of the Tribunal and by restoringthe disallowance confirmed in first appeal. C.N.RAMACHANDRAN NAIRJudge P.S.GOPINATHANJudge pms