1. The question raised on this reference is the difficult and highly debatable one of whether a particular expenditure constitutes a revenue or a capital expenditure. The facts are very few. The assessee firm carries on business in several commodities and in the course of their business they submitted tenders to the B. B & C. I. railway and undertook to supply certain commodities. In accordance with the term of the tender it had to deposit a certain amount as security for properly carrying out the contract. In the particular case with which we are concerned, the assessee could not carry out the contract, with the result that the amount of Rs. 4,419 deposited in respect of that particular under was forfeited, and the assessee claimed this as a trading loss. The Tribunal has taken the view that this was a capital loss and therefore no deduction was permissible. We have not the advantage of any reason given by the Tribunal as to why it has come to this conclusion.
2. Now, it has often been said that the lone to be drawn between a revenue and a capital expenditure is a very thin lone and it is always difficult to decide on which side of the lone particular case falls. But we have laid down a principle in Lord's Dairy Farm Ltd. v. Commissioner of Income-tax, which we think may be safely applied to the facts of this case, and this is what we say :
'As has been often pointed out, the object of section 10 is it ascertain the true profits and gains of an assessee. The profits must be ascertained from a commercial point of view. The sub-section (2) of section 10 deals with certain specific cases of permissible deductions. But even apart from these permissible deductions, if there is any loss which from the commercial point of view can be considered to be a trading loss, then that loss must be deducted before the true profits can be ascertained.'
3. Therefore, we must approach this question not from any technical point of view, but from the broad commercial aspect of the matter, and what we have really to decide is whether in arriving at the profits and gains of a business carried on by the assessee it would be permissible to him to deduct this particular loss in order to arrive at the true profits of the business. It should be borne in mind that this expenditure is not claimed as any specific allowance falling under sub-section (2) of section 10. The contention of the assessee is that this is a trading loss and the true profits of his business which are subject to tax cannot be ascertained unless this deduction is permitted to him.
4. The argument of Mr. Joshi is that this deposit was made by the assessee not for the purpose of earning profits built for the purpose of obtaining a business which would make it possible to earn profits. In other words, his contention is that the payment of this deposit is antecedent to and de hors the business which the assessee carried on and which yielded profits to him. Apart from authorities to which we shall presently turn, the contention does not seem to be tenable. This is not a case where the assessee makes this deposit in order to acquire a business, nor is this a case where an amount is deposited as a sort of a temporary investment yielding interest, the deposit being necessary in order that the assessee should be permitted to carry on a particular business. The assessee already has his business. His businesses to sell various commodities and in the course of this business, not de hors it, he submits a tender to the railway company. It is one of the terms of the tender that he must make the deposit. Therefore the making of the deposit is incidental to the business which he is carrying on. This is not a case where it is suggested that the assessee committed a breach of the contract fraudulently or that he deliberately failed to discharge his obligation under the contract. The failure to deliver the goods to the railway company was incidental to the business. It is something which would happen in any business and which would happen to any businessman. Therefore, looking at the matter on principle and from a broad point of view that we have suggested, it seems to us that this is a trading loss and the assessee is entitled to deduct it from his profits in order that the assessable profits can be ascertained.
5. The two authorities on which Mr. Joshi relied are both decisions of the Privy Council, and as will be noticed, the facts in those two cases were entirely different. The first is Tata Hydro-Electric Agencies Ltd. v. Commissioners of Income-tax. That is the well known case and it is in the context of the facts there that the Privy Council said at page 209 :
'Their Lordships recognise and the decided cases show how difficult it is to discriminate between expenditure which is and expenditure which is not, incurred solely for the purpose of earning profits or gains.'
6. Now, in the first place, the Privy Council was not considering the case of a trading loss. The Privy Council was considering a specific allowance claimed under the provisions of section 10 (2) of the Income-tax Act, and even in deciding that the Privy Council felt difficulty, and were not made in the process of earning profits. They did not arise out of any transactions in the conduct of their business. That the assessees had to make those payments no doubt affected the eliminated yield in money to them for their business but the is not the statutory criterion. The obligation to make these payments was undertaken by the assessees in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right of conduct the business, and not for the purpose of producing profits in the conduct of the business. Now, this according to Mr. Joshi is the criterion and the ratio. Assuming that is the criterion and the ratio, surely that is not applicable to the facts before us. How can it possible be said in this case that this deposit was made by the assessee in order to acquire the right to conduct the business and not for the purpose of producing profits in the conduct of the business The business was already being carried on by the assessee. This was a transaction in that business. It is in order to put through that transaction that the deposit was necessary.
7. The second case referred to by Mr. Joshi is Commissioner of Income-tax v. Motiram Nandram. In that case the assessees were carrying on business of cloth, yarn and money-lending and they wanted to start a new business and for that purpose they deposited with an oil company Rs. 50,000. In consideration of that the assessees were appointed organizing agents of the oil company for five years for a particular area. They were to recommend the selling agents and the sales were to be conducted by these selling agents, but the assesses were to receive certain commission on all goods sold by the selling agents within the area and also on all sales effected in the area by the company. The deposit was to yield interest at 7 per cent. Part of the deposit was repaid and then the company went into liquidation, and the assessees claimed the part of the deposit which was lost to them and that claim was rejected by the Privy Council. Now, in the first place, the Privy Council took the view that the deposit was made by the assessees for the purpose of being permitted to engage in a business and that must be considered to be a purpose of securing an enduring benefit of a capital nature. Therefore, on the facts of that case where the assessees were launching upon a new business and they could only start this business by making this deposit, the Privy Council observed that by making the deposit they were getting a capital asset of an enduring nature, the capital asset being the business. Mr. Joshi says that in this case also by making the deposit the assessee is obtaining a business. But that is not correct. It is true that under the Income-tax law even a single venture may be business, but his is not a case of a single venture. As we have pointed out before, it is in the course of the business which the assessee had been carrying on that it entered into this particular transaction. So this is neither a case of acquiring a new business, nor acquiring a joint nature. Further, at page 138 Sir George Rankin, who delivered the judgment of the Privy Council, points out that the deposit of Rs. 50,000 may be looked upon as a temporary investment because it yielded interest while it remained with the oil company. That feature is also absent in the case before us. Nobody can suggest that the deposit was made by the assessee as a temporary investment with the railway company. It was expressly made as an earnest; as security for carrying out the particular contract. Their Lordships also say that a deposit must be considered in relation to the Particular business, and when we look upon his deposit and the relation it has to the business of the assessee, it is clear that the deposit was made not for the purpose of acquiring any capital asset of an enduring nature or acquiring a new business, but it was made solely for the purpose of earning profits in the course of the business. The Privy Council also points out that the question that should be posed is - 'what is the object of the expenditure ?' - and they proceed to answer that question by saying - 'it must be answered from the stand-point of the assessee at the time the deposit was made.' From the point of view of the assessee in this case there cannot be the slightest doubt that the deposit was looked upon as a business expenditure and if the deposit was forfeited it was a business loss.
8. The result is that we must answer the question submitted to us in the affirmative. The Commissioner to pay the costs.
9. Question answered in the affirmative.