1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Kanpur.
2. The assessee is a registered dealer and deals in sugar. The assessment year involved is 1957-58 with the previous year ending on 12th April, 1957. During the previous year it purchased 5,200 shares of Rohtas Industries at their face value of Rs. 52,000. These shares were sold for Rs. 1,16,909 during the previous year on August 23, 1956. There was thus a surplus of Rs. 64,909, which the assessee claimed to be a capital gain. The Income-tax Officer held that the surplus earned by the assessee was profit arising from the business. The Appellate Assistant Commissioner of Income-tax agreed with this finding of the Income-tax Officer. On second appeal the Income-tax Appellate Tribunal accepted the assessee's contention and held that the surplus arising from the sale of shares was capital gain.
3. Another controversy that arose relates to the forfeiture' of security deposit of Rs. 77,290 by the Duputy Director (Food), Hyderabad. The assessee had entered into a contract with the Deputy Director (Food) for the purchase of rice and had deposited Rs. 77,290 as security for the due performance of the contract. The assessee was unable to perform the contract and the security was forfeited by the Deputy Director (Food). The assessee then started litigation for the recovery of the forfeited security. The matter finally went up to the Supreme Court which referred the matter to the arbitration of the Regional Director (Food), who by his award dated September 6, 1965, upheld the forfeiture of the security. The assessee claimed a sum of Rs. 77,290 as a business loss in the assessment year in question. The claim was disallowed by the Income-tax Officer as alsoby the Appellate Assistant Commissioner of Income-tax on appeal. The Income-tax Tribunal, however, on second appeal accepted the assessee's claim and held that the loss was properly allowable in the assessment year in question. The Commissioner is aggrieved and at his instance the following two questions have been referred to us for opinion :
' (1) Whether, on the facts and in the circumstances of the case, the forfeiture of security deposit of Rs. 77,290 was correctly treated as an allowable loss in the hands of the assessee for the assessment year 1957-58 ?'
(2) Whether, on the facts and in the circumstances of the case, the surplus realised by the assessee on sale of certain shares during the previous year was rightly treated as a capital gain
4. In order to answer the first question, two points have to be decided, (1) whether the loss on account of forfeiture of security was a revenue loss or a loss of capital nature and (2) whether'the loss could be allowed in the assessment year 1957-58. There is not much difficulty on the first point. The security deposit was made by the assessee in its capacity as a person carrying on business. The contract for the purchase of rice was a business contract entered into with a view to earning profits. It was not a deposit made in order to secure any capital asset or an advantage of enduring nature. As such the loss clearly could be attributed to the business carried on by the assessee. The Bombay High Court in a similar case reported as Narandas Mathuradas & Co. v. Commissioner of Income-tax : 35ITR461(Bom) has held that forfeiture of security of a businessman deposited for properly carrying out a contract would be a trading loss and the assessee would be entitled to deduct such loss to arrive at the true profits of his business. We are in respectful agreement with this view.
5. The next question to be considered is as to whether the loss could be claimed in the assessment for the year 1957-58. Here again there is no dispute that the security was forfeited by the Deputy Director (Food) by his letter dated November 1, 1956, which date is within the previous year for the assessment year 1957-58. If nothing else had happened the loss would have been allowable in the assessment year 1957-58 but it appears that the assessee did not accept the forfeiture and took legal steps to recover the amount from the Deputy Director. The matter ultimately was finally decided on September 6, 1965, as mentioned earlier. The contention of the department is that the loss could not be said to have accrued until the final award on September 6, 1965, by the Regional Director (Food) and, as such, the assessee could not be said to have suffered loss in the relevant previous year.
6. Under Section 10(1) of the Indian Income-tax Act, 1922, which governs the present case, tax is payable by an assessee in respect of profits and gains of a business carried on by him. In computing such profits and gains the loss, if any, suffered in carrying on the business is to be deducted out of the profits and thereafter under Sub-section (2) other overhead expenses incurred in carrying on the business are also deducted. The computation of the net profit is to be made on the basis of the method of accounting followed by an assessee. If he follows the mercantile system, the loss becomes deductible at the point when it accrues. Its allowance need not be postponed until it is paid. In order, however, that a loss may be allowed to be deducted, two conditions have to be satisfied :
(i) that the loss or the liability should have accrued in the relevant previous year; and
(ii) It should be an ascertained liability.
7. Contingent and unascertained liabilities or losses are not to be allowed. Now in the instant case the assessee had deposited security for the carrying out of the contract of purchase of rice. As is apparent from the letter of the Director (Food) dated 1st November, 1956, the security deposit or the earnest money was forfeited under Clause ' d' (iv) of the terms and conditions of sale by auction, which required the assessee to deposit the balance of the price within a stipulated time. It appears that the assessee did not deposit the balance price within the stipulated time and the assessee became liable to the forfeiture of the earnest money. The liability of the assessee accrued at that time when the Deputy Director (Food), vide his letter dated 1st November, 1956, informed the assessee that his earnest money of Rs. 77,290 has been forfeited. The assessee had, at that point of time, suffered the loss. The contention of the department that the liability was contingent or unascertained is, therefore, not correct. The liability was contingent, no doubt, to begin with, depending on the contingency of the failure of the assessee to fulfil the terms of the contract. That contingency had happened and the liability, therefore, became a liability in praesenti. The liability also could not be said to be unascertained because the exact amount of the earnest money which was forfeited was known and fixed. Thus, in the instant case, the loss not only accrued but had actually been realised from the assessee in the relevant previous year itself. The assessee thus was entitled to the deduction claimed by it. The fact that the assessee contested his liability and took proceedings for the recovery of the security, in our opinion, did not alter the legal position at all. Once the liability or a loss accrues and is ascertained or is ascertainable, it becomes an allowable deduction at that point of time. It is significant to note that the assessee's attempt to recover the security proved abortive and the forfeiture was confirmed by the Regional Director (Food). Even if the assessee had succeeded in getting a refund of the security in part or in whole, the position would not have changed. Law has: made ample provision for asituation like this under Section 10(2A) so as to prevent an assessee retaining the benefit of a loss which he eventually is found not to have suffered.Section 10(2A) provides :
' 10. (2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year. '
8. However, we must make it clear that we are not laying down the proposition that in every case where a claim is preferred by a third party against an assessee for loss or damage, the liability for such loss or damage accrues. In case where there is a dispute whether the loss or damage occurred, would depend upon the facts of each case. For Instance, if a claim is preferred against an assessee which is wholly unjustified or is frivolous the assessee may not be said to have incurred a liability until the matter is finally decided by a: competent court or authority or until the liability is accepted by the assessee. We have already indicated above that such is not the case here. According to the terms and conditions of sale, the earnest money deposited by the assessee was liable to be forfeited if he did not deposit the balance of the price within the stipulated time. The assessee had committed default of this condition and became clearly liable for forfeiture of the earnest money.
9. In Pope The King Match Factory v. Commissioner of Income-tax : 50ITR495(Mad) a demand for excise duty amounting to Rs. 21,373.70 was served upon the assessee by the Collector of Excise on December 9, 1954. The assessee objected to the demand and was seeking to get the order reversed. However, he debited this amount in his accounts on the last day of his accounting year and claimed this amount as a deductible allowance for computing his income for the year 1955-56 on the ground that he was keeping his accounts on the mercantile basis and a legal liability to pay the amount had accrued in the accounting year 1954-55 when he received the demand notice. The claim was upheld by the Madras High Court with the observation that the endeavour made by the assessee to get out of that liability by preferring appeals to the statutory authorities cannot, in any way, detract from or retard the efficacy of the liability imposed upon him by thecompetent excise authority. This case has been approved by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax : 82ITR363(SC) . That was a case of a deduction under Sections 10(1) and 10(2)(xv) of the Act in respect of sales tax imposed upon the assessee. The sales tax was levied in the relevant accounting year but it was not allowed by the department on the ground that the assessee contested his liability in appeal and, as such, it was only a contingent and unascertained liability. The Supreme Court upheld the assessee's claim with the following observation :
' It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc.'
10. The principle enunciated by the Supreme Court no doubt relates to the allowability of an expenditure but it applies with equal force to the admissibility of a loss.
11. Another decision of the Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income-tax : 37ITR1(SC) may be cited with advantage. In that case, the appellant-company had purchased some land and sold it in plots for building purposes with the undertaking that it would develop the land by laying out roads, drainage and lights. In the relevant accounting year while preparing its profit and loss account, the company took into account the entire price payable by the purchasers, even though only a part of it had been received and claimed to deduct the estimated expenditure which it was liable to incur on the development of the land. The Supreme Court held that the company was entitled to claim deduction on acccount of expenditure because the undertaking to carry out the developments within six months from the date of the sale was unconditional. The liability for the expenditure accrued on the date of the deeds of sale though the liability was to be discharged on future dates, and, further, that, although the liability, even though not ascertained, was capable of ascertainment. Here was a case of a liability under a contract just as the case before us.
12. In Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax : 56ITR1(SC) the Supreme Court does not lay down a contrary proposition even though at first blush it seems to have done so. In that case the Supreme Court was dealing with a loss resulting from embezzlement by an employee of a bank which was under liquidation. The embezzlement was not detected in the year in which it was made. The loss was claimed in a later year when it became known and when the bank failed to recover it from the employee concerned. It was argued on behalf of the department that the loss had accrued in the year in which the embezzlement took place andcould not be allowed in a later year. Repelling this contention the Supreme Court observed :
' The problem as to when loss resulting from misapplication of funds by an agent occurs must be viewed like many other problems arising under the Income-tax Act on a conspectus of all the facts and circumstances in the context of principles of commercial trading. Embezzlement of funds by an agent, like a speculative adventure, does not necessarily result in the loss immediately when the embezzlement takes place or the adventure is commenced. Embezzlement may remain unknown to the principal and the assets embezzled may be restored by the agent or servant. In such a case in a commercial sense no real loss has occurred. Again, it cannot be said that in all cases when the principal obtains knowledge of the embezzlement the loss results. The earning servant may be persuaded or compelled by process of law or otherwise to restore wholly or partially his ill-gotten gains. Therefore, so long as a reasonable chance of obtaining restitution exists loss may not in a commercial sense be said to have resulted.'
13. Now this case can very easily be distinguished. A loss by embezzlement is not suffered as a result of any statutory provision or a contractual liability. The person committing the embezzlement does not deprive the owner of the money embezzled under a colour of title or claim. In such a case clearly the loss cannot be said to arise until the loss becomes known and he has exhausted all means to make good the loss. We have already indicated above that in case of dispute the accrual of liability would depend upon the facts of each case and the nature of the statute or the contract under which the same is suffered.
14. Similarly, the case of Commissioner of Income-tax v. Mathulal Baldeo Prasad : 42ITR517(All) presents no difficulty. That was a case of loss resulting from certain speculative transactions. The assessee-firm in that case disputed its liability and the matter was referred to arbitration as provided under the contract. It was held that the loss resulted on the date when the arbitrators gave the award. On facts, this court held that it was clearly, in the contemplation of the parties that in the first instance their only right would be to get a determination by the arbitrator as to whether or not liability to loss had accrued and it was only after such ascertainment that a liability could be said to have accrued, which previously was merely a claim. There the dispute was referred to arbitration at the instance of both the parties while in the instant case the dispute was raised only by the assessee, the other party having already forfeited the amount. The matter was referred to arbitration not by the parties but by the Supreme Court. We are, therefore, clearly of the opinion that the Tribunal was right in allowing the deduction claimed by the assessee.
15. Turning now to the second question, the only facts which are available on the record are that the assessee is not a dealer in shares in the sense that he does not carry on a regular business of purchase and sale of shares. It appears that the assessee applied for allotment of shares to Rohtas Industries between November 12 and November 18, 1965. It was allotted 52,000 shares of the face value of Rs. 10. The shares were subsequently sold on 23rd August, 1956, through a sister concern named Morolis and Sons, Calcutta, at Rs. 22-9-0 per share resulting in a profit of Rs. 64,909. The question that has to be determined is as to whether this profit is a capital gain or is income arising from business.
16. The question as to whether a particular receipt is of revenue nature or is of capital nature is indeed a difficult question and often turns upon the facts of each case and the impression created on the mind of the court. Now, in the instant case, the regular business of the assessee is not dealing in shares but that by itself is not decisive. Profit arising from even a solitary transaction can sometimes be held to be a revenue income, if the transaction can be said to be an adventure in the nature of trade. Several circumstances are taken into consideration to determine as to whether a transaction is of a capital nature or an adventure in the nature of trade. In the case of purchase and sale of shares the relevant consideration would be whether the shares have been purchased with borrowed capital and they are speculative in nature, and whether they have been purchased in the open market or from the company at the time of its incorporation or expansion of its capital. In the present case all the relevant facts have not been investigated but from the facts on the record the Tribunal has drawn the conclusion that the assessee did not purchase the shares by way of an adventure in the nature of trade but as a capital investment and the profit arising from its resale is a capital gain. In arriving at its conclusion the Tribunal has taken the following circumstances into consideration :
1. That the assessee was not a dealer in shares.
2. That the shares were purchased directly from the company as a result of allotment to one of its sister concerns.
17. The Supreme Court in Patiala Biscuit , v. Commissioner of Income-tax : 82ITR812(SC) held that normally the finding of the Tribunal on the question whether a particular loss is a trading loss or not is essentially a finding of fact and would not be disturbed unless it is shown that the Tribunal had taken into consideration irrelevant circumstances or had failed to take into consideration the relevant circumstances. In that case the assessee-company, whose main activity was manufacturing biscuits, purchased preference shares from another company at the latter's initialexpansion. Both the companies belonged to the Dalmia group. That was the only occasion on which it dealt with shares. The assessee-company incurred a loss as a result of resale of those shares and the Tribunal held that the activity of the asscssee was not a trading activity but was merely investment and, therefore, the loss was not a trading loss. In the opinion of the Supreme Court the finding of the Tribunal was not vitiated in any manner. Same principle has been reiterated by the Supreme Court in Commissioner of Income-tax v. Dalmia Jain & Co. Pvt. Ltd. : 83ITR438(SC) That was also a case of loss arising from the sale of shares. The Supreme Court held that the question whether a particular loss is a trading loss or a capital loss is primarily a question of fact. If the Tribunal has come to the conclusion that the loss incurred by the assessee was a trading loss and it is not the case of the department that in arriving at its decision the Tribunal has taken into consideration any irrelevant material, or failed to take into consideration any relevant material, there is no room for interference by the court. Precisely the same is the position in the instant case. On the facts found by the Tribunal it has come to the conclusion that the purchase and sale of shares by the assessee was not an adventure in the nature of trade, it not being its regular business. The circumstances taken into consideration by the Tribunal cannot be said to be irrelevant nor is it the case of the department that the Tribunal has omitted to take into consideration any relevant circumstance. In these circumstances, we find no justification to interfere with the finding of the Tribunal.
18. We, accordingly, answer both the questions in the affirmative, in favourof the assessee and against the department The assessee is entitled tocosts, which we assess at Rs. 200.