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Commissioner of Income-tax Vs. Patnaik and Co. P. Ltd. - Court Judgment

LegalCrystal Citation
Overruled ByPatnaik and Co. Ltd. Vs. Commissioner of Income Tax, Orissa
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberS.J.C. No. 62 of 1972
Judge
Reported in[1979]117ITR388(Orissa)
ActsIncome Tax Act, 1961 - Sections 10(2), 14, 66, 256(1) and 258; British Income Tax Act
AppellantCommissioner of Income-tax
RespondentPatnaik and Co. P. Ltd.
Cases ReferredAlien v. Farquhar
Excerpt:
- motor vehicles act, 1988 [c.a. no. 59/1988]section 173(1) proviso; [d. biswas, amitava roy & i.a.ansari, jj] appeal without statutory deposit but within limitation/or extended period of limitation maintainability - held, if the provision of a statute speaks of entertainment of appeal, it denotes that the appeal cannot be admitted to consideration unless other requirements are complied with. the provision of sub-section (1) of section 173 permits filing of an appeal against an award within 90 days with a rider in the first proviso that such appeal filed cannot be entertained unless the statutory deposit is made. the period of limitation is applicable only to the filing of the appeal and not to the deposit to be made. it, therefore, appears that an appeal filed under section 173 cannot.....panda, j.1. this is a reference under section 256(1) of the income-tax act of 1961, made by the income-tax appellate tribunal (hereinafter referred to as 'the act' and 'tribunal' respectively) at the instance of the commissioner of income-tax, orissa, bhubaneshwar, for answer by this court to the following question of law :'whether, on the facts and circumstances of the case, the loss of rs. 53,650 sustained by the assessee on the sale of government loan is a capital loss or revenue loss ?'2. the assessee, m/s. patnaik and co. pvt. ltd., deals in automobiles. it holds an authorised agency for fiat cars, jeeps, trucks, etc. it also sells spare motor parts. for the assessment year 1963-64, corresponding to the financial year ending march 31, 1963, the assessee claimed a loss of rs. 53,650.....
Judgment:
Panda, J.

1. This is a reference under Section 256(1) of the Income-tax Act of 1961, made by the Income-tax Appellate Tribunal (hereinafter referred to as 'the Act' and 'Tribunal' respectively) at the instance of the Commissioner of Income-tax, Orissa, Bhubaneshwar, for answer by this court to the following question of law :

'Whether, on the facts and circumstances of the case, the loss of Rs. 53,650 sustained by the assessee on the sale of Government loan is a capital loss or revenue loss ?'

2. The assessee, M/s. Patnaik and Co. Pvt. Ltd., deals in automobiles. It holds an authorised agency for Fiat cars, jeeps, trucks, etc. It also sells spare motor parts. For the assessment year 1963-64, corresponding to the financial year ending March 31, 1963, the assessee claimed a loss of Rs. 53,650 sustained by it in the disposal of the Orissa Government Floated Loan 1962, purchased by it in the following background as narrated in the statement of facts submitted to this court, certain aspects of which, at least the underlined portions, are challenged before us as mere inferences without any supporting materials on record :

'.....4(i) The Government of Orissa floated loan on 4th September, 1961, and persuaded the assessee to subscribe Rs. 50,00,000 (fifty lakhs) to such loan bearing interest of 4 1/2 per cent.

(ii) The Government of Orissa while persuading the assessee to subscribe to the said loan gave an inkling of (sic) the assessee being accorded preferential treatment in placing orders for motor vehicles required for the various Government departments and also by granting an advance of 50 per cent, of the value of such orders placed with the assessee.

(iii) The Government of Orissa pursuant to such concession on the assessee subscribing to the loan did, in fact, advance a sum of Rs. 18,37,062 and in addition a circular was issued to the various Government departments by the State Government to make purchases of the vehicles from the assessee-company.

(iv) The assessee-company in order to gain preference for the sale of motor vehicles to Government departments agreed to the subscription of the loan and it was also known to the assessee before subscription of the 'loan that the resultant effect would be loss while disposing of the subscribed loan. The Appellate Tribunal also considered that by the grant of Government favour the incidence of interest on the bank loan was considerably reduced and that fact also weighed with the assessee while subscribing to the loan. The sales to Government departments shot up also. The Government also made arrangement for an advance of Rs. 5,38,822 on September 2, 1961, and September 3, 1961, for payment of security deposit required by the Government for the purpose of the loan.

(v) A resolution dated July 24, 1961, was passed by the board of directors acknowledging the good gesture shown by the Government if the loan were subscribed by the assessee-company. It was also considered in that meeting of the board of directors that in the interests of the company's business the loan should be subscribed. The Appellate Tribunal considered that the subscription to the loan was motivated by business prudence. The ITO disallowed the loss arising out of the sale of Government loan as capital loss, which was sustained, on appeal, by the AAC. The Appellate Tribunal, while agreeing with the assessee's contention that the subscription to the Government loan was conducive to the business and thus subservient to the existing business, held having regard to the evidence placed before it that the loss arose in the course of business activities of the company and, therefore, directed the deletion of the disallowance of the loss.

5. The Judicial Member, by a separate concurring order, agreed with the Accountant Member and examined in detail the motive in subscribing to the Government loan.'

3. There are five annexures to the statement of facts, the first three, i.e., 'A', 'B' and 'C' being the orders of the ITO, AAC and the consolidated order dated July 24, 1971, of the Appellate Tribunal, respectively, Annexure 'D' is a resolution of the board of directors of the assessee dated July 24, 1961, and annexure 'E' is a letter dated August 30, 1961, from the Financial Adviser-cum-Deputy Secretary to the Government of Orissa to all Chief Engineers/Additional Chief Engineers/Transport Controller.

4. Mr. Misra, learned counsel for the revenue, assailed the order of the Tribunal both legally and factually. On law his contentions were :

(a) (i) The business of the assessee is to purchase and sell cars, jeeps, etc., but not to purchase and sell Government securities. That being so, any investment made by the assessee in the purchase of Government loans is foreign to its business. Consequently, loss, if any, sustained in sale of such loans is not trading loss but capital loss.

(ii) The assessee had no such trading transaction in purchase and sale of Government bonds in the past, and so it was ex facie a new venture unconnected with its ordinary business--sale of automobile or spare parts.

(iii) The investment of Rs. 50,00,000 (fifty lakhs) made on Government loan bond was not the basis of any contract--express or implied, written or unwritten, for securing the bulk orders of the Government of Orissa for supply of trucks, jeeps, etc.

(iv) The said investment of Rs. 50,00,000 (fifty lakhs) by the assessee was not a dead capital or a deposit to obtain State Government orders, but it was yielding interest at 4 1/2 per cent. per annum and, therefore, it was at least an investment of a capital asset of an enduring nature.

(v) The assessee merely speculated that by acquiring this new venture it would better the prospects of its existing agency in car and jeeps, etc., which can hardly be said to be business prudence.

(vi) Investment in Government loan as done in this case by the assessee might have been at best prompted by the off-chance of 'boosting up its business' but not solely and exclusively for that object, for, one is not an integral part of the other nor is there any usual relationship between the two; and

(vii) There is no proof that the company has, within its aims and objects, dealing in purchase and sale of loan bonds or securities.

(b) On facts his contention was that the learned Tribunal has committed a grave error in travelling off the record and arriving at findings on pure surmise and conjecture.

5. In developing the factual aspect Mr. Misra argued that the alleged transaction being between a company on the one hand and the Govt. on the other, there cannot be any contract as such unless it be under Article 299 of the Constitution duly executed and signed as per provisions of law. But there is no such contract. Secondly, there is even no letter from either side offering any proposal or suggestion and accepted by the other, with any consideration so as to constitute a contract in the eye of law. Thirdly, there is no material at all to justify the finding that the assessee was 'persuaded by the Government at any stage' to subscribe to the said loan. Fourthly, the alleged 'inkling' said to have been given by the Government to the assessee is purely imaginary without any basis whatsoever.

6. His further contention was that the learned Tribunal while disposing of the second appeal and altering the findings of the forums below has merely referred to the contention of the parties and without any proper discussion of points emerging therefrom, either on the basis of authorities or on the basis of materials on record, had jumped to the conclusion saying :

'In our view to attract Government departments and to have their orders for supply of vehicles in competition with other dealers, the assessee-company imperatively agreed to make the investment in the loan and thus the loss sustained by the assessee-company partook the character of business loss. This view of ours is fortified by the following note extracted from a letter dated August 30, 1961, from the Financial Adviser-cum-Deputy Secretary to the Government of Orissa to all Chief Engineers/Additional Chief Engineers/Transport Controllers'. (i.e., annexure E)

7. According to Mr. Misra, the main judgment of the Accountant Member is lacking in discussion as to how the investment made by the assessee-company in the purchase of Government loan was ancillary and conducive to the business and, therefore, the loss sustained by it was a business loss. The independent judgment of the learned Judicial Member also, according to him, has not improved the position in any way since it is only a bald dogmatic assertion, in the stereotyped legal jargon that--

'the purchase of securities was motivated by interests and dictated by grounds of commercial expediency.'

8. The gravamen of Mr. Misra's submission on the factual aspect of the, case appears to be that the learned Tribunal has not endeavoured to make a deeper probe into the matter, as it ought to, when the assessee alleged contract between itself--a private party and Government. On the contrary, it assumed facts contended on behalf of the assessee, as if it was a domestic or family affair without document or without proof.

9. Mr. Misra's contention on the legal aspect of the matter was that the learned Tribunal has not at all turned towards the authoritative judicial pronouncements on the point as to what should be deemed to be a capital investment and, therefore, loss if any is a capital loss not attributable to revenue. In course of his argument Mr. Misra referred to several citations which would be discussed at the proper place.

10. The contention of Mr. R. Choudhury, learned counsel for the assessee, was two-fold :

11. Over the citations relied on by Mr. Misra he conceded that they are the authorities on the point on which he would also like to rely. According to him, if the principles laid down by the various authorities are applied they will exactly fit into the instant case and the finding that the loss sustained was a revenue loss would be inevitable. The second point, he urged, was that it was not open for the revenue to challenge the finding of fact arrived at by the Tribunal, namely, 'the loan bonds were purchased for the purpose of augmenting the existing business of the assessee'. Questions of fact, he submitted, are not to be disturbed by the High Court unless they are perverse on the face of it, or which a reasonable man with legal knowledge would never arrive at. According to Mr. Choudhury, such, is not the case here and both the Members of the Tribunal have independently held that the venture of the assessee in going in for purchase of the loan bonds was motivated by the sole idea of boosting up the business of the assessee-company. That finding of fact is final and has not been referred to and rightly so. What has been referred to is if the loss sustained by the assessee by the sale of Government loan is a capital loss or a revenue loss No question has been referred for the opinion of this court as to whether the venture of going in for purchase of Government loans was in course of the ordinary business transaction of the assessee-company or it was altogether a new venture and thus loss, if any, in that venture is not a loss in the revenue side. According to Mr. Choudhury, the guideline acknowledged by different authorities is what is the investment for Is it for a new venture a plunge into new waters unconnected with the existing business In other words is it for 'acquiring a new business'? If so it is a capital expenditure and so loss or gain--if any---will be attributable to capital. On the contrary, if the investment is for carrying through or augmenting an existing or running business, then it is a gain or loss on the revenue side.

12. Since both the parties rely on the same set of authorities it is unnecessary to deal with each one of them. We would, therefore, deal with a few of them to see if any guideline has been laid down which can be of any universal application. It is only in that light that we would now proceed to discuss some of the case law cited at the Bar.

13. The first two authorities relied on are both decisions of the Privy Council, which still hold the field as good law. The first is Tata Hydro-Electric Agencies Ltd. v. CIT . That was a case where under the purchase of a business undertaking one of the terms of purchase was to pay a certain sum annually to a third party irrespective of whether the business yields any profits or not and it was held (see Headnote in ) :

'...it cannot be said that the annual payments are made solely for the purpose of earning the profits of the business. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole.

No deduction, therefore, can be claimed in respect of income-tax for the payment of such amount. '

14. This is a case where there was a deed with a term that, irrespective of profit or loss, certain sum was annually to be paid to a third party. The contract coul^l be enforceable in a court of law. Further, the purchase of business was for augmenting the prospects of the existing business. Yet it was held that such payment was not expenditure incurred solely for the purpose of earning the profits of the business and hence disallowed.

15. In this case, their Lordships while recognising 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 have, with approval, referred to a passage of Lord President Clyde dealing with corresponding words in the British Income-tax Act, thus (p. 209 of 5 ITR):

' 'What is 'money wholly and exclusively laid out for the purpose of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of the company's working expenses ; is it expenditure laid out as part of the process of profit earning ?' '

16. The ratio of this case evidently goes against the assessee.

17. The next case is of CIT v. Motiram Nandram [1940] 8 ITR 132. In this case, the assessee who was carrying on business as a cloth merchant and money-lender entered into an agreement with an oil company and became its organising agent for certain territory. In consideration of his appointment as organising agent the assessee deposited certain amount with the company and it was provided that he should recoup himself to that extent from the deposits of the selling agents. Subsequently, the company became insolvent and a major portion of the deposit made by the assessee was lost to him (p. 138):

'The question in such a case as the present must be 'what is the object of the expenditure?' and it must be answered from the standpoint of the assessees at the time they made it--that is, when they were embarking upon the business of organizing agents for the company. The deposit was clearly exacted by the company as a condition of the assessees being given an agency which they hoped to manage profitably. Their Lordships think that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature and that the deposit cannot, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business; They think that the view taken by the income-tax authorities is correct.'

18. In this case, though the deposit was made under compulsion to obtain an agency, yet their Lordships of the Privy Council held that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature and that the deposit cannot, upon a true view of the terms of the agreement, be regarded as an expenditure made in the course of carrying on an existing agency.

19. This case lays stress on two aspects, namely, whether it is an existing agency and whether an investment was made for securing an enduring benefit of a capital nature. Further, Sir George Rankin, who delivered the judgment of the Privy Council, observed that the deposit of Rs. 50(sic) may be looked upon as a temporary investment because it yielded (sic) while it remained with the oil company. That feature is very much present in the instant case and hence does not support the assessee.

20. The next case relied on by both the parties is the case of Shapurji Broacha Mills Ltd. v. CIT : [1970]78ITR68(SC) . In that case, the Tribunal held that the loss suffered by the sale of securities was of a capital nature. But their Lordships held whether a particular loss is a trading loss or loss on the capital side depends on the facts of each case. The question, however, is not one of pure fact but a mixed question of fact and law ; and the decided cases indicate how the matter is to be viewed in the context of the facts. The problem must be approached in such cases in the light of the intention of the assessee, having regard to the legal requirements which are associated with the concept of trade or business.

21. Here, their Lordships made it clear that no guideline could be set out to determine whether the loss is a trading loss or capital loss and lay down that the problem has to be approached in the light of the intention of the assessee, keeping an eye on the legal requirements which are associated with the concept of trade or business.

22. The next case relied on is Ashok Marketing Ltd. v. CIT : [1961]42ITR193(Patna) . In that case, the assessee-company was dealing in commodities like sugar and cement. Later, it dealt with purchase and sale of securities. The question arose whether the loss sustained in this new venture could be set off against other income. It was held that thq sale and purchase of the Government securities were not performed by the assessee in the normal course qf its business and so the claim was disallowed. On a reference, it was held (headnote):

'(i) that even assuming that the transactions were intra vires the company it did not necessarily follow that they were performed in the course of the business of the company. Every act which was intra vires the company was not necessarily done in the course of the business of the company. In deciding whether the loss was allowable, one had to see whether the transactions of sale and purchase of Government securities had any pertinent connection with the normal business of the company and whether they were so related or bound up with the business of the company that they could be considered to have been performed in the normal course of business.

(ii) that, on the facts, there was material to justify the finding of the Tribunal that the sale and purchase of the securities were not connected with (sic) normal business of the company and that, therefore, the assessee was (sic)entitled to have the loss in the transactions set off against its other (sic) (sic)ratio of this case also hardly supports the assessee.

23. In the case of Catholic Bank of India Ltd. v. CIT : [1967]64ITR514(Ker) , it was held that loss incurred by a bank in obtaining repayment of amounts covered by Treasury Savings Certificates before the expiry of the period for which the certificates were issued is loss of a capital nature and not allowable.

24. This also goes against the assessee.

25. In the case of New Prasad Mills (P.) Ltd. v. CIT : [1972]85ITR480(Bom) , the case of the assessee was that it purchased the shares of Jupiter for boosting up their prices and their selling them at a profit and not for acquiring control either of that company or of East and West and that was finally accepted. In that case, the revenue relied on the following circumstances, namely, (1) the business of the assessee is to manufacture and sell textiles and not to deal in shares ; (2) the assessee had not done any trading transactions in the past; (3) the purchase price paid by the assessee in 1947 was far above the market price ; (4) the assessee unwillingly accepted the shares of East and West which a trader will normally not do; and (5) that after the acquisition of the first block of shares, three directors were appointed on the board of Jupiter who were intimately associated with the affairs of the assessee. Their Lordships held that these circumstances are relevant and must be taken into account for determining whether the loss claimed by the assessee is a trading loss ; but that they cannot be considered in isolation, and that the circumstances were incapable of supporting the inference that the assessee had acquired a capital asset. In the facts and circumstances of that case, the ultimate finding went in favour of the assessee.

26. On behalf of the assessee great reliance was placed on two case-law both reported in 35 ITR. In the first case of Narandas Muthuradas & Co. v. CIT : [1959]35ITR461(Bom) , the question was whether the assessee was acquiring a new business or merely augmenting an existing business and its purpose was earning more profits. In that case, Chagla C.J. concluded, following the Privy Council, thus (p. 466):

'Their Lordships [See CIT v. Motiram Nandram [1940] 8 ITR 132] also say that a deposit must be considered in relation to the particular business, and when we look upon this 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 lor 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 answeed from the standpoint 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.'

27. In the second case of G. Venkataswami Naidu and Co. v. CIT : [1959]35ITR594(SC) several case-law were discussed, and at page 615 the following passage appears:

'.....the assessee contended that the transactions in question were not in the nature of trade and the profits arising therefrom cannot be taxed. This contention was negatived by the General Commissioners whereupon the assessee appealed. Lord President Clyde described the problem raised by the assessee as one of the most familiar problems under Case I of Schedule D and observed that 'a single plunge may be enough provided it is shown to the satisfaction of the court that the plunge is made in the waters of trade; but the sale of a piece of property--if that is all that is involved in the plunge--may easily fall short of anything in the nature of trade. Transactions of sale are characteristic of trade, but they are not necessarily distinctive of it; much depends on the circumstances'.....But finally the finding of the Commissioners was confirmed and the profit was held liable to tax.'

28. On behalf of the assessee, in support of its contention that this court should not go into the questions of fact, the Appellate Tribunal being the final court of facts, the case of Rameshwar Prasad Bagla v. CIT : [1973]87ITR421(SC) was relied on. Much emphasis was laid on a passage appearing at page 426, which runs thus :

'The question with which the High Court was concerned was whether there was material before the Tribunal for arriving at the finding that the shares in question had been purchased by the assessee with a view to acquire the managing agency and control of the India United Mills Ltd. Perusal of the judgment of the High Court shows that the High Court did not discuss this aspect of the matter. On the contrary, the High Court proceeded straightaway to deal with the matter as if it had itself to arrive at an independent finding on the point as to whether the shares in question had been purchased by the assessee with a view to acquire the managing agency and control of the company. This approach of the High Court was wholly erroneous and not warranted by law. It is for the Tribunal to decide questions of fact and the High Court in a reference under Section 66 of the Act cannot go behind the Tribunal's findings of fact. The High Court can only lay down the law applicable to the facts found by the Tribunal. The High Court and the Supreme Court, in an appeal against the judgment of the High Court given in a reference under Section 66 of the Act, are not constituted courts of appeal against the order of the Tribunal. These courts only exercise advisory jurisdiction in such references.'

29. Mr. Misra for the revenue also relies on the further observations of the Supreme Court made in that context thus (p. 426) :

'The High Court in a reference under Section 66 of the Act can, however, go into the question as to whether the conclusion of the Tribunal on a question of fact is based upon relevant evidence. If the High Court finds that there is no such evidence to support the finding of fact of the Tribunal, this circumstance would give rise to a question of law and can be agitated in a reference. It is also well established that when a Tribunal acts on material which is irrelevant to the enquiry or considers material which is partly relevant and partly irrelevant or bases its decision partly on conjectures, surmises and suspicions and partly on evidence, then in such a situation an issue of law arises and the finding of the Tribunal can be interfered with. The finding may also be interfered with if it be found to be so unreasonable that no person acting judicially and properly instructed as to the relevant law could have arrived at it.'

30. To meet the objections raised on behalf of the assessee to disturb findings of fact we could do nothing better than refer to the famous case of CIT v. S. P. Jain : [1973]87ITR370(SC) . Therein it has been held thus (headnote):

'(i) Though the questions referred to the High Court did not challenge the validity of the findings given by the Tribunal, as the Tribunal had failed to take into account the relevant material on record in arriving at its finding and had further acted on inadmissible evidence and misread the evidence and based its conclusion on conjectures and surmises, the court could ignore the findings of the Tribunal and re-examine the issues arising for decision on the basis of the material on record.

(ii) That, on the facts, the only reasonable inference that could be drawn from the circumstances was that the Rana was a mere name-lender and that the income-tax authorities were fully justified in drawing an inference that the Rana was a name-lender for the assessee.

The High Court and the Supreme Court have always the jurisdiction to interfere with the findings of the Appellate Tribunal if it appears that either (1) the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law or, (2) it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it or, (3) it has acted on material partly relevant and partly irrelevant or, (4) where the Tribunal drawn upon its own imagination and imports facts and circumstances not apparent from the record or, (5) bases its conclusions on mere conjectures or surmises or, (6) where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.'

31. From an analysis of the citations referred to above, it would be clearthat no guideline has been indicated from which it has to be judged whether a particular loss should be a capital loss or loss on revenue side. TheirLordships advisedly do not lay down any such proposition because it is incapable of any such definition. Sometimes advantage of an enduringnature, though not everlasting, has been taken to be the index ; in someother cases, it has been held that the motive and the intention of the assesseefor the investment has to be looked into ; in some cases, it is held that theguideline is if it is for acquiring a new business or some profit from existing business; and at other places, it is said that the term of the contractand aims and objects in case of companies have to be looked into. Thus, itis clear that there is no inflexible guiding rule and there could not be any.In the result each case has to be decided basing on the facts and circumstances of that case. The case of Taj Mahal Hotel v. CIT : [1967]66ITR303(AP) appears to us to be a case where this principle has been recognisedand that is a case approaching the case now at hand. In that case, theassessee who was carrying on a hotel business took fresh lease of a hotelbuilding for 10 years on a rent of Rs. 1,300 per month. Under the leasedeed, the assessee was given liberty by the lessor to make any alterations ornew constructions. The assessee in doing so incurred an expenditure to thetune of Rs. 60,000. The department disallowed the claim on the groundthat it was a capital expenditure. On appeal, it was held that on the factsthe improvements effected by the assessee were of enduring advantage,though not everlasting, for the assessee's business during the period of thelease; the expenditure was neither 'rent' nor 'premium' and thedepartment was right in treating it as capital expenditure.

'In tax cases, the courts cannot ignore the legal position represented by the form of the transaction and regard 'the substance of the matter'.' (66 ITR 303--headnote)

32. Several case-law in this case were reviewed and in that illuminating judgment, Bhagwati J. approved the principle laid down by Mr. Justice Mahajan on behalf of a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re and summarised the law as follows in : [1955]27ITR34(SC) :

'In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a ;, revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.'

33. There is a reference to this case in Sri Rama Talkies, v. CIT : [1966]59ITR63(AP) , where following the decision in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) , it was held that 'the amount expended in the construction of the building or in the extension of the same or in making substantial improvements therein would, according to the test enunciated in that case, be a capital expenditure, and that if any expenditure is made for getting an advantage of enduring benefit to the business, that would also be an expenditure of capital nature, and that in the case before them substantial improvements were made in the building and land appurtenant thereto including the compound wall with the sole aim and object of getting enduring benefit for the business.'

34. It may be noted that this is a case where improvements were to the theatre which was constructed on a land taken on lease belonging to another.

35. In a recent decision of the Supreme Court in Gotan Lime Syndicate v. CIT : [1966]59ITR718(SC) , Sikri J., who spoke for the court, quoted the observations of Hidayatullah J. in Abdul Kayoom v. CIT : [1962]44ITR689(SC) as follows (p. 724 of 59 ITR);

'..... none of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases...by matching the colour of one case against the colour of another.'

36. The learned judge held that there was no necessity to review all the cases cited, as the Supreme Court has formulated certain tests in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) and the cases were reviewed again in Pingle Industries Ltd. v. CIT : [1960]40ITR67(SC) and Abdul Kayoom v. CIT : [1962]44ITR689(SC) .

37. His Lordship Sikri J. held that it is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, and that, as observed by Viscount Cave in British Insulatedand Helsby Cables Ltd. v. Atherton [1925] 10 TC 155, an expenditure made for bringing into existence an asset or an advantage for the enduring benefit of a trade (in the absence of special circumstances leading to an opposite conclusion) is a very good reason for treating such an expenditure as properly attributable not to revenue but to capital and finally held that a sum of Rs. 96,000 spent by the assessee was in the nature of capital expenditure and not revenue expenditure.

38. Bearing in mind the principles enunciated in the above cases we shall examine the facts in the instant case. From the above discussions and citations it would be clear that each case has to be judged on its own merits. So keeping the legal principles in view, we would now advert to the facts of the present case.

39. At the outset we may refer to the objection raised on behalf of the assessee to go into the facts. As indicated above it was contended that the Tribunal as a final court of fact has held that 'the investment made by the assessee-company in the purchase of Government loan was ancillary and conducive to the business and, therefore, the loss sustained by it was a business loss', and the same is binding on this court and should not be disturbed. True, the Tribunal is ordinarily the final court of fact but, in appropriate cases, in the absence of any taboo, this court is competent to scrutinise the same. In the instant case, we are of the view that the findings of facts are so vulnerable that we cannot afford to accept them as they are.

40. The admitted facts are that the assessee had purchased Government loan some time towards last part of July or first part of August (date not known), 1961, which it sold some time in the assessment year (date not known) and sustained a loss of Rs. 53,650. There are unfortunately some mis-statements of fact as would be pointed out hereafter, both in the judgment of the Tribunal as well as in the statements of facts extracted earlier. So we propose to quote below all the evidence available in the case, i.e., annexures 'D' and 'E', besides excerpts from the Khanna Commission Report. In point of time, first comes annexure 'D', which runs thus:

'Annexure 'D' (24-7-61)

Abstract of the proceeding of the meeting of the Board of Directors of Patnaik and Company Private Ltd., Cantonment Rd., Cuttack, held on 24th July, 1961.

The Chairman stated that the Government of Orissa in the FinanceDepartment had approached him to subscribe to the Orissa State Government loan to be floated in the coming month. He also stated that it was inthe interest of the company to do so as good orders can be expected by this gesture.After some discussion the following resolution was adopted. Resolved thatSri G. C. Patnaik, the Managing Director, is authorised to apply for theOrissa State Loan to the extent of Rs. 50 lakhs.'

41. The next in point of time is :

'Annexure 'E' (30-8-61)

Appendix 'A'

Government of Orissa Works Department No. 25797/7177A,

Bhubaneswar the 30th August, 1961.

Sri S. S. Misra, O.F.S.,

Dy. Secretary to Govt.

To

All Chief Engineers/Addl. Chief Engineers/Transport Controller.

Sub: Advance payment to M/s. Patnaik and Co. (P.) Ltd., for supply of Jeep, Trucks, Chassis and Pick-up Vans against orders of the Chief Engineer/Transport Controller.

Sir,

I am directed to say that after careful consideration Government have been pleased to decide that for each order placed with M/s. Patnaik and Co. (P.) Ltd. for supply of Jeeps, Trucks, Chassis, Pick-up Vans to the Public Works Department/Transport Controller, advance payment up to 50 per cent. (fifty per cent.) of the value of goods covered by the order shall be made to that company on the following terms and conditions.

(i) The Company shall execute an Agreement and furnish a Security Bond as in the enclosed form before the advance payment is made in each case.

Stamp duty payable by the executant, i.e., company, on the agreement is Rupee 1/4 and on Security Bond is Rupees 1 1/4.

(ii) The total amount of advance should on no account exceed the Security offered by the company by way of personal Security Bond to be executed by the Mg. Director and the Chairman of the Company. The Chief Engineer concerned/Transport Controller will watch the position from time to time.

(iii) The Executive Engineer to be nominated by the Chief Engineer/ Transport Controller will function as the Central Agency for payment of advance to the company in respect of all indents placed by other divisions also after due execution of the agreement mentioned above. All applications for advances should be addressed to the Executive Engineer nominated by the Chief Engineer/Transport Controller and the Executive Engineer/Transport Controller will make all payments and raise necessary debits against the divisions concerned only after full payment in respect of individual supplies are made.

2. The Executive Engineer/Transport Controller while placing orders with M/s. Patnaik and Co. will also furnish copies of the orders to the Chief Engineer, Government. On receipt of these copies, the Executive Engineer/Transport Controller will make payment of the advance in the manner indicated in Para 1 above. The balance 50% of payment in respect of each supply will become payable by the Executive Engineer/Transport Controller only after the supply is received by him in full and their acknowledgments in support of the receipt are produced before the Executive Engineer/ Transport Controller.

3. The acknowledgment should clearly indicate the quantity actually received so that the payment due can be calculated.

This para, is subject to the proviso to para. 4 in the agreement form.

4. M/s. Patnaik and Company (Private) Limited and the Executive Engineer may be informed accordingly. Copies may also be sent to all concerned.

Yours faithfully,

(Sd.) .....

Financial Adviser-cum-

Dy. Secy. to Government.

Memo No. 25798. D/- 30-8-61.

Copy forwarded to the Finance Department for information and communication to Accountant-General/Dy. Accountant-General, Orissa, Puri/ All District Magistrates for information. Memo No. 25799 dated 30-8-61:

Copy forwarded to Managing Director, Patnaik and Co. (P.) Ltd.

Copy forwarded to Managing Director, Patnaik and Co. (P.) Ltd. (sic).

FORM NO.

* * * *'

42. The only other material before the Tribunal to support its finding was the Khanna Commission report to which we may now advert.

43. The Commission had been set up to probe into certain alleged administrative improprieties committed by fifteen named Ministers including Sri Biju Patnaik who was the Chief Minister from 23-6-1961 to 1-10-1963. Allegation No. 59 was confined to Sarvashri Patnaik, Tripathy, Mardaraj and Mallik. In substance, the allegation was that:

'.....huge sums were advanced to Shri Patnaik and Company without verification of its assets and favouritism in realisation of advance.....A meeting was held on August 30, 1961, within two months after the assumption of office by Shri Biju Patnaik in the room of the Additional Development Commissioner and it was decided that some vehicles be purchased immediately for which sanction order should be issued that very day. It was also decided in that meeting that if the parties with whom orders were to be placed would require any advance for expeditious execution of the orders, such advance up to 50 per cent. of the amount of order be paid... On November 10, 1961, Sri Biju Patnaik made a note that as Patnaik & Company had purchased State Loan Bonds worth Rs. 50 lakhs they should receive preferential treatment from Government. It was also mentioned in that note that as Utkal Distributors and Patnaik & Company had each Purchased State Loan Bonds worth Rs. 50 lakhs such parties must necessarily receive Government patronage.....'

44. Sri Patnaik in that inquiry filed an affidavit which in the report appears thus:

'Shri Patnaik in the course of his affidavit has denied the correctness of the allegation. According to Sri Patnaik, no special favour was shown to the company in question. The company purchased State Loan Bonds worth Rs. 50 lakhs in 1961 and at that time it was decided by the Government that such parties, who assisted the State by purchasing State Loan Bonds of huge amounts and incurred loss thereby should be helped without adversely affecting the interest of the State. This was done to encourage purchase of State Loan Bonds. The allegation that the State Government was put to loss by sanctioning advance to Patnaik & Company has been described as wrong and baseless. As regards the mode of recovery it is stated that there was nothing wrong with that. This mode before being approved by the Chief Minister was recommended by the Finance Department.'

45. Sri Gopal Ch. Patnaik, Managing Director, i.e., the assessee, also filedan affidavit in respect of this allegation which appears in the reportthus:

'According to Sri G. C. Patnaik he was persuaded by Sri Biju Patnaik in the last week of August, 1961, to purchase 4-1/4 per cent. of Orissa Government Loan Bonds, 1972, to the extent of Rs. 50 lakhs by borrowing from the Banking Institution. Shri G. C. Patnaik was assured that in the event of his helping the State Government in purchase of State Loan Bonds the Government would give preferential treatment by purchasing 70 per cent. of its motor vehicle requirement. Further assurance was given that regular payment of 50 per cent, advance would be given for each order placed with Patnaik and company... The State Government did not honour the commitment with regard to purchase of 70 per cent, of the total requirements of vehicles for Orissa State Government Transport Organisation and Orissa Transport Co. Ltd. and the actual purchase orders placed withPatnaik and Company came to about 26.31 per cent. ......SriG.C. Pat-naik had to pay higher rate of interest on the loan taken from the bank than is payable on Orissa Government Loan Bonds. In the case filed by the State Electricity Board it is stated a compromise decree has already been obtained. The business of Patnaik and Company is further stated to have been completely paralysed as a result of the Government action.'

46. The finding of the Commissioner is:

' In respect of this allegation I find that a meeting, attended by the Additional Development Commissioner and Chief Engineers, Irrigation, Roads and Buildings and Express Highway, was held in the room of the Additional Development Commissioner on'August 30, 1961, in connection with the purchase of ten jeeps and two trucks for Chief Engineer, Irrigation, four jeeps and six diesel trucks for Chief Engineer, Roads and Buildings, and two jeeps and four one-ton pick-up vans for Express Highway.....

As would appear from the above, a decision was taken by the Additional Development Commissioner and the Chief Engineers that 4 x 50 per cent, advance of the value or orders should be paid for expeditious supply of trucks and other vehicles. The Deputy Secretary, Finance, recommended the acceptance of the proposal subject to the modification that for supplies made by Patnaik and Company the recovery should be at the rate of 10 per cent. for two months and thereafter at the rate of 50 to 75 per cent. till March, 1962. Sri Patnaik accepted the recommendation. His order dated November 10, 1961, shows that though he further reduced the rate of recovery to 5 per cent. he also indicated that the advance from Patnaik and Company was to be cleared off by March 31, 1962. This fact was also made explicit in the agreement dated January 5, 1962, which was executed by Patnaik and Company and the State Government. It was mentioned in that agreement that the entire amount of advance was to be recovered by the end of March, 1962.....Sri Patnaik appears to have taken that view of the matter in exercise of his powers, and whether one agrees with him or not it is difficult to hold that his decision was unreasonable or mala fide especially in view of the fact that the target date for the entire recovery from Patnaik & Company, according to the order of Sri Patnaik, was March 31, 1962. It may be mentioned in this context that the present Government of Orissa has also adopted the policy of making advance payment up to 80 per cent. of the value against the orders for investment in Government loan bonds vide letter dated August 31, 1967, of Superintendent, Orissa Government Press.

Apart from the above, it is not shown that Sri Patnaik passed any order in the matter. As regards the payment of 90 per cent. advance, the entire thing appears to have been done at the level of the Secretaries and no order is shown to have been passed by any of the respondents named in the allegation.'

47. Thereafter, the matter had been dealt by Mr. Tripathy, his successor, who on September 15, 1966, passed thefollowing orders :

'I asked the Secratary, Works & Transport Department, to stop giving advances for raising Government loan forthwith and take immediate steps to recover the advances. The advance should not be interest-free nor it should be a guarantee to enable him to get more and more contracts for supplies from Government for a future period and that too for long periods. This will be more or less a kind of monopoly to some selected suppliers. Send this to Finance Department soon.'

48. Thus, finally, the Commission held, on a discussion of the matters placed before it and the affidavits and the counter-affidavits, that the charge of impropriety contained in this allegation had not been proved.

49. It is evident that the Commission had been set up to enquire into the propriety of certain actions of the then Chief Minister, Sri Biju Patnaik, amongst others. In that Commission, the assessee had filed an affidavit obviously against Sri Biju Patnaik supporting his own stand 'of persuasion' and subsequent betrayal or more appropriately 'dishonouring the commitment'. Sri Biju Patnaik in his affidavit has not owned the allegations of persuasion or commitment of any sort as alleged by the assessee. Therefore, this affidavit of the assessee before the Commission was a self-serving document to suit his purpose, which can hardly be taken at its face value. Besides the apprehension that it might have been motivated to curry favour from the succeeding hostile Government cannot be ruled out. It is in this background, and basing on armexures 'D' and 'E' only that the matter had to be appraised, which we now proceed to do.

50. In that context, we would first refer to the statement of facts. It bristles with surmises masquerading as facts. We propose to point out some to justify our interference in the matter. It has been extracted earlier and portions underlined therein and numbered in the margin, would indicate some incorrect presentation of facts. The first in sequence is 'Government floated loan and persuaded the assessee on 4th of September, 1961'. There is not an iota of evidence anywhere, either oral or documentary, to support this alleged persuasion. Besides it is very vague and there is nothing as to when and who persuaded the assessee on behalf of the Government. Again, further down, it is said :

'.....while persuading the assessee to subscribe to the said loan gave an inkling of (sic) the assessee being accorded preferential treatment.....'

51. As indicated above there is no material to support the same unless it be the uncorroborated statement or the version or the contention of the assessee. Further, it is said 'pursuant to such concession on the assessee subscribing to the loan the Government advanced money'. There is nothing on record to substantiate the same also. At best it is just an inference but not an admitted fact. Also it is stated (as at (iv) in the margin) that' to gain preference for the sale of motor vehicles to Government departments agreed to the subscription of the loan ' which again goes unsupported. Thereafter, it is said 'a resolution dated 24-7-1961 was passed by the board of directors acknowledging the good gesture shown by the Government'. This is just the reverse of what is contained in annexure 'D'. There is nothing in it (annexure 'D') for the directors to acknowledge 'the good gesture shown by the Government'; rather the good gesture emanated from the side of the assessee. We wonder how such an interpretation was put by the Tribunal to annexure ' D '. This is at the root of the wrong approach and that is very much reflected in the impugned judgment (see para. 18) and so we think it unnecessary to point out in greater detail the anomalies in the same. For instance, however, therein also, without basis it is said 'the Government of Orissa persuaded the assessee-company to subscribe rupees fifty lakhs on 30th of August, 1961'; and 'if it subscribed for Government loan preferential treatment would be shown to it'. Further down, it is said 'in pursuance of such capitulation' with the Government of Orissa. This is another figment of imagination for, as is clear, there is no capitulation'either oral or documentary from Government side. Again, the sequence of events, as to when the company first resolved 'in its prudence to make investment' has been altered which does not reflect the true state of affairs, for, the resolution dated July 24, 1961 (annexure 'D'), is the origin though otherwise represented in the statement of facts. Finally, it is said, 'the assessee-corapany imperatively agreed to make the investment in the loan'. We do not find anything on record where any direction was given or pressure put on the assessee to make any such investment. We are constrained to observe all these just to show how tainted, if not faulty, is the impugned order as well as the statement of fact submitted to the court. We were at one stage thinking of remanding the case for submission of a correct statement of facts as contemplated under Section 258 of the Act. But having heard the parties in full and having all the materials on record before us, we thought it prudent not to do so and thus proceed to dispose of the matter instead of postponing the same.

52. Annexure 'D', as quoted above, was first in point of time wherein on July 24, 1961, for the first time, the chairman of the company, i.e., Sri G. C. Patnaik informed other members about the Government floating a loan. In that meeting, the managing director, G. C. Patnaik, said 'it was in the interest of the company to do so as good orders can be expected by the gesture'. It needs no ingenuity to find the meaning that this gesture would be from the side of the assessee and not from the side of the Government, as has been mistakenly held by the Tribunal. In the operative portion of it, the managing director was only authorised to apply for the Orissa State Loan to the extent of rupees fifty lakhs. It speaks of nothing more than this. Rather it may be construed, in the absence of any materials to the contrary, that such authorisation was imperatively necessary as it was outside the scope of the business of the assessee-company.

53. Annexure 'E' is a letter from the Financial Adviser-cum-Deputy Secretary to Government to all Chief Engineers/Additional Chief Engineers/ Transport Controller in the matter of advance payment to the assessee-company for supply of jeeps, etc. Nothing could be spelt out from this letter that there was any persuasion from the side of the Government to the assessee for purchasing Government loan to the tune of rupees fifty lakhs nor any commitment to place bulk of the Government orders with it. In short, it is a formal order as is done in any other case and cannot be interpreted in the way the Tribunal has obviously done. The rest of the evidence is the Kharma Commission Report which has been already referred to. Thus, factually, we are unable to find any material to support the finding of the Tribunal that there was any persuasion or pressure from the side of the Government to purchase the loan nor was there any commitment from Government side that most of its orders will be placed with the assessee.

54. The learned ITO while dealing with this matter had stated thus:

Add loss on sale of Orissa Government Securities being capital loss to be set off against capital gains. Rs. 53,650.

55. The learned Assistant Commissioner held in this context thus:

'Though business considerations might ultimately have resulted in purchase of Orissa Government loan such loan was held as capital asset by the company. Any profit or loss on sale or transfer or relinquishment of such assets was capital by nature and could not be considered as an expenditure incurred wholly and necessarily for the purpose of business or a loss sustained.in the case of carrying on of the trade. In the above consideration of the facts of the case and the points of law at issue, the finding clearly emerges that the loss on sale of the capital asset was capital in nature and could not be allowed as deduction. The ITO's action is, therefore, upheld.'

56. The learned Tribunal has not referred to any authorities on the point, but on the facts has decided the issue in favour of the assessee. Obviously, the business of the assessee is to deal with automobiles and not to go in for purchase or sale of Government loans. At least, the memorandum of association has not been filed to show that. As it appears, the assessee thought fit that if it purchased Government loan, then it could claim a preferential treatment at the hands of Government. In fact also, on that consideration, the assessee as well as another, i.e., Utkal Automobiles, were given bulk orders of Government. The investment of the assessee on such a venture is not in the course of its ordinary business but utterly unconnected with it and independent of it though the purpose might be to gain certain advantage in its normal trade. Any investment made for the purpose of boosting up one's business will not make it necessarily a revenue expenditure. It would all depend on the facts and circumstances of each case. If an investment is of a capital nature which gives an enduring benefit to the assessee, even if it be for the furtherance of its business, but not wholly and exclusively for the same, hardly can it be characterised as revenue expenditure. Doubtless, the purpose of investment has to be taken into consideration but that is not the sole criterion. It is only a factor for consideration, a link in the chain. Purpose alone cannot alter the innate character of an investment. For instance, light entertainments in the nature of a cup of coffee, tea or a smoke to the customers or even some expenditure on entertainment on occasions like Diwali or founders' day can be well attributable to revenue, for, here, the expenditure is made solely and exclusively for the purpose of the business and it leaves nothing tangible. It is a part and parcel of the business traditions and etiquette and almost a limb of it, though irretrievably lost. But if a guest house is put up to accommodate the customers, even though the purpose of the same be to augment the business by attracting customers, the very nature of the investment being of a capital nature which has an enduring benefit of substantial character, that guest house cannot change its character because of the ultimate aim of the assessee. It need hardly be said that the aim and object of all businessmen or such concerns in making an investment or incurring an expenditure is invariably for gain and never with the object of sustaining loss. But in that process sometimes they gain and sometimes they lose, as more often than not they ate taken in ordinary parlance mistakenly as synonymous, should be borne in mind. Expenditure and disbursement mean something or other which a trader pays out for certain consideration. In it there is an element of volition, inasmuch as he makes the expenditure consciously with the expectation of some return--tangible or intangible. If one purchases a new machinery or pays certain allowance to its employees, it is an expenditure incurred which he has to pay from his pocket. But a loss is something different. It comes upon him in spite of his best efforts and wishes to avoid it. It is something inevitable, it visits though unwelcomed. As has been rightly said by Finlay J. in Alien v. Farquhar-son Brothers & Co. [1932] 17 TC 59:

'That is a thing which, so to speak, comes upon him ab extra.'

57. In the instant case, the initial laying out is neither an expenditure, far less a loss. It is an investment and of a capital nature, having no remote connection with its existing business, for the investment is not in the running business. The resulting loss is, therefore, the consequence of the laying out in the new venture and referable to it only.

58. In a venture, much less in an alien new venture, if a businessman loses, that cannot be invariably attributable to revenue on the ground of motive alone if of course the initial investment was of a capital nature conferring an enduring benefit on him. For the sake of perspicuity let us take an example of a lawyer who purchases law journals to carry on his business. This expenditure on journals is solely and exclusively for carrying on his business as a lawyer. Suppose for the purpose of rising in his profession and with the sole object of prospering in his business he purchases a car. That investment over the car being of a capital expenditure of an enduring nature, though calculated to help in his business, yet not being solely and exclusively for the same, cannot be taken to be a revenue expenditure. Similarly, if he builds up a house for accommodating his clients, it is not an expenditure on the revenue side but on the capital side. So also in the case of a doctor the expenditure incurred for journals or his instruments are revenue expenses but not a house where he starts his clinic with provision of beds for patients. The concept of gain or loss on the capital side or revenue side, though prima facie confusing, much of the difficulty would be resolved, if it is viewed from the above standpoint,

'Capital assets' has been defined in the Act as meaning property of any kind held by an assessee, whether or not connected with his business or profession, but does not include--.....

(iv) Certain Bonds.

59. Under section 14 of the Act, heads of income have been enumerated (A) Salary, (B) Interest on securities, (?) Income from house property, (D) Profits and gains of business or profession, (E) Capital gains and (F) Income from other sources. From this, it would be clear that (B) Interest on securities and (D) Profits and gains of business or profession are two independent heads of income distinct from the head (E) Capital gains. Purpose or motive for augmenting the business in the circumscribed circumstances indicated above are of revenue nature. Accordingly, light entertainments, annual repairs, advertisement, contingent expenditure, etc., are allowable deductions on the revenue side but by any stretch of imagination they cannot be extended to cover investments of capital in the nature of interest-bearing securities as has been in the instant case.

60. In the case of Travancore Titanium Products Ltd. v. CIT : [1966]60ITR277(SC) , their Lordships of the Supreme Court have said (Headnote):

'In determining whether an amount expended by the assessee is deductible under Section 10(2)(xv) of the Indian Income-tax Act, the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of the business.'

61. In the case of Indian Steel and Wire Products Ltd. v. CIT : [1968]69ITR379(Cal) , their Lordships held thus (Headnote):

'Contribution of Rs. 1,50,000 to the Indian National Congress was not an expenditure incurred solely or exclusively for earning the profits within the meaning of Section 10(2)(xv) of the Income-tax Act, and was not an allowable deduction. Assuming that there was some connection between this kind of expenditure and the earning of profits, the connection was too remote.'

62. In that case, the assessee's positive and categorical case was that it made the contribution as (381-82):

'The party in power has to offer the patronage of priorities, licences under the various laws and at various levels and stages. The contributions to such a party evince first the knowledge and belief of the contributor that the contribution is worth its while and, secondly, that the contributor finds it prospective and conducive to its interest to make the contribution.

Whatever be the ethics of such conduct, even a smile of a Minister or a nod or a frown of an executive authority amenable to a Minister either of a State or of the Centre amounts to a very great help for businessmen or industrialists in getting priorities in resolving labour disputes, in getting licences and so on. This contribution was inspired by nothing else than motives of commercial expediency and for promotion of the company's business interests.'

63. Several case-law on the point were discussed and their Lordships in that illumininating judgment posed the question like this (p. 394):

'Now, is placating of a political party in power commercial expediency? Does it facilitate business either directly or indirectly? In the fertile field of democracy, it is well-known, political parties germinate and grow quickly. Different political parties have different political philosophies, different political programmes and different political passions...Since power of money is well-known to commercial men and since they know best to exploit that power, large scale contributions to political party funds may at times be considered to be commercially expedient. Since commercial men are best experienced in commercial expediency, we are prepared to proceed on the basis that some contributions to some political funds sometimes pay and prove to be expedient.'

64. But although this is so, we are not prepared to proceed on the assumption that all contributions to all political funds must always be presumed to be commercially expedient. There may be some contributions made not in commercial interest or expediency but in order to save a commercial company from the consequences of unlawful acts, say, for example, to hush up a company law investigation or a proceeding for breach of Foreign Exchange Regulations. Such contributions may also be made to satisfy a political fad or a political prejudice of the directorate of a company. Each case must, therefore, be decided on its own facts.' Finally, their Lordships answered the questions in the following manner (p. 397):

'Thus, the reasons given are not enough to show that the contribution to the Congress political fund was justified by the commercial expediency of the assessee-company or tended indirectly to facilitate the assessee's business. It may be that some such contributions at times facilitate business but then there is no presumption that all such contributions do so. There is nothing to show that the present contribution did so.'

65. In another case their Lordships of the Allahabad High Court in J.K. Cotton Spg. and Wvg. Mills Co. Ltd. v. CIT : [1966]62ITR813(All) held in the same way. In that case, the assessee-company had donated a sum of Rs. 56,000 to the Congress Parliamentary Board for its expenditure in the general elections and claimed it as a business expenditure on the ground that, with the changing pattern of the economic structure of society, it was in the interest of the company to keep the ruling party in power.

66. It was held that, as there was no direct nexus between the business of the company and the contribution, the amount of Rs. 56,000 paid to the Congress Parliamentary Board was not allowable as business expenditure.

67. From the above discussions and citations we find that there is no evidence in the instant case to hold that the assessee was persuaded by the Government to make investment on Government loans, nor was the assessee coerced to do so. No promise had been held out that it would be given the bulk of the orders of Government for purchase of vehicles if it invested Rs. 50 lakhs on Orissa Government Loans, 1972, but not otherwise. We do not think, the assessee could have appropriately shown this laying out on its business on the revenue side in its return, if the purchase of the loan bonds would have been in one assessment year but the sale and consequent loss in any succeeding year. The investment was of a capital nature, earning interest and therefore, loss, if any, is attributable to capital and not to revenue. Even if the purpose of the assessee in going in for the loan was inspired by business expediency, the present investment being of a capital nature having an enduring benefit, that investment cannot take colour or change its identity from the fond hope, expectation or speculation of the assessee. The findings of the Tribunal are based on extraneous matters not on record or on a misreading of whatever evidence is on record, and, lastly, it is contrary to the law as to what is capital loss and what is not.

68. In the result, therefore, we would answer the reference that the loss sustained by the assessee is attributable to capital and not to revenue and thus against the assessee. The Commissioner of Income-tax is entitled to costs. Hearing fee Rs. 250.

69. Before concluding the judgment, we may observe that in making a correct statement of facts under Section 256(1) the initial responsibility that rests with the Tribunal, it cannot absolve itself of, merely because the contesting parties do not suggest any amendment to the one proposed by it. That burden never shifts, nor can it be transferred, but has only to be discharged faithfully and conscientiously--even though unaided.

B.K. Patra, J.

70. I agree.


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