1. These two appeals, one filed by Standard Batteries Ltd. and the other by the ITO and the cross-objection filed by the assessee in departmental appeal, all arise out of the common order of the Commissioner (Appeals) for the assessment year 1977-78. They are, therefore, dealt with together.
2. The assessee is a company engaged in manufacture and production of various types of batteries and minor's cap-lamp. The only ground in the assessee's appeal relates to the disallowance of Rs. 1,00,000 claimed as bad debt in relation to the amount advanced to Northern India Batteries Ltd. and written off during the year. The ITO was of the view that it could not be allowed as a deduction either as bad debt or as loss inasmuch as the advance, in his opinion, was meant to ward off competition and in the nature of capital payment. It was the assessee's claim that the payment was meant to be an advance for supply of batteries in future. The assessee had relied upon a letter placing an order for 350 batteries of various types valuing at Rs. 1,27,000, for which this advance of Rs. 1 lakh was paid by cheque. The company's receipt, dated 17-6-1974, also evidenced the payment itself as well as the nature of the payment. However, the ITO was not satisfied that it was simply an advance for purchase of batteries. In his opinion, it was something more. The assessee had already a technical know-how agreement with Northern India Batteries Ltd. This agreement was dated 29-12-1973, while the advance was paid on 29-3-1974. The assessee was to get a lump sum payment of Rs. 5,00,000, in five instalments, besides royalty at 5 per cent. It was also to get 50 per cent of the production of the said company for its own distribution. He, therefore, inferred from this arrangement that the assessee was interested as a promoter of the said company. He had also seen the correspondence between the assessee and Northern India Batteries Ltd. of Ghaziabad. This correspondence also revealed that the assessee was interested in finding finance for the same. It further revealed that the assessee was probably aware that the money given as advance was not used for purchase of raw materials, but for payment towards acquisition of land for the proposed industrial unit at Ghaziabad by Northern India Batteries Ltd. In the context of all these facts, he was not impressed by the claim that this amount of Rs. 1 lakh was payment simpliciter towards supply of batteries as was contended. The assessee, according to him, had obtained an advantage of enduring nature. He also referred to some decisions of the High Courts and the Supreme Court for the conclusions that the payment was a capital one. It is under these circumstances, he disallowed the claim.
The first appellate authority concurred with him practically for the same reasons. The pointed out that the claim could have never been made as a bad debt, inasmuch as this amount was not reckoned as part of the assessee's profits at any time. Since the payment, according to him, was in capital field, the loss would also have the same character. It is in this view he confirmed the disallowance. The assessee is in second appeal.
3. The learned Counsel for the assessee took us over the agreement, the correspondence, the order, the receipt and other facts relating to the transaction. He fairly conceded that the amount could not have been claimed as bad debt. However, he stoutly opposed the inference that the payment was for any purpose other than the one as evidenced by the contemporary documents relating thereto. The letter placing the order and the receipt clearly showed that the entire transaction related to purchase of batteries. The fact that the assessee might be interested in the Ghaziabad concern as a future supplier has nothing to do with this advance. The assessee, in the collaboration agreement, had undertaken to supply paid-up capital to the extent of 10 per cent. It had not done so. There was no other step undertaken towards the execution of the collaboration agreement. Since the Ghaziabad company had only an industrial licence and could not succeed in establishing the concern, the collaboration agreement itself died a natural death.
He claimed that it is well established that the loss of advance towards purchase of goods can well be treated as a revenue loss. He also urged that even if the departmental version of facts is accepted, the assessee's claim was still allowable. The assessee not only manufactures batteries by itself, but also gets it done through others.
It has an arrangement with Power-Pack at Haryana for manufacture of motor-cycle batteries. There is also a similar arrangement with M/s Kasturi for manufacture of batteries at Hyderabad. The assessee attempted a non-exclusive licensing arrangement for manufacture of batteries on a very similar basis at Ghaziabad. Dividend, if any, on promised share capital, technical fees and royalty would have been assessable as revenue receipts. There was, therefore, no reason why the loss should not be considered to be on the same account. The assessee's interest in finding finance for Ghaziabad concern, as evidenced from the correspondence, does not mean that the assessee was a partner with the Ghaziabad firm. It was interested in ensuring supplies of batteries at cheaper price for distribution in Delhi market. He also pointed out to the decision of the Supreme Court in the case of Empire Jute Co.
Ltd. v. CIT  124 ITR 1, wherein it was held that even any enduring advantage in the revenue filed would not constitute a right of capital nature. If such an enduring advantage is in the revenue filed, the expenditure, therefore, has to be allowed as revenue deduction. He also sought to distinguish the decisions cited on behalf of the revenue. He claimed that in any view of the matter, the claim was admissible.
4. The learned departmental representative, on the other hand, read out the orders of the authorities below and relied upon them. He stressed the fact that there was no infrastructural facilities available to the company at the time, when orders were placed against it. Even the lands were not purchased. This, according to him, clearly established the fact that the payment was towards promotion of the venture at Ghaziabad He claimed that the assessee was either interested in the venture itself or had acquired a new source of supply. In either event, the assessee's contribution was towards participation in capital field and that on such factual inference, there could not be any other view than the one adopted by the authorities.
5. We have carefully considered the records as well as the arguments.
The order placed by the assessee on Northern India Batteries Ltd., Ghaziabad, and the receipt do indicate that the payment was towards purchase of batteries. If it were merely loss of advance paid for purchase of goods, there cannot be any doubt that the loss is one which is incidental to business and, therefore, to be allowed as a business deduction. But at the same time, we are not prepared to consider this fact in isolation with other facts. The assessee had an agreement for supply of technical know-how in the manufacture of batteries. This agreement expected capital participation. It also provided for supply of machinery and technical know-how. The assessee was to receive a technical fee amount of Rs. 5 lakhs to be paid in five instalments. It was to receive a further royalty at 5 per cent of the net value of sales, besides the right to 50 per cent of the supplies at specified rates to be determined. This agreement is in the form of a standard contract agreement for such supplies of technical know-how. The correspondence also shows that the assessee could not have been unaware of the fact that the advance of Rs. 1 lakh paid by it was utilized for purchase of land. This was certainly knowledge available to it even on 9-4-1974, while the cheque itself must have reached them only a little prior to that date, as it was dated 29-3-1974. The receipt itself is dated 17-6-1974. We, therefore, share the view of the authorities that the amount is not one which was paid merely for purchase of batteries, though it was probably meant to be adjusted against such future supplies. Since no attempt had been made by the authorities to show that either the order or the receipt are entirely fabricated or otherwise unreliable, we have to consider them as part of the other records like correspondence. Reading together the entire matter, we are of the view that there was a close relationship between the assessee-company and the Ghaziabad company. The assessee was no doubt interested in its promotion as a potential collaborator and supplier of goods. It is on these facts that we have to come to a finding as regards the admissibility or otherwise of the claim for deduction as a revenue loss.
6. Though the ITO had tried to say that the assessee was trying to ward-off competition by this payment, there is absolutely no material to suggest that there was any competition from this company either at the time of payment or even later. If the assessee was itself promoting the company, it hardly makes sense that the assessee built up a competitor to buy it off. However, it appears that what the ITO had in mind was that the assessee had some sort of joint venture with the Ghaziabad company and that the loss in respect of such joint venture would, therefore, be a capital loss. He also appears to have had the view that the assessee was purchasing a new source of supply and, therefore, was having an enduring advantage. Though he has not clearly spelt out the basis of his legal inference, we will examine whether the claim of the assessee could be disallowed on either of these possible grounds.
7. Though the assessee was interested in the success of the Ghaziabad company which had an industrial licence, it is clear that it only wanted batteries from them. By supply of technical know-how, there was a scope for earning technical fees and royalty. By capital participation, it could have earned dividends. But technical fees, royalty or dividend could have been taxable as income in the hands of the assessee. Besides, the collaboration agreement itself had never been implemented. It was an agreement which did not take off. If the assessee were interested in the Ghaziabad company, it is not as a co-adventurer. Capital participation implies risk. No doubt, the assessee and Ghaziabad company were interested in the success of the venture. But they were not interested in the same way. The assessee would not have got any further benefit out of the success of the Ghaziabad venture except supplies of batteries, which it was already manufacturing not only at Bombay but also at Hyderabad and Haryana. The joint venture implies sharing of the profits of the venture. To give an example, while the assessee is interested in having batteries at a cheaper price, it stands to reason that the Ghaziabad company is interested in getting the best price. Therefore, though they are both interested in the transaction, their interests are not identical but complementary, if not competitive. If there had been any right on the part of the assessee to profits of the Ghaziabad venture, we could have certainly accepted the department's case that the amount of Rs. 1 lakh was capital contribution. It is clear that the order and the receipt, whenever made, were intended to make it clear that this amount was not towards the capital promised. The assessee was not prepared to put the money even towards share capital in view of the greater risk involved.
It made it clear that it was towards supply of batteries, so that it can have right over the goods as soon as they are produced. Even if the amount is treated as a simple loan, it is difficult to imagine that the amount was intended for any other purpose than for obtaining batteries, inasmuch as, it is the only way that the amount could be adjusted. The collaboration agreement itself contemplated supplies of 50 per cent of batteries expected to be manufactured. Hence, the relationship between the assessee and the Ghaziabad company is one as between the purchaser and seller of batteries or as between a supplier and recipient of technical know-how. In either event, there is no element of joint venture as we understand it.
8. As for the possible argument that the assessee was acquiring a new source of supply, we find that the factory belonging to another could hardly be considered as the assessee's own source of supply. The case law holding that the payment for a source of supply is of a capital nature, has developed in respect of 'mine' cases. It has been held that receipts and payments in connection with the acquiring or disposing of leaseholds of mines and minerals is on capital account. It is because a mine, though a wasting asset, is a source of raw materials and, therefore, a capital asset. What is acquired is a right to mine, mineral and not the mineral itself. In the assessee's case, the factory with infrastructure thereto will continue to belong to the Ghaziabad company. The assessee will have no right whatsoever except to its technical fees, royalties, dividend and the batteries manufactured by it at a price. Under these circumstances, it is not possible to say that the assessee has acquired, for itself, a source. The licence is a non-exclusive one. As for the price at which the assessee was to take the batteries, it was to be fixed mutually at some future date. The licence itself was not to take effect if the assessee had not started production within 12 months from the date of licence, which was on 29-12-1973. The company had not even succeeded in getting the loan and much less infrastructural facilities during that period. The agreement, therefore, proved abortive on 29-12-1974. The assessee, as pointed out earlier, was already having its supplies. It was having similar arrangement in two other places. All that the assessee was ensuring was probably larger supplies of batteries. The transaction, which the assessee had, was in its own line. The advantage, even if it is enduring, is in the revenue field. The Supreme Court in the case of Empire Jute Co. Ltd. (supra) clearly pointed out that the existence of enduring advantage does not automatically mean that there has been a capital disbursement. The advantage was merely one of facility in the assessee's trading operations in a more efficient and profitable manner. The assessee v/as not to get any fixed or other capital. It had no right over the assets of the Ghaziabad company by the payment of Rs. 1 lakh. It could either get batteries, against which this amount could be adjusted or get it back if the supplies were not received. Even if this amount is towards not only the order placed but for future supplies as inferred by the authorities, it cannot be said that the benefit is such as to create a capital asset either in a tangible or intangible manner. It is under these circumstances, we find it difficult to accept that merely because of the close relationship and the assessee's interest in promoting the Ghaziabad company and making its venture a success, the contribution could be taken to be a capital outlay. We have to point out that the authorities have not suggested that the assessee had any interest other than the proclaimed ones. None of the directors in the assessee-company are stated to be interested in the Ghaziabad venture. No other collateral interests other than business ones have been suggested. Even if we were to take the view that the entire venture is one of the assessee or that the assessee was having vital interest in the Ghaziabad matter, we cannot possibly say that it is a capital outlay as long as it is for production of batteries specially in the light of the fact that there are two other units with similar interest. The enduring advantage, if any, which might have accrued, is in the revenue field. It is in this view, we find that though we have substantially accepted the departmental inference on facts, we are unable to say that the amount will have to be disallowed as a capital payment. If the outlay was business one for acquiring batteries which are the assessee's stock-in-trade, the loss thereof will have to be allowed as a business loss. It is clear that the assessee had no prospect of recovery during the accounting year. In fact, there is no suggestion that it was recoverable. Though it could not be allowed as a bad debt, it has to be allowed as a business loss under Section 28 of the Income-tax Act, 1961 ('the Act)'. In the result, the appeal succeeds. Relief due is Rs. 1 lakh.
9. The first ground in the departmental appeal relates to the question of treatment to be accorded to work-in-progress in the computation of capital base for purposes of relief under Section 80J of the Act. This issue has been decided in taxpayer's favour by the Bombay High Court in the case of CIT v. Alcock Ashdown & Co. Ltd.  119 ITR 164. The first appellate authority has followed this decision in allowing this claim. This was the view taken by this Tribunal in the assessee's own case for the assessment year 1976-77 in IT Appeal No. 1928 (Bom.) of 1980, dated 15-5-1981. His order has to be, accordingly, upheld. The appeal on this point fails.
10. The second ground in the departmental appeal relates to claim of the assessee for deduction of interest paid towards arrears of income-tax and sales tax. These were obviously disallowed by the ITO on the ground that they were in the nature of penalties. As for the claim of interest of Rs. 1,17,968 being interest as sales tax arrears, we have no doubt that the first appellate authority was right in deleting this addition as he found that the payment was in the nature of interest and that the assessee had the use of the funds in view of the delayed payment. Hence, payment of interest towards arrears of sales tax was a business interest. Non-payment of interest would have jeopardised its business as sales tax authorities would have used coercive measures to recover the same. Hence, in any view of the matter, the payment had to be made. The authorities have not satisfied us either with reference to the sales tax law or otherwise that the payment was in the nature of penalty. This was the view taken by this Tribunal for the assessment years 1974-75 and 1975-76 in IT Appeal Nos.
317 and 1130 (Bom.) of 1979, dated 23-1-1980, and IT Appeal Nos. 765 and 1287 (Bom.) of 1979, dated 8-2-1980. In these circumstances, we have to uphold the part of the order relating to the allowance of interest on sales tax to the extent of Rs. 1,17,968. However, the first appellate authority also allowed interest of Rs. 5,269 for late payment of income-tax. Here, we are of the view that the considerations are different. Though the payment is not in the nature of penalty, it cannot be considered as an allowable deduction under Section 37 of the Act, because income-tax itself is not an allowable deduction. Sales tax and the interest thereon are trading liabilities. They have to be allowed before income is determined. It is not so with income-tax. The character of interest on income-tax cannot be different from income-tax itself. It is for this reason that we have to allow the departmental appeal in respect of the payment of Rs. 5,269. The addition made by the ITO to this extent stands restored.
11. The third ground in the departmental appeal relates to the question of treatment to be accorded to the salaries and perquisites paid to the managing director as to whether the allowance of the same should be re-valued under Section 40(c) or Section 40A(5) of the Act. This issue has been decided by a Special Bench of this Tribunal in the case of Geoffrey Manners & Co. Ltd. v. ITO  3 SOT 40 (Bom.) in tax-payer's favour, holding that Section 40(c) should apply and not Section 40A(5). Since this is the view taken by the first appellate authority, the departmental appeal on this point should fail.
12. The last ground in the departmental appeal relates to the question of treatment to be given to the payment of commission of Rs. 60,000 to the managing director. The question is whether it can be taken as part of remuneration or the perquisites, so as to be affected by the ceiling under Section 40(c) [or according to the revenue, Section 40A(5)].
While holding this amount will be hit, if at all, by Section 40(c), we must also hold that we cannot accept the assessee's claim that commission cannot be treated as remuneration/perquisites. The Commissioner (Appeals) had followed a decision of one of the Benches of this Tribunal in deciding this issue in tax-payer's favour. However, a Special Bench of this Tribunal has taken a different view in the revenue's favour in the case of Mettur Chemical & Industrial Corpn.
Ltd. v. ITO  1 SOT 265 (Mad.). This issue, therefore, has to be decided in the revenue's favour and the departmental appeal has to be allowed on this point. The ITO would re-work the disallowance with reference to Section 40(e) by considering Rs. 60,000 as part of the assessee's remuneration including perquisites.
13. In the result, the departmental appeal is partly allowed in the manner indicated in the preceding paragraphs.
14. The first ground in the assessee's cross-objection relates to the claim for addition of gratuity liability to the extent of Rs. 1,85,563 allegedly ascertained with reference to the Payment of Gratuity Act, 1972. The first appellate authority found that this being a provision is hit by Section 40A(7). The assessee claims that it could be allowed under Section 36 or 37 of the Act. This Tribunal has been consistently holding that in view of the special provision relating to gratuity liability, which required that certain conditions should be satisfied before allowance of this amount on provision basis, the same cannot be allowed unless those conditions are satisfied. The first appellate authority has referred to a decision of this Tribunal for taking a view adverse to the assessee. We uphold his order on this point.
15. The next ground in the cross-objection relates to the amount of Rs. 1 lakh, which was advanced to Northern India Batteries Ltd. and which became irrecoverable during the year. This issue was dealt with in the assessee's appeal itself in the assessee's favour in paragraph 8 supra.
Since the assessee's appeal has been allowed, the assessee's cross-objection has become ineffective and will, therefore, be treated as infructuous. We will, accordingly, treat this ground as having been dismissed.
16. The last ground relates to the assessee's objection against levy of interest of Rs. 46,541 under Section 215 of the Act. We find that the issue has been remitted by the Commissioner (Appeals) to the ITO for examining the assessee's objection. The learned Counsel for the assessee expressed an apprehension that the ITO may understand the order of the Commissioner (Appeals) as one which directs mere recalculation of interest. The first appellate authority has stated in the operative part of his order that 'He will recalculate interest if the said section is applicable'. The earlier part of the order also asks him to examine the claim of the assessee that no interest should have been levied. We, therefore, find that there is no cause for any apprehension on the part of the assessee. The entire matter has been restored to the ITO. Even if there be any further doubt on this matter, this order should make it clear. We are, therefore, of the view that there could not be any appeal on this point. The order of the first appellate authority makes it clear that the issue has been remitted to the ITO for a fresh consideration in accordance with law.
17. In the result, the assessee's appeal is allowed, the departmental appeal is partly allowed and the cross-objection is treated as dismissed.