D.K. Kapur, J.
(1) In the assessment year 1958-59, Shri R. C. Jain claimed a loss of Rs. 75,000.00 in business transactions relating to disposal pipes. He was otherwise deriving income as a director of some limited companies and was receiving income as director's salary, fees, dividends and interest. The facts set out in the statement of the case submitted by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, show that Shri R. C. Jain (hereinafter referred to as the assessed) was previously a member of a Hindu Undivided Family doing business in pipes under the name of M/S. P. S. Jain Pipe Co. After the disruption of that firm, the assessed entered into a transaction with M/S. Laxmi Iron Stores, Calcutta, which was offering disposal pipes for sale. The assessed entered into the agreement with this firm, in his individual capacity and by a contract in writing dated 12th July, 1957, agreed to purchase 2 lacs feet of disposal pipes of 4 inch type at the rate of Rs. 2-25 np per foot. He was unable to take delivery of these pipes and the Calcutta firm informed him that because of this failure the goods had been sold on the assessed's account resulting in a loss of Rs. 75,000.00, which was payable by him in accordance with clause 4 of the aforementioned agreement. This amount was partly paid in the accounting year in question and partly in November, 1958 and February, 1960. The loss of Rs. 75,000.00 was claimed as a business loss which was disallowed by the Income Tax Officer as a speculative loss. The interest claimed on the amount borrowed to pay the loss was also disallowed.
(2) On appeal to the Appellate Assistant Commissioner, it was held that there was no business loss as no business in pipes was ever started; the loss was accordingly treated as a capital loss and disallowed.
(3) On appeal to the Tribunal, it was held on a consideration of the agreement that the assessed did not take delivery of the goods and, thereforee, there was only a proposal to start business which never materialised and, hence, there was no allowable loss. The interest claimed was also disallowed as well as the traveling expenses, etc., incurred in connection with the transaction.
(4) On the assessed's application, the following questions of Law were referred to this Court for our opinion :-
'(1) Whether, on the facts and in the circumstances of the case, the loss of Rs. 75,000.00 could be allowed as a revenue deduction during the year under questions (II) Whether, on the facts and in the circumstances of the case, the interest paid on the borrowings by the assessed for the purpose of paying the above loss is a permissible deduction and (III) Whether, on the facts and in the circumstances of the case, the traveling expenses and bank commission in connection with the above loss is a permissible deduction ?'
(5) The orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have been annexed as part of the statement of the case. The agreement as well as the correspondence relating to the transaction between the assessed and M/S. Laxmi Iron Stores, Calcutta have also been annexed as a part of the statement of the case. It is necessary first to refer to the agreement between the assessed and Shri M. L. Bhanja, dated 12th July, 1957, by which the assessed agreed to purchase two lacs feet of disposal pipes. According to this contract, the price of the pipes was fixed at Rs. 2.25 np. per foot. The delivery was to be made within two months in such Installments and on such dates as the vendor might decide commencing on 30th July, 1957. It was also agreed that time was the essence of the contract and in case of failure, the purchaser might annul the whole of the contract and purchase the pipes from any other person and claim any deficiency in price and expenses and damages from the vendor. Similarly, if the purchaser failed to take delivery, the vendor was entitled to annul the whole of the contract and sell the pipes to any other person and claim the deficiency in price and expenses and damages etc. The goods were to be paid for in cash upon delivery. There was also an arbitration clause with a named arbitrator, Shri Rameshwar Lal Agarwalla of Lilooah, Howrah.
(6) On 24th July, 1957, the vendor wrote to assessed to state that 10,000 ft. of pipes were lying ready for delivery. The delivery was not taken but the vendor gave another opportunity to the assessed to lift the goods. The assessed wrote on 6th August, 1957 to say that the goods should be held on his account up to 14th August, 1957 as the market was turning unfavorable. On 17th August, 1957, the vendor wrote to the assessed to say that the goods had not been taken delivery of and a last opportunity was being given to take delivery up to the 31st of the month failing which the goods would be sold on the assessed's account. On 23rd August, 1957, the asses- see wrote that he could not take delivery due to sudden fall in the market. He also said that the vendor should hold the goods for another one month. On 2nd September, 1957, the vendor wrote saying that he could hold the goods for another seven days failing which the goods would be sold in the open market. On 18th September, 1957, the vendor again wrote to state that the goods had been sold in the open market at a loss of Rs. 75,000.00. Later, the assessed went to Calcutta and an award was given by the arbitrator in favor of the vendor to the extent of Rs. 75,000.00. The amount in question was to be paid in three Installments, Rs. 20.000.00 on or before 10th October, 1957, Rs. 40,000.00 on or before 15th November, 1958 and Rs. 15,000.00 on or before 22nd February, 1960. As appears from the statement of the case, all these Installments have been paid by the assessed.
(7) On behalf of the assessed, it is urged that the transaction was an adventure in the nature of trade and that it is quite irrelevant that the assessed did not take delivery of the pipes. It is stressed that the market fell and the goods in question were resold by the vendor under the express terms of the contract. For this purpose, reference is made to clause 4 of the contract which reads as under :-
'4. That in case of failure on the part of the Purchaser to take delivery of the goods within the stipulated period the Vendor may annul the whole of this contract and sell the pipe to any other person or firm and claim the deficiency in price and any expenses and damages incurred by him from the Purchaser.'
(8) Reliance is placed on Regent Estates Ltd. v. Commissioner of Income- tax, West Bengal, (1963) 48, I.T.R. 162, which was the case of a company entering into a forward contract for the purchase of 90,000 dollars without taking delivery of the same and re-selling the same at a later date at a much higher rate of exchange. The company made a profit of Rs. l,27,125.00 and claimed that the amount was exempt from taxation as a casual and non-recurring receipt. It was held : 'in my opinion the most important question is the object or purpose for which the assessed acquired foreign exchange......... the transaction itself in my opinion has the unmistakable character of dealing in foreign exchange with the intention of making profit.' In this case, reference was also made to Commissioners of Inland Revenue V. Fraser, (1942) 24 Tax Cas. 498, in which a woodcutter had bought whisky for re-sale. Although this was his sole dealing in whisky and he had no knowledge of the trade and had not taken delivery of the whisky, it was held that it was an adventure in the nature of trade and hence the profit was taxable as income.
(9) It is stressed on behalf of the assessed that these cases are more or less at a parallel with the assessed's case. Although the assessed had been a member of a firm dealing in pipes, this was his sole transaction in pipes as an individual. The object of this transaction was to make profit and hence even though no delivery was taken the transaction remained a business transaction, and the resultant loss was a business loss just as a profit in similar circumstances would have been a business profit.
(10) Reliance is also placed on Rutledge v. The Commissioner of Inland Revenue, (1928) 14, Tax Cas. 490, The assessed in that case was a money lender who happened to be in Berlin in 1920, where he look the opportunity of purchasing a large quantity of paper very cheap. The paper was re-sold at a substantial profit on the assessed's return to Scotland. It was held that the profit from the transaction was taxable as an adventure in the nature of trade. It was observed thus :-
'AN adventure it certainly was; for the Appellant made himself liable for the purchase of this vast quantity of toilet paper obviously for no other conceivable purpose than that of re-selling it at a profit; and that is just what he did. The element of adventure accordingly entered into the purchase from the first.'
(11) The present case shows that the assessed entered into an agreement to purchase two lacs feet of pipes. Obviously, this large quantity of pipes could not have been purchased except for the purpose of making profit. It so happens that the assessed has made a loss. If he had made a profit, it would certainly be considered an adventure in the nature of trade. It, thereforee, follows that the loss is also a business loss. The factor which seems to have weighed with the Appellate Assistant Commissioner and the Tribunal to hold that it is not a business loss is the fact that the assessed did not take delivery of the pipes. One cannot help noticing that the assessed had to take delivery of the pipes against cash at Calcutta and further if he had taken delivery, there would be no question or dispute that it was a business transaction. In order to avoid the obviously inconvenient and cumbersome procedure of taking delivery in Calcutta and himself selling the pipes, the assessed has permitted the pipes to be resold by the vendor. Does this make the transaction any less a business transaction? In the case of the dollars involved in the case of Regent Estates Ltd., aforementioned, the dollars were not taken delivery of, but, it still remained an adventure in the nature of trade.
(12) The Supreme Court has had opportunity to deal with the principles applicable to the case like the present in G. Venkataswami Naidu and Co. v. Commissioner of Income-Tax 0065/1958 : 35ITR594(SC) . In that case, the assessed firm had bought certain plots of land and sold the same at a substantial profit. The assessed firm were the managing agents of the firm to whom the plots were sold and the Tribunal held that the sole object of making the purchase was to sell the same at a profit to the managed company. The Court had to decide whether the transaction was one of investment or one of trade. It held that the answer to the question whether the transaction was an investment or a purchase and re-sale for trading profit depended on the intention which had led to the initial purchase. There might be transactions where a person made a capital investment and realised the same, thus obtaining a capital accretion. Several factors had to be considered in deciding the nature of the transaction. These factors would include the nature of the goods or property purchased, the dominant purpose of the transaction and the manner in which the article purchased, had been dealt with. Thus, there might be cases in which property was held for the purpose of investment, but, on a good price being offered the property might be sold. On the other hand, there might be cases 'where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade'. Applying this test to the present case, one has got to ask the question: What was the object of assessed in entering into this transaction? Obviously, the disposal pipes were not income yielding in the sence of house property or investments like debentures or shares. The only object of such an transaction could be to either utilise the pipes in some works or constructions or to resell them at a profit. There is no material to show that the assessed required the pipes for any works or constructions, or that such a huge quantity of pipes could be used by the assessed except to resell the same. Thus, all the ingredients necessary for making the transaction an adventure in the nature of trade were present. It would, thereforee, follow that the fact the assessed made a loss in this adventure in the nature of trade would make that loss just as much a business loss as a profit in the same transaction would have resulted in a business profit.
(13) In re Kalyan Mal Badhulal, Cawnpore : 18ITR54(All) bales of cotton were purchased and sold at profit and it was held that the transaction was one in the nature of trade. These authorities would support the assessed's case. It is, however, noteworthy that there is no case in which a loss in an adventure in the nature of trade has been allowed. In fact, there is no case either way. This case is, thereforee, in a sense a novel one. I now turn to the submissions made on behalf of the Revenue.
(14) It is contended that the amount in question is not taxable on the ground that the so-called loss is really damages paid by the assessed in breach of contract. Alternatively, it is urged that it is loss of a capital nature prior to the commencement of the business and, thereforee, not taxable.
(15) In C. Parekh & Co. (India) Ltd., Bombay v. Commissioner of Income-tax, Bombay City : 24ITR24(Bom) , a contract for the purchase of jeeps was entered into by the assessed, but, the seller repudiated the contract after having received an advance against the price of the jeeps. A criminal complaint for cheating was filed by the assessed against the seller and the sum spent in prosecuting the complaint was claimed as a deduction, but was disallowed on the ground that it was a preliminary expense. It was held by the High Court that the amount of Rs. 8.150.00 spent on prosecuting the criminal complaint could not be claimed as a deduction in view of the fact that the jeep business was not started at all. It is difficult to see how this decision is applicable to the present case. There has been no repudiation of the contract by either party in the present case. Due to the fall in the price of the pipes, the assessed did not take delivery of the same, but preferred to suffer the loss. It would be a different matter if the Income-tax authorities had found that the transaction was not a genuine one. Once the transaction is accepted as genuine, it is difficult to see why the business did not start as the transaction was entered into. The liability under the contract arose as soon as it was executed on 12th July, 1957. Thereafter any gain or loss sufferred under the contract would be from an adventure in the nature of trade.
(16) Refernce is also made to Patiala Biscuit . v. Commissioner of Income-tax, Punjab : 82ITR812(SC) , Certain preference shares of a sister firm belonging to the Dalmia Group were bought by the assessed and resold at a loss of Rs. 4,80,985.00. It was held that it was a capital loss and not a loss from a trading activity- It is noticeable that the transaction was one relating to shares which are capable of being purchased both for purposes of investment or for purposes of profit, i.e., for trading purposes. It is not possible to hold that pipes can be bought for purposes of investment except in very special circumstances. A transaction relating to two lacs feet of pipes as in the present case could not be treated as an investment and hence this authority is not at all applicable to the present case.
(17) Reference has also been made to Associated Mining Industries Limited v. Commissioner of Income-tax, West Bengal, Calcutta : 27ITR429(Cal) , which was the case of an assessed claiming deduction in business on account of prosepecting operations in relation to mica mines. It was held that no business had been commenced and, thereforee, there could be no business expense. This case clearly relates to a situation where there had been no trading at all. In view of the fact that in the present case, there has been both a purchase of pipes as well as a sale of the same, it is difficult to hold that there has been no adventure in the nature of trade.
(18) In Commissioner of Income-tax, West Bengal Ii, v. Rajasthan Mines Ltd. : 78ITR45(SC) , the question before the Supreme Court was whether the purchase of land which included the right to receive arrears of rent and royalty followed by its resale at a substantial profit could be said to result in a profit arising from an adventure in the nature of trade. It was held that there was nothing to show that the transaction was an adventure in the nature of trade. It is notable that the transaction related to property which was income deriving, and thus, the tests already referred to had to be applied to the circumstances of the case. The nature of the transaction had to be determined from the intention at the time of making the purchase. This authority can be of no help in determining whether the present transaction is one in the nature of trade. If it is not an adventure in the nature of trade, what was the object of the transaction? It seems that on inescapable conclusion must be drawn that it was an andventure in the nature of trade as no other intention can be deduced from the circumstances of the case.
(19) As regards the contention that the amount in question is not allowable as a business expense because it is damages for breach of contract, it is note-worthy that the damages payable have been incurred due to a fall in the price of pipes. The damages payable in such a case are the difference between the rate at which the pipes were bought and the rate at which they were resold in the market. If the assessed had taken delivery of the pipes himself and resold the same himself, he would have suffered the same loss in the market. The fact that the assessed did not take delivery but preferred the the transaction to end in a re-sale by his vendor does not make it any the less a business loss. It is, thereforee, difficult to find that the loss is not allowable on account of the fact that the goods were not taken delivery of. In the circumstances, the answer to the first question has to be in the affirmative in favor of the assessed and against the Department.
(20) It is urged by counsel for the Revenue that the loss should be spread over the three years in which it was paid, but, there seems to be no justification for this. The liability to pay the loss arose at the time it was incurred and the manner of its re-payment does not at all affect either the loss or the year in which it was incurred. The loss took place as soon as the liability to pay the same arose under contract. It is a different matter that Installments were allowed by the arbitrator. In view of the fact that the answer to the first question is in the affirmative in favor of the assessed, it follows that the second question whether the interest on borrowings for paying the loss is a permissible deduction has also to be in favor of the assessed and hence, the second question has to be answered in favor of the asssesee. The question of traveling expenses and Bank commission which forms the subject-matter of the third question has also to be decided in favor of the assessed under Section 10(2)(xv) of the Income-tax Act, 1922. The result is that all the three questions are answered in favor of the assessed and against the Department. The assessed will be entitled to costs. Counsel's fee Rs. 250.00.