S.K. Mal Lodha, J.
1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as 'the Tribunal'), has referred to the following question for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the difference of Rs. 20,967 between the guaranteed amount and the actual purchase of country liquor was allowable as a trading loss in the computation of the assessee's total income for the assessment year 1968-69? '
2. We may succinctly state the facts. The non-petitioner is a Hindu undivided family. The source of income of the assessee, amongst others, is from purchase and sale of country liquor. It did not maintain accounts for its business. It declared purchases of 7,556 litres of country liquor of the value of Rs. 56,791. The assessee worked out its profit by adopting a rate of Rs. 1.50 per gallon, which came to Rs. 2,550. Against the amount of the net profit, the assessee claimed a sum of Rs. 23,608 as a trading loss on account of the deficiency between the minimum guaranteed amount of Rs. 80,400 and the actual purchase of Rs. 56,901. The assessee claimed this deficiency in accordance with the stipulations contained in the licence issued to the assessee, enabling it to sell the country liquor during the accounting period which commenced from April 1, 1967, and ended onMarch 31, 1968. The Income-tax Officer in his order dated March 30, 1972, did not accept the assessee's claim of deficiency as a trading loss, for, according to him, the minimum guarantee was given by the assessee to acquire the right of carrying on business in a particular area and as such it constituted capital expenditure. The Income-tax Officer has observed as under :
'First of all, regarding the loss, the position is that the shortfall in guarantee which is not a revenue loss cannot be allowed. Assessee agrees to pay the minimum guarantee amount for acquisition of a right to carry on the business in a particular area and, therefore, in fact, the amount agreed to be paid as guarantee money or in other words to lift the goods worth a certain minimum amount is for securing of this valuable right and the actual business started only after that and thus the shortfall in guarantee has no bearing on the business us such so far as its Income is concerned.'
3. On appeal, the Appellate Assistant Commissioner, vide his order dated November 26, 1973, agreed with the view taken by the Income-tax Officer. A further appeal was lodged by the assessee. The Tribunal did not agree with the view taken by the Appellate Assistant Commissioner and held, as is clear from its order dated May 5, 1975, that the liability arose directly from the terms of the licence during the previous year and, therefore, the corresponding loss of the assessee on account of the deficiency also arose during the accounting period and so whether or not the assessee had maintained the accounts, the loss is claimable by it as its business loss. It allowed a sum of Rs. 20,967 as loss against the income of the assessee from business during the assessment year 1968-69.
4. An application under Section 256(1) of the Act was filed by the Commissioner. The Tribunal has referred the aforesaid question for the opinion of this court.
5. A copy of the licence has been filed by the assessee marked annexure 'A'. The licence is for the retail sale of country liquor from April 1, 1967, to March 31, 1968. The licensee guaranteed the minimum sale of country liquor. The important conditions in the licence are contained in clause 2, which is as under :
d ykbZlsUlnkj dks f}rh;o'kZ ds izR;sd ekl ds vUr rd 1 tuojh 1967 dks izHkko'khy fuxZe ewY; dh njls xkjUVh dh /kujkf'k ds 2@22 izfrekal ds fglkc ls cujkf'k dh nS'kh 'kjkc mBkuh iMsxh ;fn ykbZlsUlnkj bruh cujkf'k dh 'kjkc 1tuojh 1969 dks izHkko'khy fuxZe ewY; dh nj ls mBkus vleFkZ jgsxk rks mls mDrfuxZr ewY; ds fglkc ls vUrj dh jkf'k dh vfrfjDr 'kjkc vkxkeh ekl dh 10 rkjh[k rdxkSnke ij djuh gksxh A
jo ykbZlsUlnkj }kjk mijksDrvUrj dks vnk;xh u fd;s tkus vFkok vfrfjDr 'kjkc u mBkus tk;s dh n'kk essa ;gvUrj udn tekur esa ls vFkok ykbZlsUlnkj dh py vkSj vpy lEifk rFkk mlds okfjlkuls olwyh ;ksX; gksxk A blds vfrfjDr ykbZlsUl nsusokys vf/kdkjh dks ykbZlsUl jndjus dk Hkh vf/kdkj gksxk A
x ;fn ykbZlsUlnkj] mldks fn;sx;s LVkd dks] cpus esa foQy jgs vkSj ,slk LVkd mlds mkjkf/kdkjh dk gLrkUrfjrdj fn;s tk;s vFkok okil ysuk iM+s rks bl izdkj gLrkUrfjr ;k okfil fy;s x;s LVkddk fuxZe ewY; ml izHkko'khy nj ls ftlls xkjUVh dh /ku jkf'k dk fglkc yxk;kx;k xkjUVh dks iwjk djus ds fu;fer ys[ks ess 'kkfey ugha fd;k tk;sxk rFkkxkjUVh dks iwjk djus ds fu;fer ykbZlsUlnkj ds ys[ks esa igys ls vdfyr Creditdh gqbZ jde esa ls ;g jde de dj nh tkosxh A
6. It will be relevant here to read the material part of Section 37 of the Income-tax Act, 1961 (for short ' the Act '):
'37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '.'
7. It is well settled by a catena of cases that the criteria for capital expenditure can be grouped under four headings :
(1) Expenditure for acquisition of a capital asset;
(2) Expenditure once and for all;
(3) Expenditure to acquire an enduring benefit; and
(4) Expenditure relating to fixed capital. Thus, according to Section 37, the conditions for allowance are:
(1) The expenditure must not be governed by the provisions of sections 30 to 36 and Section 80VV.
(2) the expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee.
(3) the expenditure must not be personal in nature.
(4) the expenditure must not be capital in nature.
8. According to the stipulations contained in the licence-deed, the assessee in case of failure to lift the country liquor of the minimum amount of guarantee, was liable to make good the loss to the State Government. The liability to make good the loss to the Government of Rajasthan arose from carrying on of the assessee's business. It is not disputed by the learned counsel for the Revenue that the assessee was under an obligation to make good the deficiency if it fails to lift the country liquor of the minimum amount of guarantee and to make good the loss to the Government of Rajasthan in regard to the deficiency. This arose directly from the stipulations contained in the licence. According to Section 37(1) of the Act, this amount has been laid out wholly and exclusively for the purpose of business of the assessee, namely, the sale of the country liquor of the amount of guarantee stipulated in the licence-deed from April 1, 1967, to March 31, 1968, and so such loss is an allowable deduction being a trading loss.
9. In this connection, we may notice the authorities relied on by the learned counsel for the assessee non-petitioner.
10. In Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. : 103ITR298(Guj) , the question arose whether the payment of Rs. 91,387 made to the Textile Commissioner under the provisions of Clause 21C(1)(b) of the Cotton Textile (Control) Order, 1948, was business expenditure allowable under Section 28 or under Section 37 of the Act. The textile Commissioner, in that case, issued directions to the assessee to pack a minimum of the particular types of cloth as mentioned therein. This was not done and hence by different orders, the Textile Commissioner directed the assessee to pay certain amounts in respect of the relevant assessment years under Clause 21C(1)(b) and the amounts were paid by the assessee. The assesseeclaimed these amounts in the relevant assessment years as deductible expenses. It was observed by the Gujarat High Court as under (head-note) :
' It is well settled that in arriving at the figure of profits and gains, what is to be considered is the net profits and gains in the commercial sense arid not only receipts, and all amounts which are proper items of expenditure can be deducted at the stage of arriving at the figure of profits and gains of business. Section 37, on the other hand, is a specific provision where deduction is provided by the Act itself and under that action, any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, is allowed as a deductible expenditure in computing the income chargeable under the head ' Profits and gains of business or profession '.'
11. In CIT v. Tarun Commercial Mills Co. Ltd. : 107ITR172(Guj) , the question was whether the penalty of Rs. 18,247 paid to the Textile Commissioner for non-fulfilment of the assessee's export obligation was business expenditure incurred wholly and exclusively for the purpose of the asses-see's business? The learned judges observed as under (p. 181):
' In the interest of business, textile manufacturers opt for payment of compensation or damages to cover up the shortfall in the export obligations. It is no doubt true that the word used in the scheme which we have set out above for the sum to be paid in default of fulfilling the export obligation has been described as a penalty but, in the ultimate analysis, it is the substance of the transaction between the parties which has to be considered for purposes of determining what is the nature and import of the scheme and the bond executed in pursuance thereof. The exercise of option, as stated above, may be the result of commercial expediency as well as certain extraneous factors over which the manufacturers might not have control and, therefore, in view of the scheme and the bond with which we are concerned here, it cannot be said that there is a breach of a public policy which may render the payment, agreed to be made for the default arising as a result of the breach, as one akin to penalty. Under no circumstances, without violence to the language, it can said to be infraction of the law. In that view of the matter, therefore, we do not find any reasons to interfere with the order of the Tribunal when it viewed the payment in question as expenses wholly and exclusively laid out for the business.'
12. In Addl. CIT v. Arvind Mills Ltd. : 109ITR212(Guj) , a special permission was granted by the Textile Commissioner in exercise of his powers under the Cotton Textile (Control) Order, 1948, issued in exercise of the powers conferred by the Essential Supplies (Temporary Powers) Act,1946. One of the conditions of the special permit was that the assessee should execute a bond in favour of the President of India agreeing to export an agreed quantity of cloth and in default thereof to pay a sum calculated at the rate of 11 paise per meter to cover the shortfall. The assessee exported rag cloth amounting to 90% of the target and paid a sum of Rs. 35,193 towards the shortfall. The assessee claimed this sum as a business loss under Section 28 or business expenditure under Section 37. It was held that the parties to the agreement clearly contemplated that there might be a shortfall in the export target for various reasons ; that the assessee had achieved 90% of its target and the sum calculated at a fixed rate to cover the shortfall which was contemplated was not in the nature of penalty for infraction of the law or violation of public policy. It was further held that this was a loss connected with and arising out of trade and, therefore, the same was deductible.
13. In CIT v. Surya Prabha Mills (P.) Ltd. : 123ITR654(Mad) , against the quota of 715 bales, the assessee imported only 374 bales and it had to pay Rs. 34,100 for non-import of the remaining bales of the allotted cotton under the guarantee clause. The assessee chose to pay the amount rather than import the balance quantity in order to minimise its loss. The claim of the assessee to deduct the sum of Rs. 34,100 was negatived by the officer who held that the payment was in the nature of a penalty for non-fulfilment of the obligation. The assessee claimed deduction of Rs. 34,100. It was held by the Madras High Court that the payment was allowable as a deduction.
14. We may now examine the authorities relied on by the learned counsel for the Revenue.
15. In Assam Bengal Cement Co. Ltd. v. CIT : 27ITR34(SC) , the appellant company acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, lease of certain limestone quarries for a period of twenty years on half-yearly rents and royalties. In addition to the rents and royalties, the appellant agreed to pay to the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant any lease, permit or prospecting licence for limestone in a group of quarries without a condition that no limestone will be used for the manufacture of cement. The appellant also agreed to pay Rs. 35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question arose whether in computing the profits of the appellant, the sums of Rs. 5,000 and Rs. 35,000 paid to the lessor by the appellant could be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922 (the old Act). It was held that the payment of Rs. 40,000was a capital expenditure and was, therefore, rightly disallowed as a deduction under Section 10(2)(xv) of the Act.
16. In Behari Lal Beni Parshad v. CIT , the assessee paid a competitor in its business a sum of money so that the assessee may itself secure the contract for the purchase of armour plates from the American Field Commission without any competition. It was held in that case that as no stock-in-trade was purchased with that amount and everything that was purchased from the American Field Commission was paid for independently and separately, and the amount was paid so that the competitor may withdraw from the competition with the assessee it was an expenditure in the nature of capital expenditure to prepare the ground for securing all the business of armour plates from the American Field Commission and so the amount was not a permissible deduction for the purpose of income-tax.
17. In N. Peer Sahib v. CIT : 54ITR681(KAR) , the assessee carried on business in mining iron ore. He obtained mining leases from the Government which was the owner of the sub-soil rights. He paid to the ryotwari pattadars who owned the rights of cultivation in the lands in question, certain amounts during the relevant years for permission to carry on mining operations in their lands. These amounts were payable whether he worked the mines or not. It was held that the amounts were payments for the acquisition of the right to dig the surface land at the beginning of the mining operations and were, therefore, capital expenditure.
18. All the aforesaid cases relied on by the learned counsel for the Revenue are distinguishable on facts.
19. So far as Raja Ram Kumar Bhargava v. CIT : 47ITR680(All) is concerned, it may be stated that the assessee in that case had paid commission to his employees in respect of the work done in execution of the contract with the Government. The question was whether the expenditure incurred or laid out was wholly and exclusively for the purpose of the business of the assessee. It was held that the commission, which forms part of the salary under the conditions of service, can, therefore, be claimed as an allowable deduction under Section 10(2)(xv) of the old Act. It was further observed that the expenditure claimed under Section 10(2)(xv) of the old Act is not to be tested on the basis of reasonableness. The learned judges observed as follows (headnote):
' ......that expenditure claimed under Section 10(2)(xv) of the Act isnot to be tested on the basis of reasonableness. All expenditure incurred wholly and exclusively for the purpose of the business must be allowed and the question that is to be decided is whether the particular expenditure claimed was expended wholly and exclusively for the purpose of thebusiness. If the expenditure was incurred on the ground of commercial expediency in order to facilitate the carrying on of the business, it is allowable under Section 10(2)(xv).'
20. In this case, in terms of the licence, the assessee was under an obligation to lift country liquor of the value of Rs. 80,400 and on its failure to lift the country liquor to that extent, it was under an obligation to make good the deficiency to the Government of Rajasthan. The liability to pay the deficiency was there in terms of the licence and arose directly from the carrying on of the assessee's business. The principles laid down in the authorities cited by the learned counsel for the assessee are attracted. In these circumstances, the Tribunal was right in holding that the difference of Rs. 20,967 between the guarantee amount and the actual purchase of country liquor was allowable as trading loss in the computation of the assessee's total income for the assessment year 1968-69.
21. The result is that the question referred by the Tribunal is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
22. We leave the parties to bear their own costs of this reference.
23. Let the answer be returned to the Tribunal as required by Section 260(1) of the Act.