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Judgment
Balasubrahmanyan, J.—Both these tax case arise on the same appellate order of the Income Tax Appellate Tribunal. Two questions of law
arises for our consideration. The question we would like to dispose of first concentrate the extent of the power of remanded exercisable by the
Appellate Tribunal. This question has been formulated in the present case in the flowing terms :
Whether, on the facts and in the circumstance of the cease the Appellate Tribunal was right in entertaining fresh grounds of appeal put forth by the
assessee and in directing the Appellate Assistant Commissioner to admit the fresh grounds and decide the case on merits notwithstanding the fact
the the claim for deduction sought to be raised in the fresh grounds was not a point of dispute either before the Income Tax Officer or before the
Appellate Assistant Commisssioner at the time of the original appeal proceedings?
The controversy relates to the quantum of deduction claimed by the assessee in respect of interest in a particular transaction. At he stage of
assessment, the assessee claimed an allowance of interest ion the sum of Rs. 37,132. The ITO disallowed the entire claim. The assessed appealed.
The AAC allowed the appeal in part and restricted the deduction to one fourth of the amount calmed, namely, Rs,. 9,285. ON further appeal by
the assessee, the Tribunal remained the matter to the AC to go into the question once again. On remand, the AAC gate a different decision. This
time he disallowed the entire claim for Rs. 37,132 and confirmed the order of assessment,. The assessee once against appealed to the Tribunal.
The Tribunal was inclined to allow the claim in toto. At this stage, the assessee moved an additional ground of appeal and put forward a claim for
deduction not only in the sum of Rs. 37,132 which has so far figured in the discussion, but for Rs. 1,032,605.50 of which Rs. 37,132 formed part.
This additional ground was opposed by the Department. The Tribunal, however, entertained this ground and once again remanded the case to the
AAC directing him to go into the admissibility of the claim for deduction of Rs. 1,02,605.50.
The Department''s contention in this reference is that the Tribunal exceeded its jurisdiction in making its order of remand, This condition cane be
easily met by examining the position whether the Tribunal would have power to deal with the claim themselves. The answer, in our opinion, can be
in no doubt. The classic example of a case where the courts have upheld the Tribunal grant of a larger allowance to an assessee than he had himself
asked for in the assessment is to be found in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., . That was a case where
as assessee claimed development rebate at the appropriate percentage on the cost of new installations in the assessees textile mill of the value of
RS. 93,215. The claim for development rebate was disallowed by the ITO. When the assessee brought this claim in appeal before the Tribunal the
assessee apparently thought of asking for an outright deduction of the entire amounts of Rs. 93,215 on the footing that it represented current
repairs to machinery and not a mere capital outlay on new installations entitled only to a fractional allowance by way of development rebate. The
Tribunal allowed this change of front on the part of the assessee and granted the entire sun of Rs. 93,215 as an admissible diction in the
computation of the assessees taxable profits. This decision of their appellate jurisdiction. The Supreme Court, however, rejected that plea and
sustained the Tribunal''s decision observing There is nothing in the Income Tax act which restricts the Tribunal to the determination of the questions
raised before the departmental authorities. "" The Supreme court added : ""All question whether of law or fact which relate to th assessment of the
assessee may be raised before the Tribunal.
The difference between the case before the Supreme Court and the present case is that in the former the Tribunal exercised the power directly
to entertain a new claim whereas in this case the Tribunal remanded th matter for a fuller inquiry. When the power exists in the Tribunal to deal with
a new of additional claim as has been held to exist by the Supreme Court, then it must be conceded that what the Tribunal can do directly it can do
indirectly as well.
An argument was addressed for the Department to the effect that when the Tribunal admitted the additional ground it tended to enlarge the
subject-matter of the appeal. In Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , the Supreme Court found that
despite the change of front which the assessee was permitted in that case by the Tribunal, the subject matter of the appeal was was not enlarged
again, the new ground permitted to the assessee before the Tribunal in that case held out a larger tax relief than the assessee has asked for during
the assessment. Yet, the Supreme Court did not think this made for any change in the subject-matter of the appeal. The same principle must apply
to the present case as well.
A latter decision of the Supreme Court in The Additional Commissioner of Income Tax, Gujarat Vs. Gurjargravures Private Ltd., , was cited by
Mr. Jayaraman, learned standing counsel for the Department, as striking a different note. We do not, however, think so. In that case, exemption
under s. 84 of the I. T. ACt, 1961, was not claimed by the assessee before the ITO. The question before the Supreme Court was whether such a
claim could be entertained by the Tribunal in appeal for the first time. The Supreme Court held that the appeal was not entertainable on the new
plea. The proceise basis of the Supreme Court''s decision is to be found in the following observation (p. 5) :
In the present case, neither any claim was made before the Income Tax Officer, nor was there any material on record supporting such a claim.
Clearly enough as appearing from other observation is that judgment the Supreme Court was not laying down any opinion on, m at least, two
other kinds of case. One is a case where the assessee makes a claim before the assessing authority, but brings no supporting material on record.
The other is a case here the material already there in the assessment record, but the assessee hasn''t made a claim before the assessing authority.
Conceivably, these instances cannot be covered by the Supreme Courts decision above cited., It might well be that in both instances, an assessed
can very well press a claim before the appellate authority for the first time. It is, however, unnecessary to labor this point further. For, in the face of
the claim in this cease, m having been put forward by the assess even in the assessment stage although at a lesser sun, the claim cannot be shift out
in line at the appellate stage merely because the appellate authority has to go into a larger question in a matter of a quantum on the same subject of
claim, or because the claim was enough to be put forwards from a different angel. Our answer to the question of law reproduced at the bargaining
of this judgment is, therefore, in the assessee''s favour.
The other question of law before us arises out of the Tribunal''s decision on the merits of the assessee''s claim for deduction. As earlier
mentioned, the assessee''s original claim for deduction was for Rs. 37,132. This was refused by the ITO, and his order was ultimately confirmed in
appeal by the AAC. The Tribunal, however, allows the claim for deduction. The Tribunal''s deduction in this regard is now canvassed by the
Department on the following question of law :
Whether, on the fact and in the circumstances of the case, teh sum of Rs. 37,132 was not an admissible expenditure for the assessment year
1967-68?
For answering this question, it is necessary to consider the relevant facts. The assessee is a private limited company running a number of buses
under route permits issued by the Road transport authorities. The assessee agreed to transfer one of the buses belonging to it, along, with the route
permit, for Rs. 1,30,000 to two joint purchasers,. It received an advance of Rs. 1,00,000 from the purchases. The delivery of the vehicle to the
purchasers was to be on receipt of the balance of consideration. Till then and till the transfer of the route permit in the purchaser''s name the
assessee under took to run bus and hand over the daily collection to the purchasers. It point of fact, however, the assessee did not remit the daily
collection for more than week or so. Nor was the assessee ready and willing to deliver the bus on receiving the balance of sale consideration. The
purchaser there upon and sued the assessee for damages for breach of contract. The court decreed the suit for Rs. 1,02,605.50. the quantum of
damages apparently included an element of interest, reckoned at Rs. 37,132. the assessee debited this amount in its interest account and claimed it
as a dedication in the conniption of its taxable profits from the bus transport business.
The assessee''s claim for deduction was put forwards in various ways. Before the ITO, in the first instance, the contention was that Rs. 37,132
represented interest deductible under s. 36(1)(iii) of the I. T. ACt. the AAC, on the contrary was asked to consider the claim as filing under type
residuary head of expenditure in s. 37 of the ACt. Before the Tribunal, the assessee did not put forwards its peal for deduction under any particular
provision in the statute. Instead, reliance was placed on general principal9less of commercial accounting.
WE may, without wasting our breach, reject the assessee''s initial peal that sum of Rs. 37,132 qualified for deduction under s. 36(1)(iii). for,
under this provision, what is deductible is interest paid by the assessee on capital borrowed by him for purpose of the business which is not the
case here.
Now could the payment be regarded strictly, as expenditure failing even under the residuary head of s. 37. The payment of Rs. 37,132 under
the decree was not an outlay of money on any goods or services or on anything which brought any asset or advantage into the assessee''s business.
We are, therefore, left to consider the assessee''s claim under the only the responsibility left, namely, that the payment of damages, in the
circumstances, amounted to a loss incurred by the assessee in the course of its business.
The I. T. ACt contain detailed provisions for allowance of business expenditure of various kinds, although they are by no means exhaustive. the
Act also makes express privation for set-off and carry forward of business losses, where they from the end result of a years'' trading. But
Parliament has not enacted any rules for the treatment of what may be called, for want of a better expression, itemized losses in business. Losses of
this kind might arise in various ways. A man may lose money in a particular deal in business. Or the money may get lost from the show p or the
factory just that without the assessee being under any blame. These are familiar instances of itemized business losses. How to treat loosed of this
kind for tax purpose is nt. anywhere laid down in the I. T. ACt. Courts however, have evolved certain tests for proper tax treatment of losses in
trade, By and large they have derived inspiration from the discipline of accountancy and the practice of commercial accountants.
The basic principle which courts have again and again reiterated in the reported cases is that no loss can be allowed unless it is shown that it
was incidental to the assessee''s trade or business,. Strong and co. of Romsey Ltd. v. Woodifgiled [1906] 5 TC 215, may be said to have
established this principle at the earliest. it has been follows in this country for a long time. The Supreme court has adopted it in two cases of trading
losses resulting from embezzlement by employees : Badridas Daga Vs. The Commissioner of Income Tax, and Commissioner of Income Tax U.P.
Vs. Nainital Bank Ltd., . the principle of these decisions is that it is not enough that the loss is somehow connected with the assessee''s business but
it must be incidental to the very carrying on of the business. Particular application of this principal have yielded varying resulte. Fro instance, a
businessman or trader, in the course of carrying on business, might be rendered liable for penalties, for damages, and such like payments. The
question would be whether the payments of such kind could be allowed s business losses. The decisions of courts on this subject are marked by
extreme sophistication. We are asked to make a distinction, broadly, between pantalets for infractions of the law, and compensation or damages,
for breaches of contract. Somewhere, in between, apparently fall cases relating to payment of damages inactions for negligence for the tortious
acts, either of the assessee or if his employees or agents. Courts have more or less uniformly laid down that where the assessee pays a penalty for
any valuation of infraction of law, he would not be entitled to a deduction of that loss in the compassion of his taxable business profits. This is
apparently on the theory that it is not necessary fro business to be carried on anywhere by violating the law of that place. In this sense it is said that
penalty4s cannot be regarded as being incidental to trade, In contrast, damages paid by an assessee for the breach of a trading agreement is
regarded with very few exception, a loss incidental to the carrying on of the trades. This rule is justified on the basis that in the very nature and
exigencies of th business it might become necessary or expenditure as such to enter into contracts as to wiggle out of them, as much to make them
as to break them. As for payment of damages for negligence in tort ceases in which the assessee gets involved, the English case of STrong and Co.
of Romsey Ltd. V. Woodifgiled [19096] 5 TC 215, already quoted has itself established a particular test. This test is applied by asking the
question : Did the liability for trot fall on the taxpayer in his character as a trader or in any other character? In the case of Strong and Co. of
Romsey Ltd. v. Woodified (supra), an innkeeper has to face an action for negligence by a lodger of his own his a window in the inn fell and injury
resulted. The decision went against the innkeeper both in the action for damages and in the Income Tax proceedings for allowance of damages
paid by him under the judgment. the court, considering question in an apple from the Commission by way of case stated, held that the taxpayer ran
the risk of the windows, in his inn falling on the heads of customers and passers-by, but he ran that risk as the owner of the structure, and not in hi
character as an innkeeper. the loss was not incidental to innkeeper; it was inherent in property owing. this was the distinction established in that
case.
in out country, over-sophistication has marked the tax treatment of even damages for breaches of contract. In the early years of this century
our courts were inclined to distinguish between what they called an ""honest"" breach of contract and a dishonest"" breach of contract Compensation
or damages paid by the erring taxpayer wa held to be deductible only in the former case, but not in the latter. Typical of this lie of decision is Mask
& Co. v. CIT [1943] 111 ITR 454 decided by a Bench of this court. The learned judges who gave judgment in that case must have been quite
aware that a distinction was usually drawn, in a boars manner, only between a breach of the law, m on the one hand, m and a breach of contract
on the other. Nevertheless they thought that even in the case of a breach of contract, it might be necessary to equate it to a veritable violation of the
law, if the assessee should commit the breach of contract with impunity. the following passage from the judgment in that case is oft quoted (P. 462)
:
In the present case, the assessee wa not fined for a breach of law, but was made to pay damages for a breach of the contract entered into. the
assessee''s action in disregarding the undertaking given was palpably dishonest and we are of the opinion that the awards of damages which
followed did not constitute an expenditure falling within section 10(2)(xii). it was not incidental to the trade.
Nearly forty years have gone by since the writing of the judgment in MASK AND CO. Vs. COMMISSIONER OF Income Tax,
MADRAS., . We have since has a number of decision of courts in this genus, The phrase ""dishonest breach of contract of courts in this genus. The
phrase ""dishonest breach of contract"" has, by and large, gone out of fashion. This might be explained, without regret, by reference, to the growing
tendency among learned judges in the pose-war period to view tax questions in the contact, of business realities rather then in the context of
business moralities. In any case the allowability of damages for contractual breaches is nowadays being examined in the perspective afforded by
the nature of the trade, the manner of carrying it on, the circumstances attending alike on the formation, and the breach of the commercial contract
in question and the like,. There are the consideration which are regarded nowadays as the real pointers to the question whether the liability incurred
for damages is or is not incidental to the assessee''s trade. This way of approach to the problem might seem to be amoral, but there never has been
a more amoral legislative measure in the statue book than the I. T. ACt. If a puritanical approach were at all relevant, all contractual breaches must
be regarded as violations of the sancity of contract. But we are lying in an age when contract, as a mode of bringing about legal relationship has
been desanctified by the law itself. What is more, Income Tax is not limited to lawful business only. It is imposed on the profits of illegal business
too. Where the still be on the net income after all the deduction are allowed, and not on the gross recipes. it would, therefore, seem that the true
test of allowance of a trading loss is not whether it arises from an infraction of the law of from a dishonest breach of the contract, but whether it is
incidental to the assessee''; s breach of the contract, but whether it is incidental to the assessee''s trade such as it is. A prudish approach to this out-
and-out tax question is, in our opinion, wholly alien to the discussion.
The Tribunal in their order have observed that the assessees repudiation of the contract is not illegal, but if we may say so merely unethical.
We do not see wherefrom they so. As we mentioned earlier, the assessee is an incorporated company. It was being managed buy certain person
up to a stage. Soon after the singing of the agreement for sale of the bus in question a new set of people took over the company. As might be
expected, the new group which got into the management took stock of the affairs of the company. They apparently believed that amount of Rs.
1,00,000 stated to have been paid by the purchasers as advance for the trader of the bus did not find it sway into the coffers of th company. They
believed that the then managing director has helped himself to the money received from the purchasers. This was apparently the reason why the
assessee under the new management repudicated the sale of the bus in question. It, however, subsequently turned out, m on further examination,
that a portion of the advance consideration paid by the purchasers has gone in discharge of a bank loan and thereby the vehicle was relieved from
a hire purchase transaction to which it wa earlier tied up. This discovery apparently should have led the new management to acquiesce in the
decree for damages, even though they has resisted the suit in the first instance. These facts, which clearly emerge from the order under reference
do not support the valued judgment passed by the Tribunal to the effect that the assessee has acted unethically in repudiating the contract.
We are satisfied that the loss occasioned by the breach committed by the assessee in the contract of sale of the bus is a loss incidental to the
assessee''s trade. It is as incidental as the having in the complexion and personnel of the assessee''s board of directors. the only other aspect of the
loss which needs verification is whether the loss, such as it is is an item of revenue loss. Fro, m if it is a capital loss, it being incidental to the trade
will not save it from disallowance. But we are satisfied that if the amount represent the interest element in the award of damages, it can hardly be
branded as a capital loss. Indeed, there can possibly be no dispute, at this stage, at any rate, that Rs. 37,132 represents th interest part of the
compensation decreed by the court. The assessment order itself has discussed the question in. thee background of s. 36(1)(iv), that is to say as an
interest payment. This underlines the position that the amount of Rs. 37,132 cannot be considered s capital in nature.
Earlier we, have reproduced the text of th queen of law referred to us by the Tribunal. the frame of the questions is couched in a negative
fashion, raising the query whether th sum of Rs. 37,132 is not an admissible expenditure? We think this is hardly the way of framing a question of
law in a tax reference. A negative format in the farming of a question for division, as in the framing of an issue in a suit, may be permissible to bring
out consideration of burden of profit where they haven to loom large in the controversy. But that seldom applied in tax reference. The question is
also defectively drawn up in another respect. The Tribunal granted the deduction in question not on the ground that the sum of Rs. 37,132 was an
item of expenditure, but, as we earlier pointed out, m on the basis of general principles of deduction. WE, therefore, reframe th question suitably,
before proceeding to enter our formal answer thereto :
Whether, on the facts and in teh circumstances of the case, m the sum of Rs,. 37,132 was an admissible deduction in the computation of the
assessees business (income) for the assessment year 1967-68?
Our answer to the question, as reframed is in the affirmative and against the Department. In view of a nature of our answers to both the
questions in these references we award costs against the Department. Counsel''s fee Rs. 500 (One set).