Commissioner of Income Tax, Tamil Nadu-V vs Textool Co. Ltd.

Messrs. Textool Company Ltd., Coimbatore, which is the assessee in this Income Tax reference, is a company carrying on business in the

manufacture of carding engines, draw frames, ring frames and cone winding machines.

The assessee had to import certain materials as component parts for the purpose of manufacturing carding engines. The imports had to be made

under import licences obtained under a peculiar scheme. The licences were to be applied for through the Indian Cotton Mills Federation. Under

the licensing scheme, the assessee had to pay the Federation certain sums in advance as premiums to cover the entire imports the licence. Credit

was given by the Federation to the assessee of the extent of the actual import of articles under the respective licences. If the assessee was not in a

position to utilise the licences to the fullest extent, and there were shortfalls in actual imports, to that extent the assessee''s premiums with the

Federation would stand forfeited.

In the two account years relevant to the assessment years 1968-69 and 1969-70, the assessee wrote off Rs. 2,28,287 and Rs. 1,87,185,

respectively, which represented premiums forfeited to the Federation on account of partial non-utilization of the import licences on the assessee''s

part. The assessee then claimed the sums so written off as admissible deductions in the computation of its taxable business profits. The ITO

disallowed the claim. The Tribunal, before which the matter ultimately came for consideration, held that the assessee was entitled to the deduction

claimed. The Tribunal rejected the department''s contention that the write-off was not incidental to the assessee''s business.

The department now challenges the correctness of the Tribunal''s decision by a reference on the following question of law :

Whether, on the facts and in the circumstances of the case, the sums of Rs. 2,28,287 and Rs. 1,87,185 are to be deducted from the total income

?

We think the answer to the question must be in the affirmative. The Tribunal found, and, in our opinion, quite correctly, that the loss was in the

course of the assessee''s business and for the conduct of its business. The only error in the Tribunal''s order was in describing the assessee''s claim

as one of expenditure. Actually, the assessee''s claim to deduct Rs. 2,28,287 and Rs. 1,87,185 was not in respect of actual items of expenditure of

outgoing in the two account years. On the contrary, the figures represented the amounts written off as items of revenue loss. They represented

portions of advance premiums in deposit with the Federation which were forfeited, when within the import licence period, the assessee failed to

effect the imports. The forfeited amounts were lost to the assessee, with the expiry of the period of the licence.

Under the I.T. law, allowance for losses is granted under a test which is slightly different from that which is appropriate to the deduction of items

of expenditure. Where the assessee claims a business loss, the main question to be considered is, whether the loss is incidental to the business.

Please see Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215 . The principle of this English decision on the allowance of business

loss has been followed by courts in our country : Vide Commissioner of Income Tax U.P. Vs. Nainital Bank Ltd., .

The Tribunal has clearly dealt with this aspect of the write-off being incidental to the assessee''s business. The Tribunal found that the assessee

had to import from abroad certain component parts necessary for its manufacturing business. The assessee had to be abide by the scheme of

import licences, under which the assessee had to pay premiums to the Federation in advance covering the entire import entitlement. Owing to

business exigencies, the assessee could not fully utilise the import entitlement, resulting in a forfeiture of part of the advance deposit with the

Federation. The Tribunal, therefor, felt no difficulty in finding that the deduction claimed by the assessee in writing off the amounts so forfeited was

in the course of and incidental to the assessee''s business. On this finding, the question referred to us fairly answers itself.

We may observe, in conclusion, that the frame of the question of law sent to us by the Tribunal is wide in its language. The question not only

calls for an inquiry as to whether the deduction claimed is strictly a business deduction, but also whether it can be claimed as proper revenue item

of allowance. This latter aspect of the allowance of business loss would be equally important. In this case, however, we do not have to go into this

aspect of the question, because the departmental authorities did not at any stage contend that the amounts which the assessee had written off were

non-revenue items.

For the reasons earlier stated, this reference is answered in the affirmative and against the department. The assessee is entitled to its costs.

Counsel''s fee Rs. 500 (one set).