Commissioner Of Income-Tax, West Bengal-I. v. Anglo-Indian Jute Mills Co. Ltd.

The Judgment of the Court was delivered by

C.K Banerji, J.:— This reference arises out of the income-tax assessment of Anglo-Indian Jute Mills Co. Ltd., the assessee, for the assessment year 1962-63, for which the relevant previous year ended on the 31st March, 1962.

2. The facts found and/or admitted in the proceedings are as follows:

The assessee is a limited company and carries on business of manufacture and sale of jute goods. Before the ITO the assessee claimed deduction of Rs. 2,54,064 paid by it for purchase of loom hours, as business expenditure. It also claimed set off of Rs. 11,50,000 received by it from M/s. Tolaram Prakash Chand on settlement of the assessee's claim for damages for breach of certain transferable specific delivery contracts against speculative losses suffered by the assessee on settlement of certain other transferable specific delivery contracts. The ITO rejected both the said claims of the assessee.

3. The assessee had on the 12th March, 1962, estimated and paid advance tax of Rs. 5,60,000 on the basis of a total income of Rs. 17,41,361. In the income-tax return filed subsequently the income was shown as Rs. 25,32,861. The assessee sought to explain this discrepancy as being due to its inability to arrive at the correct figure due to fluctuation of jute prices at the time of the estimate and also due to the fact that certain development works contemplated could not be finalised during the relevant year and prior adjustment of depreciation and development rebate could not be made earlier. ITO rejected the explanation of the assessee and the advance tax paid being short of the statutory percentage of the assessed tax, levied penal interest under s. 215 of the I.T Act, 1961. Being aggrieved, the assessee appealed to the AAC who, following the order of the Appellate Tribunal in ITO v. Empire Jute Mills Co. Ltd., in Income-tax Appeal No. 3526 (Cal) of 1965, held that the amount spent for purchase of loom hours was revenue expenditure and allowed the claim of the assessee for deduction. He, however, rejected the claim of the assessee for set off of the amount received from M/s. Tolaram Prakash Chand against the speculative losses on the ground that the failure of the seller to deliver the goods to the assessee resulted in litigation between the parties and the assessee received the said amount as a result of settlement of the said litigation and the same, therefore, was not a speculative profit which could be set off against speculative losses.

4. On the imposition of interest under s. 215 of the I.T Act, 1961, it was urged on behalf of the assessee in the appeal that the ITO should have exercised his discretion under r. 40(1) and (4) of the I.T Rules, 1962, in favour of the assessee and should have waived the interest. The AAC held that no appeal against the levy of interest lay and rejected the claim of the assessee.

5. The assessee preferred a further appeal to the Income-tax Appellate Tribunal on the disallowance of the claim of set off of the amount received from M/s. Tolaram Prakash Chand and also against the levy of interest under s. 215 of the I.T Act, 1961. Revenue also appealed to the Appellate Tribunal against the allowance of the amount spent for purchase of loom hours.

6. The Appellate Tribunal, following the judgment of this court in Commissioner Of Income-Tax (Central), Calcutta v. Empire Jute Company Ltd., [1974] 97 ITR 581, held that the amount spent for the purchase of loom hours was a capital expenditure, and set aside the order of the AAC. On the question of disallowance of set off of the amount received from M/s. Tolaram Prakash Chand against speculative losses, reliance was placed on behalf of the assessee on a circular of the Central Board of Revenue dated 12th September, 1960, as to what constituted loss arising from speculative transactions and also to p. 60 of the Working Manual, Vol. 3, of the East India Jute and Hessian Exchange Ltd., containing bye-laws for trading in transferable specific delivery contracts in raw jute and jute goods and rules of conduct of business in such contracts, where certain options were given to the buyer in case of non-implementation of contract by the seller and it was urged that the contracts which resulted in losses were similar in nature to those with M/s. Tolaram Prakash Chand which resulted in profit and, therefore, those losses should be set off against such profit. It was also urged that in a transferable specific delivery contract no payment of price was required to be made at the time of entering into the contract and only differences were paid or settled.

7. The Tribunal found that upon the breach of the contracts by nondelivery of the goods there was an arbitration on the claim of the assessee against the seller. The proceedings finally went up to the High Court and were ultimately settled as a result whereof the assessee received the said sum of Rs. 11,50,000 from the said seller and such receipt was damages for breach of the contract. Following the decisions of this court in CIT v. Pioneer Trading Co. P. Ltd., [1968] 70 ITR 347 and Daulatram Rawatmull v. CIT, [1970] 78 ITR 503, the Tribunal rejected the claim of the assessee and upheld the order of the AAC.

8. On the imposition of interest under s. 215 of the Act the Tribunal held that the assessee had urged a number of grounds in its appeal before the AAC apart from the challenge to the levy of interest and, following a decision of the Bombay High Court in Mathuradas B. Mohta v. Commissioner Of Income-Tax, Poona., [1965] 56 ITR 269, set aside the order of the AAC and directed him to dispose of the appeal as to levy of penal interest on merits.

9. On the application of the assessee under s. 256(1) of the I.T Act, 1961, the Tribunal has drawn up a statement and has referred the following questions of law for the opinion of this court:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of Rs. 2,54,064 for purchase of loom hours was a capital expenditure and hence not deductible in computing the business income from manufacture and sale of jute goods?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the receipts of Rs. 11,50,000 from M/s. Tolaram Prakash Chand were not of the nature of speculation but damages for breach of contract after the breach had occurred?”

10. And on the application of the CIT under s. 256(1) of the I.T Act, 1961, the Tribunal has also referred the following question of law:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that in an appeal against the assessment order it is open to an assessee to take up along with the other grounds of appeal the ground whether the charge of interest under section 215 of the Income-tax Act, 1961, was proper?”

11. At the hearing Mr. Ajit Sengupta, learned counsel for the revenue, submitted that the assessee's question No. 1 was covered by the decision of this court in CIT v. Empire Jute Co. Ltd., [1974] 97 ITR 581 and should be answered in the affirmative and in favour of the revenue. Mr. Sengupta further submitted that the assessee's question No. 2 was also covered by the decision of this court in CIT v. Pioneer Trading Co. Ltd., [1968] 70 ITR 347 and should also be answered in the affirmative and in favour of the revenue. Mr. Sengupta further submitted that the question referred at the instance of the Commissioner is covered by an unreported decision of this court in Income-tax Reference No. 373 of 1969 intituled CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [(since reported in [1979] 119 ITR 751 (Cal)] and the necessary directions as given by this court in the said decision should also be given in this case.

12. Dr. Debi Pal, learned counsel for the assessee, agreed with Mr. Sen-gupta that the assessee's question No. 1 was covered by the decision of this court in CIT v. Empire Jute Co. Ltd., [1974] 97 ITR 581. He submitted that an appeal is pending before the Supreme Court from the said decision and, therefore, a certificate should be given by us on the said question as a fit case for appeal to the Supreme Court on his oral application. On the question referred at the instance of the revenue, Dr. Pal agreed with Mr. Sengupta that the same was covered by the decision in Karam Chand Thapar's case, [1979] 119 ITR 751 (Cal).

13. Dr. Pal, however, urged in respect of the assessee's question No. 2 that there were certain facts in the instant case, which distinguished it from the case of Pioneer Trading Co. P. Ltd., [1968] 70 ITR 347 (Cal). He drew our attention to the following provisions in the bye-laws governing this contract as follows:

“(ii) If contract be not implemented by the presentation of documents and/or bank certificate as referred to in paragraph 8(b)(i) within the extended period referred to in the immediately preceding cl. (i), buyers shall thereupon be entitled to exercise any one of the following options on the sixteenth working day after the extended due date:

(1) Of cancelling the contract.

(2) Of buying against sellers in the open market on the day in which the option is declared and charging them with any difference.

(3) Of cancelling the contract and charging sellers the difference between the contract and the market prices on the day on which the option is declared.”

14. He urged that the contract itself specifically provided for the consequences of its non-implementation or breach. Under cl. (3) the assessee received from its seller the difference between the contract price and the market price and thus both the claim and the receipt of the amount by the assessee was not on the breach of the contract but under the contract itself which made specific provision for payment of such difference. In the instant case, admittedly, the goods were not delivered and the claim of the assessee was settled in terms of the said clause by payment of difference under the contract. Accordingly, he submitted that the decision in Pioneer Trading Co. P. Ltd., [1968] 70 ITR 347 (Cal) did not apply to the facts and circumstances of this case.

15. We are unable to accept the contentions of Dr. Pal. Clause 3 of the said bye-laws and rules only restates the law as to the consequences of breach of a contract and provides nothing more.

16. The said clause does not confer on a party affected by the breach of the contract any special right or advantage or benefit other than that available in law for breach of contract, whereunder for non-delivery of goods the person aggrieved is entitled to damages on the basis of the difference between the contract price and the market price. That is all that has been provided by the parties in the said clause. In our opinion, there is little distinction between the facts of the instant case and those in Pioneer Trading Co. P. Ltd., [1968] 70 ITR 347 (Cal) and it cannot be said that the latter would not govern the instant case.

17. Dr. Pal, however, submitted that if his contentions were not accepted he would pray for oral leave for a certificate of fitness for appeal to the Supreme Court on the point inasmuch as the Madras High Court in R. Chinnaswami Chettiar v. Commissioner Of Income-Tax, Madras, [1974] 96 ITR 353 has expressly dissented from the decision of this court in Pioneer Trading Co. P. Ltd., [1968] 70 ITR 347 (Cal).

18. With regard to the question referred at the instance of the revenue we direct that the Tribunal will consider the question of levy of interest under s. 215 of the I.T Act, 1961, keeping in view the principles laid down in our judgment in Karam Chand Thapar & Bros. (P.) Ltd., [1979] 119 ITR 751 (Cal).

19. If the Tribunal finds that the assessee is denying its liability to pay interest at all, then it would reconsider the matter further, if not, and the challenge is only to the quantum or method or manner of imposition of interest, the appeal should be dismissed in limine on this issue.

20. The other questions are answered as follows:

(1) The assessee's question No. 1 is answered in the affirmative and in favour of the revenue.

(2) The assessee's question No. 2 is also in the affirmative and in favour of the revenue.

21. On the assessee's question No. 1 as to loom hours, an appeal is pending before the Supreme Court in the case of Empire Jute Co. Ltd., [1974] 97 ITR 581 (Cal) and as the assessee desires to go to the Supreme Court on its question No. 2 also, the assessee will, therefore, be at liberty to make a formal application for the grant of certificate of fitness for appeal to the Supreme Court on both the said questions as it is not desirable that piecemeal certificates of fitness should be granted.

22. There is another reference, at the instance of the assessee from the same order of the Tribunal, bearing the same number as in this reference which is also disposed of by this judgment. There will be no order as to costs.

Dipak Kumar Sen, J.:— I agree.