Law:

Section:

I Section 28(i) of the Income-tax Act, 1961 (Corresponding to section 10(1) of the Indian Income-tax Act, 1922) - B usiness deduction/Loss - Year in which deductible - Assessment year 1957-58 - Whether forfeiture of security of a businessman deposited for properly carrying out a contract would be a trading loss and the assessee would be entitled to deduct such loss - Held, yes - Assessee following mercantile system of accounting had deposited an amount as security deposit for due performance of contract - As assessee could not perform contract, security deposit was forfeited on 1-11-1956 - Assessee launched litigation and ultimately on 6-9-1965 assessee's liability was upheld in an award - Assessee, however, claimed amount in question as deduction in year 1957-58 - Whether liability having accrued on date of forfeiture of security deposit, same was to be allowed as deduction in year in question - Held, yes FACTS-I The assessee had entered into a contract with the Deputy Director (Food) for the purchase of rice and had deposited an amount as security for the due performance of the contract. The assessee was unable to perform the contract and the security was forfeited by the Deputy Director (Food). The assessee then started litigation for the recovery of the forfeited security. The matter finally went up to the Supreme Court which referred the matter to the arbitration of the Regional Director (Food), who by his award dated 6-9-1965, upheld the forfeiture of the security. The assessee claimed the sum deposited as security as a business loss in the relevant assessment year. The claim was disallowed by the ITO as also by the AAC on appeal. The Tribunal, however, on second appeal accepted the assessee's claim and held that the loss was properly allowable in the assessment year in question. On reference : HELD-I The security deposit was made by the assessee in its capacity as a person carrying on business. The contract for the purchase of rice was a business contract entered into with a view to earning profits. It was not a deposit made in order to secure any capital asset or an advantage of enduring nature. As such the loss clearly could be attributed to the…

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