Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee-company engaged in plantation and construction activity had deposited an amount of Rs. 10 lakhs with a Calcutta-based company for appointing it as a distributor of other company - Amount so deposited was interest-bearing deposit - However, Calcutta-based company with which deposit was made by assessee never started production leading to its failure to pay interest and refund of amount advanced by assessee - After around 10 years, assessee agreed to abandon Rs. 3 lakhs on condition of payment of Rs. 7 lakhs by other company - Accordingly, Rs. 3 lakhs was claimed as deduction of business expenditure which was disallowed by authorities below - Whether expenditure incurred was for acquiring a capital asset, i.e., an advantage of an enduring nature in form of distribution rights - Held, yes - Whether, therefore, when part of such capital asset was written-off to retrieve balance, obviously written-off part represented capital outlay and, therefore, assessee was not entitled to deduction of same under section 37(1) - Held, yes CASES REFERRED TO Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 /3 Taxman 69 (SC) [Para 2] and CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 / 99 Taxman 575(SC) [Para 2]. P. Balachandran for the Applicant. P.K.R. Menon and George K. George for the Respondent. JUDGMENT C.N. Ramachandran Nair, J. - This is a reference at the instance of the assessee. The question raised is whether the Tribunal was justified in confirming disallowance of loss of Rs. 3 lakhs claimed by the assessee, being part of deposit made by the assessee with another company for acquiring right to distribute their products. The assessee, a company engaged in plantation and construction activity, deposited an amount of Rs. 10 lakhs with Calcutta-based company for appointing the assessee as a distributor of the other company. The amount deposited by the assessee was Rs. 10 lakhs and was interest-bearing deposit carrying interest at 24 per cent per annum. However, the company at Calcutta with which deposit was made by the assessee never started production leading to their failure…

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