Cochin Malabar Estates & Industries Ltd. V. The Commissioner of Income Tax, Cochin

ITR/5/2000

AI Insights

The case involves The Cochin Malabar Estates & Industries Ltd., the applicant, who sought a tax reference regarding the disallowance of a claimed business expenditure of Rs. 3 lakhs. This amount was part of a Rs. 10 lakhs deposit made with a Calcutta-based company for acquiring distribution rights, which never materialized as the company did not start production and eventually faced liquidation. The Tribunal and lower authorities had rejected the claim, leading to this reference. The High Court, after considering the arguments and relevant legal precedents, upheld the Tribunal's decision, stating that the expenditure was for a capital asset and not deductible under the cited section of the Income Tax Act.

• Counselvise Citation: [2008] 140 COUNSELVISE.COM (IT) 804474 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 03-03-2008
• Assessment Year: misc
• Other Referred Cases: EMPIRE JUTE CO. LTD. V. C.I.T., 124 I.T.R. 1, CIT v. MADRAS AUTO SERVICE (P) LTD., 233 I.T.R. 468
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: P K R MENON; GEORGE K GEORGE
• Assessee Lawyers: P BALACHANDRAN
• Keywords: Business expenditure; Capital asset; Deposit; Disallowance of loss; Distribution Rights
• Section: 37(1)

Judgement Text

" IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR MONDAY, THE 3RD MARCH 2008 / 13TH PHALGUNA 1929 ITR.No. 5 of 2000() ------------------- AGAINST THE ORDER IN RA.182/COCH/1998 IN ITA.516/COCH./1993 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPLICANT: ----------- THE COCHIN MALABAR ESTATES & INDUSTRIES LTD., COCHIN BY ADV. SRI.P.BALACHANDRAN RESPONDENTS: ------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT FOR R SRI.GEORGE K. GEORGE, SC FOR IT FOR R THIS TAX REFERENCE HAVING BEEN FINALLY HEARD ON 03/03/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR & T.R. RAMACHANDRAN NAIR, JJ. -------------------------------------------- I.T.R. No. 5 OF 2000 -------------------------------------------- Dated this the 3rd day of March, 2008 C.R. 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 annum. However, the company at Calcutta with which deposit was made by the assessee never started production leading to their failure to pay interest and refund the amount advanced by the assessee. After around 10 years, the assessee agreed to abandon Rs. 3 lakhs on condition of payment of Rs. 7 lakhs by the other 2 company. Accordingly Rs. 3 lakhs was claimed as deduction of business expenditure. The claim was rejected by the assessing officer , the first appellate authority and also the Tribunal in the second appeal. It is against this order of the Tribunal, the assessee has sought reference of the question pertaining to disallowance. 2. We have heard Sri. P. Balachandran senior counsel appearing for the assessee and Sri. P.K.R. Menon, senior counsel appearing for the respondent-revenue. We notice that all the three authorities below have come to a clear-cut finding that the amount of Rs. 10 lakhs deposited by the assessee was to acquire distribution rights of the products of the other company. When the deposit was made obviously the manufacturing company before whom deposit was made had not commenced production. In the course of 10 years after deposit, the other company obviously did not start any production and the company itself faced liquidation proceedings. In these circumstances, the Tribunal noticed that the expenditure incurred was for acquiring the capital asset, that was an advantage of enduring nature in the form of distribution rights. When part of such capital asset is written off to retrieve the balance, obviously the written-off part represents the capital outlay and therefore the assessee is not entitled to deduction of 3 the same under Section 37(1) of the I.T. Act. We are therefore of the view that the Tribunal is right in disallowing the claim. Even though counsel for the assessee relied on the decisions of the Supreme Court in EMPIRE JUTE CO. LTD. V. C.I.T., 124 I.T.R. 1 and CIT v. MADRAS AUTO SERVICE (P) LTD., 233 I.T.R. 468, we do not find that these decisions will support the case of the assessee which was a case of writing off part of the deposit to retrieve the balance amount after 10 years of deposit for the purpose of acquiring distribution rights. We therefore uphold the order of the Tribunal. Accordingly the question referred is answered against the assessee and in favour of the revenue. A copy of this judgment under the seal of the High Court and Signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, Cochin. (C.N.RAMACHANDRAN NAIR) Judge. (T.R.RAMACHANDRAN NAIR) Judge. kk 4 "