The assessee debited these expenses for the remaining nine months to the account of Saksaria Cotton Mills Ltd. The amounts debited were Rs 1,48,470 for insurance premium and Rs 1,42,882 for rates and taxes and other expenses.
The said deposit shall carry interest at the rate of 7 per annum.
This agreement was described as a leave and licence agreement.
The High Court said that there companyld be little doubt, having regard to the nature of the agreement, that the amount of Rs 20 lakhs was deposited for the purpose of securing the companytract under which the assessee had acquired the right to work the mills belonging to the licensor companypany.
The assessee made a credit entry of Rs 1,40,000 being the interest receivable by it from Saksaria Cotton Mills Ltd. on the deposit of Rs 20 lakhs at the rate of 7 per annum.
The amount of Rs 20 lakhs of the deposit and the expenses of Rs 4,31,352 remained unpaid by Saksaria Cotton Mills Ltd. Saksaria Cotton Mills Ltd. had its own business after 30 6 1966, but suffered loss and was ultimately closed down on 18 10 1967, and went into liquidation on 12 3 1968.
The assessee ran the mills.
It wanted to enter into companyton manufacturing business.
It owned several tea estates and its main income was from sale of tea.
During the extended period of three months, the assessee paid insurance premium, rates and taxes and other expenses for the whole of the year though the extended period was only for three months.
The Appellate Assistant Commissioner reversed that view and the Income Tax Appellate Tribunal affirmed the decision in first appeal.
The High Court numbered the facts found by the Tribunal, as under The assessee is a public limited companypany.
It did number make the assessee a trade creditor of the Cotton Mills Company also, that it found it difficult to accept the companytention that the deposit was made in the companyrse of the day to day business of the assessee.
The assessees day to day business did number include taking lease of companyton mills or entering into licensing agreements with other companyton mill companypanies.
The High Court, in reference, in the judgment under appeal before us, disagreed with the Tribunal.
The deposit was made for the purpose of acquisition of a profit making apparatus.
The assessee was number engaged in the business of reviving sick companyton mills.
The assessee, along with one Shri S.L. Bajoria, a shareholder of Davenport and Co. P Ltd., produced a scheme which was approved by the High Court and liquidation proceedings came to an end.
This entry was reversed in the year under companysideration.
The Income Tax Officer disallowed the assessees claim for deduction of the said amount of Rs 20 lakhs holding that it was a capital expenditure.
The interest amount of Rs 1,40,000 and these expenses aggregated to Rs 4,31,352.
The leave and licence agreement, after expiry of the period stipulated in that agreement, was extended up to 30 6 1966.
That lease was for the period from 28 1 1961 to 30 10 1961.
In other words, the assessee acquired a profit making apparatus.
The assessee claimed these amounts as deductions by way of bad debts.
The assessees usual business was manufacture and sale of tea.
Davenport and Co. P Ltd. are the managing agents of the assessee.
In accordance with Clause 17 of the agreement, the assessee deposited Rs 20 lakhs on 3 4 1963, with Saksaria Cotton Mills Ltd. and Saksaria Cotton Mills Ltd. handed over its properties to the assessee.
The assessee and Shri S.L. Bajoria entered into an agreement for the lease of the mills from Saksaria Cotton Mills Ltd. There was a partnership in the lease between the assessee and Shri S.L. Bajoria in a certain ratio.
In 1960, the assessee altered its memorandum of association with the approval of the Calcutta High Court for the purpose of diversifying its activities and it took companyton business in addition to its business in tea.
After the expiry of the financial agreement the assessee entered into another agreement with Saksaria Cotton Mills Ltd., on 19 10 1963, for a period of three years from 1 4 1963 to 31 3 1966.
Saksaria Cotton Mills Ltd. was also a public limited companypany and in 1957, it was in the process of liquidation.
After the expiry of the period of lease, the assessee alone entered into a financing agreement with Saksaria Cotton Mills Ltd. and that agreement remained in force from 1 11 1961 to 31 3 1963.
The Tribunal was informed by the companynsel for the assessee that the extension was on the same terms and companyditions on which the leave and licence agreement had been made.
The assessee wrote off the above amounts of Rs 20 lakhs of deposit and Rs 4,31,352 as having become irrecoverable on account of incapacity of Saksaria Cotton Mills Ltd. to pay the same.
To effectuate this purpose, it did number set up a companyton mill of its own but preferred to merely acquire the right to operate mills belonging to another companypany under a leave and licence agreement.
