Write-off of lease advance for factory premises held deductible as business loss, not capital, for non-resident company

HC held that advances made by the non-resident assessee-company to a landlord, pursuant to agreements for acquiring factory premises on lease for its existing manufacturing and service business, were made wholly for business purposes. Since acquisition of leasehold premises is ordinarily not in the capital field, the loss arising on non-recovery of such advances constituted a business loss, not a capital loss. Consequently, the amount written off was allowable as a deduction in computing taxable income. The question was answered in the affirmative, and the Tribunal's disallowance was reversed in favour of the assessee.

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Issues Involved:
1. Whether the Tribunal erred in law in disallowing the amount of Rs. 1,08,088 written off as a deduction in arriving at the taxable income of the company.

Judgment Summary:

1. Tribunal's Disallowance of the Amount:
The Tribunal disallowed the amount of Rs. 1,08,088 written off by the assessee-company, stating that it did not fall u/s 28, u/s 36, or u/s 37 of the Income-tax Act, 1961. The Tribunal held that the amounts were not shown to be loans to be adjusted against future rent and were not advanced in the course of banking or money-lending business. Additionally, the amounts were advanced in earlier years and thus could not represent the expenditure of the year in question.

2. Assessee's Argument:
The assessee argued that the amounts were advanced to the landlord to facilitate the construction of factory premises for its existing business. The agreements indicated that the premises were to be leased for ten years with an option to renew for five more years. The assessee contended that the acquisition of property on lease was a business asset, and any expenditure incurred in connection therewith should be allowable as business expenditure. Reliance was placed on various court decisions, including CIT v. Hoechst Pharmaceuticals Ltd., CIT v. Bombay Cycle and Motor Agency Ltd., and CIT v. Cinceita Private Ltd., which held that expenditure on lease deeds was business expenditure.

3. Department's Argument:
The Department argued that there was no material on record to show that the factory premises were required for the assessee's existing business. Even if they were, the advances had no proximate connection with the carrying on of the business. The Department distinguished the cases cited by the assessee, stating that those involved actual executed leases, whereas the present case involved advances made before the execution of the lease deed.

4. Court's Analysis:
The Court reviewed the agreements and found that the factory premises were being acquired for the assessee's existing business. The Tribunal had rejected the claim on the ground that the amounts were advanced in earlier years, not on the ground that the premises were not for the existing business. The Court held that the period of the lease was not of much relevance and that the amounts advanced for acquiring the factory on lease were for the purpose of the assessee's business.

5. Conclusion:
The Court concluded that the amounts advanced by the assessee to the landlord for acquiring the factory premises on lease were for the purpose of business. Therefore, the loss of these advances should be treated as a business loss and not a capital loss. The question posed was answered in the affirmative and in favor of the assessee. No order as to costs.

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