Accrued business loss and capital investment treatment govern forfeited deposit and share-sale surplus in income tax analysis.

A forfeited security deposit given in the course of a rice purchase contract was treated as a trading loss because the liability became present and ascertained when forfeiture was intimated, and the pendency of litigation did not defer accrual under the mercantile system. The later recovery of any such amount would fall to be dealt with under the provision governing remission or cessation of liability. On the share-sale issue, the Tribunal's factual finding that the shares were acquired as a capital investment, and not as part of an adventure in the nature of trade, supported treatment of the surplus as capital gain rather than business income.

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Issues: (i) Whether forfeiture of the security deposit of Rs. 77,290 was an allowable business loss in the assessment year 1957-58. (ii) Whether the surplus realised on sale of the shares was taxable as capital gain.

Issue (i): Whether forfeiture of the security deposit of Rs. 77,290 was an allowable business loss in the assessment year 1957-58.

Analysis: The security was deposited in the course of the assessee's business under a contract for purchase of rice. The forfeiture arose from failure to perform the contract and was therefore a trading loss, not a capital loss. The liability accrued when forfeiture was intimated during the relevant previous year and the amount was definite and ascertained. The pendency of litigation challenging the forfeiture did not postpone accrual of the loss. Under the mercantile method, an accrued and ascertained business loss is deductible in the year in which it arises, and any later recovery is dealt with under the provision corresponding to remission or cessation of liability.

Conclusion: The question was answered in the affirmative, in favour of the assessee.

Issue (ii): Whether the surplus realised on sale of the shares was taxable as capital gain.

Analysis: The assessee was not a dealer in shares, and the record supported the Tribunal's view that the shares were acquired as a capital investment rather than as part of an adventure in the nature of trade. Whether a receipt is capital or revenue depends on the facts, and the Tribunal's finding on this mixed question of fact was based on relevant circumstances. No ground existed for interfering with the Tribunal's conclusion that the transaction did not amount to trading activity.

Conclusion: The question was answered in the affirmative, in favour of the assessee.

Final Conclusion: Both referred questions were decided for the assessee, with the forfeited security treated as a deductible business loss and the share-sale surplus treated as capital gain.

Ratio Decidendi: A business loss accrues and becomes deductible when the liability becomes present and ascertained, even if the assessee disputes it later; and a share transaction is capital in nature where the Tribunal finds, on relevant facts, that it was not an adventure in the nature of trade.

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