Themas and Co. Ltd. vs Commissioner of Income Tax and Trav-Co.

Kumaea Pillai, J.—This is an application for requiring the Income Tax Appellate Tribunal to state: and refer a case u/s 66(2) of the Indian Income Tax; Act. The applicant, referred to hereinafter as the Assessee, is a company registered under the. Travoeore Companies Act and known as A.V. Thomas and Co., Ltd., Alleppy. The reference sought for is in respect of certain questions of law arising out of the order passed on 1-6-1955 by the Madras Reach ''A'' of the Income Tax Appellate Tribunal in I.T.A. No. of60/54-55 which appeal itself related to the assessment of the asscssce for the year 1952-53.

As the application R.A. No. 392/55/56, made by the Assessee u/s 66(1) of the Income tax Act to refer the case to this Court was refused by 1st Appellate Tribunal on 25-1 1-1955 the Assessee La''s made this application u/s 6 0(2).

In paragraph 3 of the petition filed in this Court u/s 66(2) it is said that the Assessee ''carries on business generally as agents, managing Agents Secretaries, Merchants, Bankers, contractors, Engineers, etc. as per the provisions move elaborately set out in the memorandum of association. The company is also interested in promoting I Ind undertaking the formation and establishment of individual trading, manufacturing and other institutions and companies as may be considered to be conducive to the profit and interest of the company. The company is also permitted under its Memorandum of Association to assist any company financially or otherwise by issuing or subscribing for the capital shares, stock, debentures, of any company and also to invest its monies in such securities as may from time to time be determined.

The correctness of these statements'' has not been disputed before us by the Income Tax Department. Regarding the Assessee''s business the Tribunal also has said in paragraph 2 of its order in R.A. No. 392 of 1955-56:

The Assessee is a public limited company financing and promoting other companies as its main business. In addition to managing agency of several other companies and estates; it was also carrying on, business in forwarding, clearing, steamer agency and in a few trading lines.

Between 14th Sept. and 13th December 1948, the asscssce advanced certain amounts totalling in all to Rs. 6,05,071-8-5 to a private limited company at Pondicherry known as the Southern Agencies Ltd. At that time the Southern Agencies Ltd. were floating a company known as the Rodier Textile Mills Ltd., for purchasing from the Anglo-French Textiks Ltd., Pondicherry, a textile mill known as the Rodicr . Textile Mills Ltd. and carrying on the work of that mill.

According to the Assessee tire amount of Rs. 605071-8-5 was advanced to the Southern Agencies Ltd., for helping them in the piomotion of the Rodicr Textile Mills Ltd., by making the necessary deposit with the venders in London and for their expenses, and this advance is a venture falling within the objects permitted by the Assessee''s Memorandum of the Association.

It is also alleged by the Assessee that the agreement in respect of the advance was that if the floatation of the new company was accomplished the Southern Agencies Ltd. would either refund the advance to the Assessee or allot to the Assessee shares for the said amount in that company and that there was also an understanding that the Assessee would be given a distribution agency from the Rodier Textiles Mills Ltd.

For reasons which it is unnecessary to state here the promotion of the Rodicr Textiles Mills Ltd. failed and the asscssce was able to get back fr-.;m the Southern Agencies Ltd. only Rs. " 2,00,000 out of the advance of Rs. 605071-8-5. The amount of Rs. 2,00,000 was paid to the Assessee on 7-12-1951, and since the Assessee could not recover the balance amount of Rs. 4,05,071-8-5 that balance was written oil by the Assessee as a bad debt on 31-12-1951.

In the assessment for the year 1952-1953 the asscssce; claimed a deduction on account of the writing oif of this bad del. it, but the Income Tax Officer disallowed the deduction on the ground that the amount in. question had become neither bad nor doubtful on 31-1-1951 and that the writing off of the said debt was therefore premature. Regarding this matter the Income Tax Officer said in his order:

It is stated that a sum of Rs. 6 laks and odd was advanced to Southern Agencies (Pondicherry) Ltd. in the year 1948 towards purchase of shares in the Rodier Textiles Mills Ltd. (in formation) of which the former were the promoters, that ultimately the scheme of promotion of Rodier Textile Mills fell through and it was not formed at all, that the Sou them Agencies to whom the amount was paid had no means to pay back the full amount that it paid only Rs. 2 lakhs and that the balance of Rs. 405072 had therefore to be written off as bad.

Before going into the question of the admissibility of the amount in question I find from the papers before me that the amount became neither bad nor doubtful as on 31-12-1951. In the minutes of the Directors'' meeting held on 12th October 1951 it is stated that Messrs. Southern Agencies (Pondicherry) Ltd. in which the Managing Director is also interested have been able to realise a good portion of the deposits made with the Sterling Company & a first instalment of Rs. 2 lakhs had already been paid by them to M/s. A. V. Thomas and Co. Ltd.

It is also further stated that the Managing Director was hopeful of recovering a substantial portion of the original advance for shares but it was not possible that the company may lose a portion of this outstanding. When this was the position in October 1951 when the receipt of Rs. 2 lakhs was considered as a first installment, it was certainly premature on the part of the Assessee to have written of the entire balance after deducting the above Rs. 2 lakhs in the accounts for year ended 31st December 1951.

In any case as the advance was given only in 1948 and the first instalment of Rs. 2 lakhs was received only towards the end of 1951 when it was hoped to receive furdier instalments as well, the Assessee was not in order in claiming the whole amount as a bad or doubtful debt in the accounts for the year .1951. The bad debt claim is therefore disallowed''''. On appeal by the Assessee the Appellate Assistant Commissioner of Income Tax, Trivandrum, also held that this deduction was not permissible, but the reason given by him for the disallowance of the deduction was different from that given, by the Income Tax Officer. The appellate Assistant Commissioner considered from certain passages in the directors'' report placed before the annual general meeting of the Assessee company on the 15lh December 1952 that the object with which the advance was made was for purchasing shares in the new company in order to secure its agency, and therefore held that the loss in question was not a revenue loss but a capital loss and so no deduction could be allowed in respect of it. The relevant portion of his order reads:

It appears to me that if this was the object with which an advance of Rs. 6 lakhs was made for purchasing the shares of the now company, this advance when it became irrecoverable should not be treated as a business bad debt of the company, as this advance must then be said to have been made for the acquisition of a capital asset which might be either the control of the new company or the gaining of its goodwill which would result in the grant of its agency rights, to the Appellant company.

While the normal business of the latter might include acting as the agents of the several companies and it may also be that in the ordinary course of its business loans might be advanced to these companies by the Appellant, purchase of shares of newly floated company with the object of getting appointed as its agents cannot ''''but be said to be a transaction of capital nature. I therefore do not find any justification to treat this irrecoverable advance as a revenue loss. Emphasis is laid by the Appellant''s representative on the fact that a similat YA advance made for the purpose of acquisition of certain real estates resulted in a profit which has beer* .* returned by die company as revenue profit.

This I am afraid, is hot germane to tire point at issue which is whetiier the advance made by the'' company for acquiring shares of the Rodicr Textile Mills Ltd. was of a revenue or capital nature. It is however of interest to note that this profit on the sale of real estate had in fact been described in'' tho-1 extract quoted above as a capital profit.

While I find that the Income Tax Officer has-not dealt with this aspect in the assessment order, the Appellants'' representatives, whom I have questioned in this regard, have no objection to my going, into this question now. I have therefore heard his, arguments thereon, but cannot agree with him that this is deductible as a revenue expense.

Against the order of Appellate Assistant Commissi''oner the Assessee filed I. T. A. No. 5160 of 1954-55 before the Income Tax Appellate Tribunal. The Madras Bench ''A'' of the Tribunal heard] that appeal and dismissed it on 10-6-1955 holding that the advance in question was not made in the normal course of the business of the Assessee and that the transaction was actuated only by personal!,'' motives. After the dismissal of the appeal tire'' Assessee asked for a reference to this Court u/s 66(1) of Income Tax Act, alleging that the1" following questions of law arise out of the Tribunal''s/- order:

(i) Whether on the facts and in the circumstances of the case the sum of Rs. 4,05,071-8-5 can be claimed by the Assessee as a bad debt written off under the provisions of Section 10(2) (xi) of the Act, (ii) Whether on die facts and in the circurnstanccs of the case the Assessee can claim the sum of Rs. 4,05,071-8-5 as permissible deduction u/s 10(2) (xv) of the Act, and (iii) Whether on the facts and in the circumstances of the case, the Assessee is permitted to claim the deduction of the said sum of Rs. 4,05,071-8-5 as a proper debit and charge it lo the profit and loss account of the Assessee company.

The Income Tax Department filed a reply stating:

The facts stated in the enclosure to the Reference Application of the Assessee are substantially correct in so far as they are not prejudicial to the interest of the Department and argumentative in nature", and suggesting that, the questions taught be consolidated and recast as:

''Whether, on the facts and in die circumsistances of the case the Tribunal was correct in holding that the amount of Rs. 4,05,071-8-5 claimed to the Assessee company as a deduction was not missible either u/s 10(2) (xi) or 10(21''J (xv) and that this comprehensive question might be referred to the High Court. The Tribunal however rejected the Assessee''s application on the ground | that, the case involves only findings on questions of '' fact and that no question of law arises out of the order:

The procedure adopted by the Tribunal appears to be rather unusual. Regarding the fwtej of the case there is practically no dispute between the Department and the Assessee. The Assessee feeing a registered company its memorandum of .association was available to the department and the department had not only not disputed in any of the proceedings the Assessee''s allegation that the advance was made in the normal course of its business and in pursuance of its memorandum of association but also expressly admitted in the proceedings, on the application for reference before the Tribunal that ''''the facts stated in the enclosure to the reference application of the Assessee are substantially correct.

It was not on the ground that the advance in question was not made in the normal course of the business of the company but only on the ground'' that the amount written off had not become bad or doubtful on 31-12-1951 that the Income Tax Officer disallowed tire deduction claimed by the Assessee. The Appellate Assistant Commissioner also did not consider the advance to be one out of the normal course of the Assessee''s business and disallowed the deduction only because he considered the item was not a revenue expense and was a capital expense.

In the light of these facts and the dear admission of the Department that the facts stated in the enclosure to the reference application are substantially correct and also the nature of the question submitted by the Department for reference to this court it is clear that there was never any dispute between the Assessee and the Department as to whether the advance in question had been made in the normal course of the Assessee''s business or not, and the two points on which there was difference between them were only whether the amount written off had become bad or doubtful on 31-12-1951 and whether that amount was a capital loss or revenue loss.

At any rate, it would appear that the Assessee had no opportunity to meet the ground on which the Tribunal decided the case against it, namely, that the advance was not made in the normal course of its business and was actuated only by personal motives. It would also appear Iron the Tribunal''s order dated 10-6-1955 in I. T. A. No. 5160 of 1954-55 that the Tribunal has decided the question of the applicability of Sections 10(2) (xi) and 10(2) (xv) against the Assessee only because of its finding that the advance in question was not made in the normal course of the Assessee''s business and that the question whether Section 10(2) (xi) or Section 10(2) (xv) would apply if the advance was made in the normal course of the Assessee''s business has not been considered.

In the circumstances we hold that the question of law suggested by the Department viz; "Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 4,05,071-8-5 claimed by the Assessee company as a deduction was not admissible either under Sections 10(2) (xi) or 10(2) (xv)?"

During the course of the hearing in this Court there was a suggestion that besides the question of the applicability of Sections 10(2) (xi) and 10(2) (xv) the further question also arises in this case as to whether , the Tribunal was competent to decide the case against the Assessee on a new ground wirioh had not been set up before and which the Assessee had no opportunity to meet either before the Income Tax Officer or the Appellate Assistant Commissioner, and some arguments were also addressed to us as to whether a specific question has to be raised or not as to the competency of the Tribunal in regard to this matter.

In our opinion tire question as recast by the Department is wide enough to cover not only tire question of the applicability of Sections 10(2) (xi) and 10(2) (xv) but also the competency of the Tribunal to decide the case against the Assessee on the new ground, and we desire to make it clear that the question as recast by the Department has been understood by us to cover all these three matters & it is on the basis that all these three matters are covered by the question, "Whether, on tire facts and in the circumstances of the case, the tribunal was correct in holding that the amount of Rs. 4,05,071-8-5 claimed by the" Assessee company of a deduction was not admissible cither under Sections 10(2) (xi) or 10(2) (xv)? the Tribunal is being required to state and refer a case.

In the result we hold that the following question of law arises out of the order of the Tribunal in this case:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 4,05,071-8-5 claimed by the Assessee company as a deduction was not admissible either under Sections 10(2)(xi) or 10 (2) (xv) and require the Tribunal to state the case and refer it accordingly u/s 66(2) of the Income Tax Act. No costs.