Subba Rao, J. - (1.) This appeal by certificate preferred against the order of the High Court of Madhya Pradesh, Indore Bench, raises the question whether an item of Rupees 42,63,090-14-7 should have been allowed as a trading lost in computing the profits of the appellant-company under R. 3 of the Indore Industrial Tax Rules, 1927 .
(2.) The facts may be briefly stated. The appellant, Indore Malwa United Mills Ltd., is a public limited company incorporated and registered under the Indore Companies Act, 1914. Since the incorporation it has been carrying on business of manufacturing cloth. Under the Memorandum of Association of the said company, for the purpose of the textile business it was authorized to raise or borrow money from time to time and to invest its funds, inter alia, in loans to others. For the purpose of carrying on the business, the appellant company originally appointed M/s. Karimbhai Ibrahim and Co. Ltd. as its Managing Agents. On June 8, 1926, the Board of Directors of the appellant company passed a resolution to the following effect: "Resolved that Surplus Fund of the company be invested with the agents in current account with the company at the same rate of interest, viz., 6 per cent." On November 28, 1929, the appellant-company entered into an agreement with M/s. Karimbhai Ibrahim and Sons Ltd. whereunder they were appointed as the Managing Agents of the appellant-company in place of M/s. Karimbhai Ibrahim and Co. Ltd. On July 10, 1932 the Board of Directors reaffirmed the resolution of June 8, 1926. Pursuant to the power conferred on the Managing Agents under the said agency agreement and the said resolution, Karimbhai Ibrahim and Sons Ltd. borrowed large sums of money from outsiders, entered them in the appellant-company's accounts and invested large sums with themselves "in current account with the company" in terms of the said resolution and utilized the same for their own purposes. Before the Annual General Body Meeting they used to bring large amounts into the accounts of the company and show that they had paid off their debts. After satisfying the General Body they would again withdraw large sums for their purposes. The General Body was also aware of the loans and indeed it approved the said transactions. In the year 1933 the Managing Agency company went into liquidation. For the assessment year 1941, the appellant-company submitted its return of income and claimed thereunder a deduction, among other items, a sum of Rs. 49,13,316, under the head of bad debt and trading loss written off in the profit and loss account of the appellant-company-we are only concerned in this appeal with this item and, therefore, it is not necessary to notice any other particulars of the assessment. The Assessing Authority allowed only Rs. 6,41,913-2-0 as bad debt and disallowed the amount due from Karimbhai Ibrahim and Sons Ltd. on the ground that the said borrowings were not made for the purpose of the business of the company. On appeal the Appellate Authority also took the same view. On further appeal, the High Court confirmed the finding of the Appellate Authority on the ground that the losses incurred by the company were really dehors the business of the company, though they might involve fraudulent conduct of the Managing Agents. Hence the present appeal.
(3.) Mr. A. V. Viswanatha Sastri, learned counsel for the appellant, contended that the employment of the Managing Agents was incidental to the carrying on of the appellant's business that as the Managing Agents had the power to borrow funds for the appellant-company and invest the surplus in loans to themselves, the loss caused by such investment was also incidental to the carrying on of the appellant's business and, therefore, the said loss was deductible in arriving at the trading profits of the appellant-company.;