Ramaswami J. - (1.) This appeal is brought, by special leave, from the judgment of the Madras High Court dated October 9, 1962, in T. C. No. 136 of 1960.
(2.) The appellant-company is a private limited company incorporated under the Indian Companies Act. It carries on business as managing agents of several concerns. It also derives income from insurance agency. Amer- Hind Manufacturers Limited was one of the companies for which the appellant-company was appointed managing agents from July 16, 1950. It was previously managed by another company called "American Agencies Limited". Amer-Hind Manufacturers Limited was engaged in the manufacture of carbon paper, ink and other allied products. It was in need of large funds for carrying on its manufacturing operations. The managing agency agreement between the appellant-company and Amer-Hind Manufacturers Limited provided that the appellant-company should lend or advance the necessary amounts required by the managed-company. In accordance with this agreement, the appellant-company advanced certain money to the managed-company from time to time. The total amount thus advanced up to December 31, 1954, amounted to Rs. 3,40,956 and odd. It appear further that the appellant-company along with S. N. N. Sankaralinga Iyer who was a director of the company guaranteed the loan of about Rs. 2 lakhs obtained by the managed-company from the Indian Overseas Bank Ltd., Madras. Amer-Hind Manufacturers Ltd. later on failed in its business. The bank pressed for the repayment of the loan but Amer-Hind Manufacturers Ltd. was unable to repay. Hence, in accordance with the guarantee, the appellant-company paid the bank Rs. 81,593-8-0 representing the total amount due by Amer-Hind Manufacturers Ltd. On payment, the bank released to the appellant-company the stock pledged by Amer-Hind Manufacturers Ltd. from which the appellant-company was able to realise Rs. 44,905 and odd. The balance due to the appellant company from the managed company under this account was Rs. 36,693 and odd. The total amount thus due to the appellant company from Amer-Hind Manufacturers Ltd. under the above account as well as in respect of advances under current account came to Rs. 4,03,203. Even thereafter the business of Amer-Hind Manufacturers Ltd. did not improve and the appellant-company found that there was no prospect of realising the amount due from Amer-Hind Manufacturers Ltd. It was written off in the books of account of the appellant-company during the previous year ending December 31, 1955. Thereafter, the appellant-company claimed allowances in respect of Rs. 4,03,203 in computing the profits of its business for the assessment year 1956-57. While examining this claim, the Income-tax Officer held that there was no prospect of the appellant-company recovering the amount from Amer-Hind Manufacturers Ltd. But the Income-tax Officer observed that under the terms of the managing agency agreement it was not obligatory on the part of the appellant-company to advance the amount and therefore the loss sustained by the appellant-company was a capital loss and it was not liable to be deducted as a business expenditure. The appellant-company preferred an appeal to the Appellant Assistant Commissioner of income-tax who also rejected the claim. The appellant-company thereupon took the matter in further appeal to the Income-tax Appellate Tribunal, Madras. The Appellate Tribunal found that the appellant-company was carrying on the business of managing agents, that the business of managing agency continued in the relevant year of account, that sub-clause (19) of clause 13 of the memorandum of association of the appellant-company empowered it to lend moneys and also to guarantee the performance of contracts, and that the advances in question and the agreement guaranteeing payment to the bank were only in pursuance of the aforesaid objects. The Tribunal accordingly held that the loans advanced and payments made to the bank under the guarantee were in the course of the business of the appellant-company, and allowed the claim. Thereafter, the Appellate Tribunal referred the following question of law for the decision of the High Court under section 66(1) of the Income Tax Act : "Whether there are materials for the Tribunal to hold that the debts in question was incurred in the course of the business so as to make its loss deductible under section 10(2)(xi) -
(3.) After hearing the reference, the High Court held that the appellant- company acquired the managing agency on condition of giving loans and making advances and the loss arising out of such advances would only be capital loss as it related to the structure or framework of the managing agency business. The High Court accordingly answered the question against the assessee.;