Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, which relates to the assessment year 1965-66, the assessee posed two questions before the Tribunal for reference to this court. The questions were as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal had any materials or had relied on irrelevant or partly irrelevant materials to come to the finding that a loss of Rs. 87,546 had accrued or arisen to the assessee during the previous year relevant to the assessment year 1965-66 and whether such finding was not otherwise unreasonable or perverse ? 2. If the answer to question No. 1 is in the affirmative, then whether, on the facts and in the circumstances of the case, the loss of Rs. 87,546 was a trading loss incurred by the assessee in the course of its business and was not a capital loss arising from the loss of capital invested in the subsidiary company ?"
(2.) The Tribunal, however, has referred one question refraining it as follows : "Whether the Tribunal was justified in law in treating the loss of Rs. 87,546 as a trading loss and not as a capital loss for the assessment year 1965-66?"
(3.) The Revenue did not come up in an application for reference before this court. It appears that the only point involved related to the amount of Rs. 87,546 treated by the ITO as not admissible as an item of business expenditure. The assessee-company which at all material times, according to the Tribunal, had diverse lines of business like managing agency, imports and distributorship, purchase and sale, on its own account, etc., had a wide net work of subsidiaries to which it advanced loans from time to time. The list of loans and advances to subsidiaries as on March 31, 1964, showed that the assessee was a creditor to the extent of over Rs. 20 lakhs. The corresponding figure for the year ended March 31, 1965, i.e., accounting year under appeal, was about Rs. 7,43,000. The subsidiaries to which the loans were advanced by the assessee were all controlled by the assessee-company and some of them had actually appointed the assessee-company as their managing agents. There was one company called Group Marketing (India) Pvt. Ltd., which was a hundred per cent. subsidiary of the assessee-company. The balance-sheet of Group Marketing (India) Pvt. Ltd. as on December 31, 1965, showed that there were outstanding loans due to the two directors, Mr. Khan and Mr. Crawley, to the extent of Rs. 38,384. The assessee bought up the share capital of this company thereafter and advanced unsecured loans to the company. Thereafter, the balance-sheet as on December 31, 1965, of the subsidiary showed that the unsecured loans due to the assessee were of the order of Rs. 47,976. The amounts due to the directors mentioned earlier had been repaid. The two directors mentioned were not connected with the assessee-company. There was a running account between the assessee-company and Group Marketing (India) Pvt. Ltd. on account of which there was a debit balance of about Rs. 87,546 at the beginning of April 1, 1965. This amount was written off by the assessee during the assessment year 1965-66 and was claimed as a bad debt. The ITO considered the facts as pointed out above and also noted that some of the office establishment charges of the subsidiary were transferred to the loan account with the assessee-company after the discontinuance of the activities of that subsidiary. As the financial position of the subsidiary was not sound at the time the loans were advanced and as no interest was charged by the assessee-company to the subsidiary, the ITO inferred that the loan was connected with the assessee's participating in the capital of the subsidiary company and that the claim was not allowable. In that view of the matter, he disallowed the sum of Rs. 87,546.;