Ajit K.Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the loan of Rs. 48,52,951 was advanced by the assessee-company in the ordinary course of its business is based on relevant and adequate evidence and is reasonable ? 2. On the facts and in the circumstances of the case and especially in view of the fact that part of the loan of Rs. 48,52,951 was advanced by Burlow and Co. Ltd., and not by the assessee-company itself, was the Tribunal justified in holding that the sum of Rs. 21,96,390 out of the aforesaid amount was allowable as a bad debt while computing the assessee's total income and that it was not a capital loss ?"
(2.) Shortly stated, the facts are that the assessee is a limited company and derives income from managing agency and from various other sources. Air-conditioning Corporation Limited was a company managed by the assessee-company. Another company, Burlow and Co. Ltd., was a 100% subsidiary company of the assessee-company. The assessee-company became the managing agent of Air-conditioning Corporation Ltd., on the basis of an agreement dated February 22, 1949, for 20 years. The assessee advanced loan to the said company from lime to time and the loan as on March 31, 1949, stood at Rs. 15,67,147. Thereafter, the said debt was taken over by the 100% subsidiary company of the assessee, viz., Burlow and Co. Ltd. and Burlow and Company Limited, from April 1, 1949, started financing Air-conditioning Corporation Limited on the basis of the agreement dated June 28, 1949. Burlow and Company Limited agreed to finance Rs. 45.1 lakhs to Air-conditioning Corporation Limited. The advance given by Burlow and Company Limited stood at Rs. 49,52,951 as on March 31, 1956. On April 1, 1956, the assessee-company took over the loan granted by its 100% subsidiary Burlow and Company Ltd., and sold the loan to Orient Paper Mills Ltd., a concern belonging to the Birlas in terms of the letter dated April 10, 1956, containing the terms and conditions for a sum of Rs. 26,56,561. The unrealised amount of Rs. 21,96,390 was written off by the assessee-company and the same was claimed as a bad debt and/ or a trading loss.
(3.) The Tribunal, on these facts, found as follows : (a) The loan has been granted in the course of the managing agency business of the assessee-company. The Department, at no stage, has doubted the genuineness of the letter dated April 10, 1956, on the basis of which the loan has been purchased by Orient Paper Mills Limited for a lesser amount of Rs. 26,56,561. (b) Under the circumstances, the transaction was in the course of the business activity of the assessee-company. (c) As the assessee-company could not realise the loan because the balance of the amount became unrealisable after the debt was purchased by Orient Paper Mills Ltd., it cannot be said that the loan was a capital loss. (d) The acquisition of the shares and selling out of the loan are two different transactions and they could not be linked together. (e) The assessee-company was doing the business of financing and, accordingly, it financed Air-conditioning Corporation Limited. Accordingly, the transaction was in the, course of the business activity of the assessee-company and as the assessce-company could not realise the loan for the lesser amount which became unrealisable after the debt was purchased by Orient Paper Mills Limited, the same was rightly written off as a bad debt or as a loss.;