RAMASWAMI,J. - (1.) IN this case, the assessee is a public limited company called Sitalpur Sugar Works Limited which carried on the business of manufacture of sugar. The assessee follows the mercantile system of accounting. The assessment year is 1945 -46 and the accounting year of the assessee is the year ending with 30 -6 -1944. In 1936 the company bought a second hand sugar manufacturing machine from Java. After working the machinery for two years the company resolved to sell the machinery. On 30 -8 -1938 a contract was executed between the company and Lakshmiji Sugar Mills. It was agreed that the machinery would be sold for a sum of Rs. 5,15,000 and that half of the amount will be paid by 31 -3 -1939 and the other half will be paid in equal instalments on 31 -3 -1940 and on 31 -3 -1941. There was a clause in the contract that these two instalments would carry interest at the rate of 5 per cent. Lakshmiji Sugar Mills also agreed that for these two instalments they would furnish a guarantee or execute a mortgage bond. On 31 -3 -1939 Lakshmiji Sugar Mills paid half the sale price as agreed upon. For the balance of the purchase price Lakshmiji Sugar Mills executed a mortgage of the machinery and agreed to pay interest at the rate of 5 per cent. The assessee treated the amount of Rs. 2,57,500 as loan in its books of account and according to the mercantile system adjusted interest every year in its books of account. The amount of interest adjusted is shown below : Year of account. Amount of interest adjusted and assessed. 1938. -39 3,218/12/ - 1939. -40 13,035/15/3 1940. -41 12,714/ -/9 1941. -42 12,875/ -/ - 41,843/12/ -. The interest shown in the books of account was assessed to income -tax for the respective years. Lakshmiji Sugar Mills however did not pay the interest agreed upon. In 1941 the assessee filed a suit on the mortgage. The parties however entered into a compromise and Lakshmiji Sugar Mills paid Rs. 2,66,000 in full satisfaction of the claim due on the mortgage bond. The total amount claimed by the assessee was Rs. 2,99,343 and the result of the compromise was that the assessee had to remit a sum of Rs. 33,343. The compromise was effected during the accounting year and the assessee claimed that the remission of Rs. 33,343 should be treated as a bad debt or as an irrecoverable loan under S. 10(2)(xi), Income -tax Act. The claim was rejected by the Income -tax officer on the ground that the debt had not arisen in the course of the assessee's business. An appeal was taken on behalf of the assessee before the Appellate Assistant Commissioner who allowed the appeal holding that the amount of Rs. 33,343 should be allowed as a bad debt for the purpose of assessment of income -tax. The Income Tax Department preferred an appeal to the Income Tax Appellate Tribunal who set aside the order of the Appellate Assistant Commissioner and held that the assessee was not entitled to any deduction under S. 10(2)(xi) of the Act. The reason given by the Appellate Tribunal was that the transaction of the sale of machinery was not a transaction of the assessee in carrying on his trade but was in the character of an investment.
(2.) IN this state of facts the Income Tax Appellate Tribunal has referred the following question of law for the opinion of the High Court : "Whether, the department having previously taxed the interest income of Rs. 41,843/12/ - during the years 1938 -39 to 1941 -42, on mercantile basis as business income, the amount of Rs. 33,343 realised short subsequently as interest can be allowed as a deduction - On behalf of the assessee Mr. Dutt put forward the submission that the sale of the Java machinery was a proper trading transaction and the assessee was entitled to a deduction of the loss in the computation of the income -tax. The submission is based upon S. 10(1) and S. 10(2) (xi), Income -tax Act. Section 10(1) states that "the tax shall be payable by an assessee under the head 'profits and gain of business or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him." Section 10(2) provides that "such profits or gains shall be computed after making the following allowances, namely,...... (xi) when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation.............." The argument of Mr. Dutt is that the transaction was a business transaction and the assessee was entitled to a deduction under S. 10(2)(xi) and the remission of Rs. 33,343 should be treated as a bad and doubtful debt due to the assessee in respect of a portion of his business. In my opinion the agreement of Mr. Dutt must be accepted as valid.The assessee had purchased sugar manufacturing machinery in 193S from Java in order to increase its business capacity and to make more profits. The machinery was used for two years and in 1938 the assessee decided to sell the machinery to Lakshmiji Sugar Mills. The reason which induced the assessee to sell the machinery was that Government had introduced zoning system in Muzaffarpur and there was no prospect of obtaining adequate sugar -cane in the area. It was for this reason that the assessee decided to sell the Java machinery. In my opinion, the circumstances unmistakably indicate that the transaction was a proper trading transaction made in the course of the normal business of the assessee. In this connection, the Memorandum of Association printed at page 13 of the paper -book is important. Article 3(1) of the Memorandum of Association states : "To carry on business as manufacturers and refiners of and dealers in all kinds of sugar, sugar preparations and other bye -products and as planters and cultivators of sugarcane plants and any other trade or business whatsoever which can, in the opinion of the Company, be advantageously or conveniently carried on by the Company by way of extension or in connection with such business or is calculated directly or indirectly to develop any branch of the Company's business or to increase the value of or turn to account any of the Company's assets property or rights." Article 3(12) states that one of the objects of the company is "to sell or dispose of the undertaking of this company, or any part thereof, in such manner and for such consideration as the company may think fit, and in particular for shares (fully or partly paid -up), debentures, stock or securities of any other company." Articles 3(16) and 3(20) are also important. Article 3(16) reads : "To invest and deal with the monies of the company not immediately required upon such securities and in such manner as may from time to time be determined." Article 3(20) provides : "To do in any part of the world either as principals, agents, trustees, or otherwise, and either alone or in conjunction with others and by or through agents, sub -contractors, trustees or otherwise, all such other things as may appear to be incidental or conducive to the attainments of the above objects or any of them, and so that the various objects shall be regarded as independent and in no wise restricted by reference to the name of the company or to the business or objects contained in any other paragraph." In my opinion the sale of the Java machinery is a proper trading transaction which is expressly authorised by Arts. 3(1), 3(12), 3(16) and 3(20) of the Memorandum of Association. It is of course true that every transaction which is covered by the Memorandum of Association of the Company cannot be said to be necessarily performed in the course of its business (see, for example, the opinion of Lord Clyde in - 'Commissioner of Inland Revenue v. Hyndland Investment Co. Ltd., (1929) 14 Tax Cas 694 at p. 699 (A) ). The question is not whether the transaction is within the powers of the company but the question is whether the transaction is in the nature of a business or a trading activity. In dealing with this question, it is of course a relevant circumstance that the transaction is authorised by the Articles of the Association but that circumstance is not a conclusive circumstance. It must further be shown that the transaction has a proximate connection with the normal business of the company and that the connection is so proximate that the transaction can be taken to have been performed in the ordinary course of the business of the company. To put it in other words, it is the 'nature' of the company's transaction which must determine whether it is carrying on the trade or not; it is not sufficient to demonstrate that the transaction is within the company's powers (see the opinion of Lord Justice Atkin in - 'Commissioner of Inland Revenue v. Korean Syndicate Ltd.', (1921) 12 Tax Cas 181 (B). Applying the principle in the present case I hold that the sale of the Java machinery is a transaction not only within the company's powers but is a transaction performed in the normal course of the company's business. The amount of Rs. 33,343 remitted by the assessee is therefore in the nature of a commercial loss and the assessee is entitled to a deduction of this amount under S. 10(2) (xi) of the Income -tax Act.
(3.) THIS view is borne out by a decision of the English Court in - 'Commissioners of Inland Revenue v. Dale Steamship Co. Ltd.', (1924) 12 Tax Cas 712 (C). In that case, the assessee company was formed inter alia, (a) to acquire steamships and other vessels, (b) to build, charter, let out on hire and trade with ships, (c) to carry on business as ship -owners, merchants, etc., and (d) to invest and deal with the moneys of the Company not immediately required as might from time to time be determined. The Company at the outbreak of the war owned and traded with five ships. Of these one was detained by the enemy at Hamburg, one was sold, and the remaining three were sunk during the war. The proceeds of sale and the insurance moneys received were all placed on deposit or invested in easily realisable investments in order to facilitate the resumption of trading or winding up. It was held by Rowlatt, J., that the Company was carrying on a trade or business. In reaching this decision Rowlatt, J., relied upon the authority of - 'Commissioner of Inland Revenue v. South Behar Railway Co.', (1924) 12 Tax Cas 657 (D).;