COMMISSIONER OF INCOME TAX Vs. INVESTA INDUSTRIAL CORPORATION LIMITED

JUDGEMENT

(1.) THE question that has been referred to us by the Tribunal in this reference under S. 256(1) of the IT Act, 1961, runs thus :

(2.) THE question relates to the asst. year 1963 64, the corresponding previous year being the year which ended on 31st March, 1963. The assessee company was incorporated in 1941 for carrying out the objects mentioned in its memorandum of association. In particular, from its very inception, it started carrying on business as managing agents and became the managing agents of two companies, viz., (1) Investa Machine Tools and Engineering Co. Ltd. (hereinafter referred to as "Tools Co.") in 1942 and (2) Palanpur Vegetable Products Ltd. (hereinafter referred to as "Palanpur Co.") in the year 1946. From 1945, it started financing the Tools Co. and from 1949 it started financing Palanpur Co. As on 31st March, 1963, the loan financed to Tools Co. stood at Rs. 1,50,000 and the interest that had been charged on this loan account had been offered for taxation as part of the company's income and that was accordingly being taxed as business income by the IT authorities. As regards Palanpur Co., the loan to that company from the assessee as on 31st March, 1951, amounted to Rs 1,86,000. It appears that during the accounting periods 1949 50 to 1950 51, interest of Rs. 5,291 and Rs. 8,211 was charged to this loan account and the same was offered for taxation as part of the assessee company's business income and was charged to tax as such. During the subsequent accounting years also whatever interest was received or charged to Palanpur Co. was brought to tax as business income of the assessee company. It appears that the financial position of Palanpur Co. deteriorated some time in 1953 and actually its factory was closed down from June, 1953. Interest on this loan account was, therefore, forgone by the assessee company during the years 1952 53 and 1953 54. It further appears that even the recovery of the principal amount itself became doubtful, with the result in the balance sheet as on 31st March, 1953, the loan was shown as doubtful. In view of this situation no interest was charged during the subsequent accounting years 1954 55 to 1956 57 (both inclusive). During 1957 58, it was agreed between the parties, viz., the respondent company and Palanpur Co., to treat this loan as interest free loan until such time as the Palanpur Co. was in a position to pay. Attempts were made to restart the Palanpur Co.'s business by change in the management and those attempts fructified when the managing agency of Palanpur Co. was taken over by Forbes Campbell & Co. Ltd., in October, 1959, and the business was restarted in February, 1960, by the new managing agents. In the beginning the results were encouraging and in respect of the accounts of the year 1960, the directors in their report to the shareholders expressed the hope that the company would be able to earn some profit. But despite all efforts the financial position of Palanpur Co. deteriorated and it was taken into creditors' voluntary winding up on 12th March, 1963. It thus became clear to the assessee company that Palanpur Co. was not going to revitalize its business and the assessee company's shareholding therein as also its loan were items of dead loss. Accordingly, the assessee company wrote off in its account books during the year ended 31st March, 1963, the amount of Rs. 1,86,000 which was outstanding as a bad debt or irrecoverable loan or business loan. On 7th Aug., 1963, the assessee company received a letter from the liquidator of Palanpur Co. stating that the unsecured creditors would get nothing.

(3.) AT the outset it may be stated that Mr. Mehta for the assessee did not press the contention that the item should be allowed as a deduction as being a bad debt under S. 36(2) of the Act and the only question that was debated at the Bar was whether the said item could be regarded as an allowable deduction as a trading loss while computing the business income of the assessee company for the relevant assessment year under S. 28 of the Act. Mr. Joshi appearing for the Revenue urged before us that if due regard be had to the memorandum of association of the assessee company it would be clear that there was no obligation on the part of the assessee company to make any advance or to make any finances to the managed company and in the absence of any such obligation being there, the advances made could not be regarded as advances or finances incidental to the carrying on of the assessee's business. He also urged that the loan also could not be regarded as a loan having been made in the course of business, inasmuch as there was no security obtained by the assessee company from the managed company for such large advances. He also pressed into service the aspect that the loan could be said to have changed its character from October, 1959, when there was a change in the managing agency of Palanpur Co. He, therefore, urged that the item in respect of which a claim of deduction was made could not be regarded as a loss incidental to the carrying on of the business by the assessee company. It is not possible to accept any of these submissions of Mr. Joshi for the reasons which we shall presently indicate.