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TMI Blog1981 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 1,75,000 was transferred to the share capital on account of the 7 partners. Thereafter, further advances made to the aforesaid company and the balances due on different dates from the above company were as under: Date Amount Rs. 31-3-1966 4,54,447 31-3-1967 5,65,471 31-3-1968 2,44,290 31-3-1969 2,44,490 31-3-1970 2,44,490 31-3-1971 2,29,990 The aforesaid balance of Rs. 2,29,990 was not considered, to be recoverable and was, therefore, written off as a bad debt during the previous year relevant to the assessment year 1971-72. It may be stated that the aforesaid company was incorporated to run a hard board paper mill. It went into production in November 1965 but due to losses the factory along with the land, plant and machinery, etc., were sold to Swarup Textile Ltd., Muzaffarnagar, UP, for a consideration of Rs. 3,30,000 vide sale deed 16-11-1967. Before the ITO it was claimed that the loss of Rs. 2,29,990 should be allowed either as a bad debt under section 36(1)(vii) or as a trading loss under section 28(i). The submission made before the ITO was that the advances made to the aforesaid company were for the purposes of the assessee's business. According to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 20,000 as goods were purchased on credit. The arrangement with Rohtas Industries Ltd. was terminated and thereafter the arrangement with Straw Products Ltd. was also terminated. The breaking of these arrangements upset the business of the assessee. 4. Thereafter, the assessee changed its pattern of doing business and instead of giving security deposits the assessee started advancing moneys in a running account which was adjusted against the goods purchased. By making advances in a running account goods were purchased from Swatantra Bharat Paper Mills (P.) Ltd. Interest was charged from Swatantra Bharat Paper Mills (P.) Ltd. on the outstanding balances and such interest was shown as income from paper business. After the year 1967 the business of Swatantra Bharat Paper Mills Ltd. declined but the money advanced to them earned interest and such interest was shown as income of the paper business in the profit and loss account. It was claimed that the advances to Gokal Chand Jagan Nath (P.) Ltd. were on the same pattern as to Swatantra Bharat Mills (P.) Ltd. and the purpose of the advances was to earn interest, to sell the products of the aforesaid company and also sell raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 was transferred to the share capital account on16-3-1965. According to the learned departmental representative the advances made by the assessee to the aforesaid company were in the nature of capital and were made for setting up the factory of the aforesaid company. It was submitted that such advances a part of which could not be ultimately realised could neither be allowed as a bad debt or as a trading loss. It was pointed out that against the finding of the AAC that the aforesaid claim could not be allowed as a bad debt there was no appeal by the assessee and, therefore, the only question, for consideration was whether the claim of the assessee could be allowed as a trading loss. She submitted that the two judgments in the cases of B.D. Bharucha and T.J. Lalvani relied on by the AAC were distinguishable on facts. She referred to page 441 of the Commentary by Kanga & Palkhivala, 7th edn., vol. I, wherein the learned authors have observed as under : "But if the real nature of the transaction is investment of capital rather than a loan, e.g., where the assessee buys shares in a company in order to provide the company with finances, the resulting loss would be a capital loss and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom money was advanced on behalf of the said company a sum of Rs. 14,500 was recovered in this year. He submitted that it was only in this year that the assessee lost all hopes of recovering any part of the sum of Rs. 2,29,990. When we put it to the learned counsel for the assessee that if the veil of incorporation was lifted, it would be apparent that the sum of Rs. 2,29,990 was due from the same persons who were the partners of the assessee-firm and as such the assessee could not claim any loss from its own partners, the learned counsel for the assessee submitted that such an argument should not be considered because such was not the case of the revenue. He also submitted that in law a partnership firm, the partners of the firm and a limited company were separate legal entities and, therefore, the loss incurred by the assessee-firm should be allowed. 8. In reply the learned departmental representative submitted that the ITO himself had stated that since the shareholders of the aforesaid company and the partners of the assessee-firm were the same the loss claimed by the assessee could not be allowed and as such the revenue was not making any new claim before us. She submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. Thereafter, the assessee had made substantial advances and these advances are apparently for the purpose of establishing a factory for manufacture of fibre board by the aforesaid company. The said company had started production in November 1965 but because of losses it was sold on16-11-1967. From the facts of this case, it is apparent that the advances were made by the assessee to the aforesaid company for the purpose of setting up a factory. The learned counsel for the assessee had argued that the advances were made to enable the assessee to sell the goods manufactured by the said company and thereby make profit. The assessee does appear to have purchased the goods worth Rs. 1,21,472 sold by the aforesaid company in the year ending 31-3-1977 but that by itself would not establish that such large advances were made only for making the aforesaid purchases. The advances were made by the assessee to the company for creating a source from where goods could be purchased. The creating a source for making purchases would be an enduring benefit and that the loss would be of a capital nature. Our finding, on the facts of this case, is that the advances to the aforesaid company were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led a suit against the said company apparently for the reason that the shareholders and the directors of the company are the same persons as the partners. On the facts of this case, we cannot record a finding that the loss of Rs. 2,29,990 became a loss of the assessee only during this year. 13. We may now briefly refer to the judgments relied on by the learned counsel for the assessee. In the case of Dhanalakshmi Corpn. advances were made during the course of the business and it was for that reason that the loss was allowed. The facts of that case are distinguishable. In the case of Indore Malwa United Mills, money was borrowed by the managing agents and the loss was held to be incidental to the company's business. There is no question of any loss by money borrowed by the managing agents in this case. In the case of B.D. Bharucha film distributor had advanced certain moneys and incurred a loss because the picture was not released for exhibition before the stipulated date. The loss in that case was allowed as a trading loss. The facts in that case are again distinguishable. In F.M. Chinoy & Co., the loss which was allowed occurred through the managing agents. No question of managin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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