TMI Blog1962 (10) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Respondent:K. N. Rajagopal Sastry, R. N. Sahthey and P. D. Menon, JUDGMENT HIDAYATULLAH J. The assessee, A. V. Thomas and Co. Ltd., Alleppey, claimed a deduction of Rs. 4,05,072-8-6 the assessment year 1952-53 as a bad debt which was written off in its books of amount on December 31, 1951. This claim was disallowed. After sundry procedure, the following question was considered by the High Court of Kerala and answered against the assessee company : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 4,05,071-8-6 claimed by the assessee company as a deduction was not admissible either under section 10(2)(xi) or 10(2)(xv) ?" The High Court certified the case as fit for appeal to this court and this appeal has filed by the assessee company. The Commissioner of Income-tax (Bangalore), Kerala, is the respondent. The assessee company was incorporated in 1935 and, as is usual with companies, its memorandum of association authorised it to do multifarious business. According to clauses 1, 5, 18, and 23 it was authorised "to be interested in, to promote and to undertake the formation and establishment of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s late as June 12, 1951, the advance was considered to be good and recoverable, the balance was written off on December 31, 1951, which was the close of the year of account of the assessee company. It was this amount which was claimed in the assessment year 1952-53 as a bad debt actually written off, alternatively as an expenditure, not of a capital nature, laid out or expended wholly and exclusively for the purpose of the assessee company's business. The Income-tax Officer, Alleppey, held that the debt was written off at a time when it was neither bad nor doubtful and the claim to write it off was premature. He, therefore, disallowed it. An appeal was taken to the Appellate Assistant Commissioner and he upheld the order of the Income-tax Officer though on a different ground. He held that the advance was made for the purpose of purchasing shares of the new company then in formation and it was thus made for the acquisition of a capital asset, which was either the control of the new company or "to gain its goodwill likely to result in the grant of agency rights" to the assessee company. According to the Commissioner, the loss, if any, was of a capital nature and the question whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company ?" These questions show that the deduction was claimed (i) as a loss in the doing of the business under section 10(i),(ii) as a bad debt actually written off under section 10(2)(xi); and (iii) as an expenditure laid out wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Income-tax Act. The assessee company applied to the High Court and the High Court directed a reference on the single question which has been quoted. That question shows that the High Court did not direct the case under section 10(1) of the Act. The Tribunal had considered the case from the point of view of the business and had held that this was not an advance in the normal course of the business but one out of "personal motive." The High Court apparently had not accepted that the matter could be considered under section 10(1) and framed the question under clauses (xi) and (xv) of section 10(2). The question as propounded and considered by the High Court related to the two clauses only. An attempt was made before us to raise the issue under section 10(1) and to claim the deduction as an ordinary business loss. We disallowed the argument because in our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount actually written off as irrecoverable in the books of the assessee :.... (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." In support of its case, the assessee company stated that as there was no dispute about the facts that this was an advance in the ordinary course of business it should be treated as a trading loss or alternatively as a bad debt or an expenditure claimable under section 10(2)(xv). The assessee company relied strongly upon certain ledger entries of the Rodier Textile Mills Ltd., in the books of the assessee company. These have been marked as annexures "A-1" to "A-3". The High court also referred to these accounts and they have been construed as showing that there was an attempt by the assessee company to acquire a capital asset. These accounts began in 1948 and ended on December 31, 1951. The accounts are headed "personal ledger". In December, 1948, sundry amounts totalling Rs. 6,05,071-8-5 are sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any the case under section 10(2)(xv) becomes completely untenable. In any event, the amount was not expended in the year of account ending with December 31, 1951; it was expended in 1948. It remains to consider the case under section 10(2)(xi). In this connection, we were referred to the memorandum of association to show that it was one of the objects of the assessee company to promote other companies and this amount was paid to Southern Agencies Ltd. to promote the Rodier Textile Mills Ltd. There is no doubt that the objects mentioned in the memorandum of association of the assessee company include the promotion and financing of other companies. A memorandum, however, is not conclusive as to the real nature of a transaction. That nature has to be deduced not from the memorandum but from the circumstances in which the transaction took place. Here, the different versions given in the books of accounts of the assessee company belie the assertion that this was an amount paid to promote the Rodier Textile Mills Ltd. Even though this money was available on December 31, 1948, and the subscription list for the shares remained open from January 5 to 20, 1949, no application for a single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses for several preceding years can be accumulated and thrown into the scale against the income of another partner for a particular year. No principle of writing off bad debt could justify such a course, whether in the year following the dissolution or, as logic would permit, in some subsequent year in which the partner's insolvency has crystalised. The 'bad debt' would not, if good, have come in to swell the taxable profits of the other partner." This court also approved the dictum of Rowlatt J. in Commissioner of Income-tax v. Abdullabhai Abdulkadar 1961] 41 I. T. R. 545; [1961] 2 S. C. R. 949.and referred to the observations of Venkatarama Aiyar J. in Badridas Daga v. Commissioner of Income-tax [1959] S.C.R. 690 where the learned judge speaking for this court said that a business debt springs directly from the carrying on of t 'he business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business ". Section I0(2)ffi) is in two parts. One part deals with an assessee who carries on the business of a banker or. money-lender. Another part deals with business other than the aforesaid. Since this was not a loan by a banke ..... X X X X Extracts X X X X X X X X Extracts X X X X
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