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TMI Blog1962 (10) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 other companies", to make investments and to assist any company financially or otherwise. At the material time the assessee company had three directors, whose names are given below : 1. A. V. Thomas, 2. S. Sankaranarayana Iyer, and 3. J. Thomas. There was another private limited company known as the Southern Agencies Ltd., Pondicherry, and its directors were : 1. A. V. Thomas, 2. S. S. Natarajan, and 3. C. S. Ramakrishnan Karayalar. There was a mill in Pondicherry known as Rodier Textile Mills belonging to the Anglo-French Textiles Ltd., Pondicherry. The assessee company averred that the Southern Agencies Ltd. took up in 1948 the promotion of a limited company to be known as Rodier Textile Mills Ltd., Pondicherry, with a view to buying and developing the Rodier Textile Mills. The assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 whether the claim of bad debt was premature or otherwise did not arise for consideration. The Appellate Assistant Commissioner also held that the deduction could not be claimed as an allowance under section 10(2)(xv) of the Income-tax Act. The assessee company appealed to the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner but on a third ground. The Tribunal accepted that one of the objects of the assessee company was the promotion and financing of other companies for gain but this advance of Rs. 6,00,000 was not made by the assessee company in the normal course of its business. It was rather a transaction actuated only by personal motives. In reaching this conclusion the Tribunal observed that the advance was made to Southern Agencies Ltd., which was not a company promoted by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 opinion the question as considered in the High Court does not embrace it. The assessee company should have requested the High Court at same stage to frame a question that there was no material for the Tribunal to reach the conclusion that this was not a business transaction but a case of an advance out of personal motives. It was contended before us that the High court in calling for a reference on the the single question had stated that that question would cover three matters. The first two were mentioned in the question and the third which was said to be implicit was whether the Tribunal was competent to decide a case which had not been made out by the department at and earlier stage. But this was not the same thing as saying that the Tribunal had no material before it on which it could reach the conclusion that this wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shown as amounts "paid to you by Indian Coffee and Tea Distributors Ltd., Madras, towards purchase of shares." On January 1, 1949, the amount opened with a debit balance of Rs. 6,05,071-8-5. Nothing appears from the accounts who this "you" was. A number of reversing entries were made in respect of certain amounts and then December 31, 1949, the amount was shown as follows : By advance for sundry expenses due from the promoters Rs. of new company debited to this transferred 5,071-8-5 By balance 6,00,000-0-0 1950 opened with entry on January 1 -To Balance 6,00,000-0-0 and closed with an entry By amount paid to Southern Agencies Ltd. 6,00,000-0-0 This was shown as an opening balance on January 1, 1951. On December 7, a payment of Rs. 2,00,000 was shown and Rs. 4,00,000 were transferred for writing off. On Decem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 share was made on behalf of the assessee company. The entry till the end of 1949 was that the amount was laid out for purchase of shares. It was only subsequently that it was shown to be an advance to the Southern Agencies Ltd. In fact, the entry comes only at the end of 1950 when it is set down "By amount paid to Southern Agencies Ltd." The assessee Company raised three contentions in support of the case that this became a bad and doubtful debt which was actually written off (a) that the High Court was wrong in saying that before the assessee could claim the deduction under section 10(2)(xi) it must prove that it had in the past purchased and sold agencies, (b) that the object of the assessee company was to apply for shares but as it did not apply for shares the transaction between it and the Southern Agencies remained an Advance in the ordinary course of business, and (c) Southern Agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 banker or money lender, the debt to be a debt proper had to be one which if good would have swelled the taxable profits. Applying these tests, it is quite obvious that an advance paid by the assessee company to another to purchase shares cannot be said to be incidental to the trading activities of the assessee company. It was more in the nature of a price paid in advance for, the shares which the Southern Agencies had a right to allot in the Rodier Textile Mills Ltd. This cannot, therefore, be described as a debt and indeed the changes in the books of account of the assessee company clearly show that the assessee company itself was altering the entries to convert the advance into a debt so as to b(, able to write it off and claim the benefit of sec tion 10(2)(Xi). In our opinion, section io(2)(xi) was inapplicable to the facts of this case. In the result the appeal must fail and it is dismissed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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