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TMI Blog1969 (6) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ny (Amco Ltd.) and transact, perform and superintend all such matters and things relating to the business and affairs of the company for carrying out its objects as are required to be done by them as such managing agents under the articles of association ", etc. By clause 8 they were given the power to generally conduct and manage the business. In short, they had all the powers that are usually entrusted to managing agents. By clause 13, it was agreed that, " the managing agents may at their option and on such terms and conditions as may be mutually agreed upon from time to time, lend and advance to and for the use of the company moneys to any extent as they may like and so long as any sum remains due by the company to the managing agents, the managing agents shall be entitled to continue to act as the managing agents of the company even after the expiry of the period hereinbefore mentioned. " By clause 12 it was provided that, in the event of the company being wound up at any time for the purposes and with the object of transferring the business of the company to another company, Amco Ltd. " shall make it one of the terms and stipulations of their agreement " of transfer that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st two items mentioned above and the second question is with reference to the third item mentioned above. In the arguments before us, however, counsel on behalf of the Commissioner stated that lie would not advance any argument so far as the second item mentioned above is concerned, namely, the item of loans of Rs. 35,000. He was not in a position to support the reference as regards that item, and in our opinion rightly, because, they were pure loans advanced by the managing agents to the company in the course of their business and there can hardly be any dispute that the assessee-company would be entitled to claim them as deductions. To that extent, therefore, the first question will have to be answered in favour of the assessee in the affirmative. Then we turn to consider the remaining two items which are claimed as deductions by the assessee. First of all, there is the sum of Rs. 17,400 which was advanced to Amco Ltd. from time to time between April, 1955, and March, 1956, by the assessee. The purpose of these advances is stated in the statement of the case to be " for ensuring continuity of its (Amco's) production". As regards this item, both the Income-tax Officer and the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of these amounts is not likely to 'facilitate' the winding up. We do not find any material to justify this view. " They also held that the second ground was not sound and that the mere fact that clause 13 is so worded as to make it only optional on the part of the assessee to make the advances " will not support the view that the amount is not a loss in the course of business. When a loss incidental to business is allowable and in this case the loss is incidental and, therefore, the absence of an obligation does not affect the claim. " In the arguments before us on this item counsel has made two sub- missions. The first is that there was no obligation on the assessee to make these sundry advances. As managing agents they were merely required to manage the company and were not financiers and therefore it must be held that, when they made these sundry advances to Amco Ltd., they merely wanted, so to say, oblige the managed company, but that sort of payment cannot be, held to be in the normal course of business and cannot be allowed as a deduction. Secondly, he pointed out that the managing agents, who had intimate knowledge of the position of Amco Ltd., well knew that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other valuables which were stolen from its custody and, in order to safeguard its own reputation, the bank paid up the value of that jewellery to its constituent and then claimed the amountso paid up as a business loss. One of the arguments advanced on behalf of the Commissioner against the allowance of that deduction was that the bank was under no legal liability to its constituent to pay the value of the jewellery pledged with it. It was also argued that the bank, which was a pledged and therefore a bailee of the jewellery, had merely to take as much care of the pledged jewellery as a person of ordinary prudence would take under similar circumstances and that the bank had done that and therefore it was not liable for the loss of the jewellery pledged. The Supreme Court answered the contention at page 642 as follows : " Granting that, on proof that it had taken as much care of the jewellery pledged with it as it would have taken if it belonged to it, the bank could enforce its rights and recover the full amount due from the constituents, the question still remains whether in admitting liability for the value of the jewellery pledged, the bank laid out expenditure for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it was at any time the case of the department that these transactions were unbusinesslike or imprudent transactions and were being disallowed for that reason. The ground upon which the Income-tax Officer disallowed this item was that there was no obligation to make these sundry advances and that clause 13 of the agreement made it discretionary or optional on the part of the assessee to make the advances. Moreover, these advances were merely in the nature of " accommodation loans " and did not partake of the nature of business transactions. The Appellate Assistant Commissioner merely added other reasons by saying that the advances were made for the purposes of the winding tip of the company--ground which has not been pressed before us so far as this item is concerned. At no stage, therefore, was it the department's case that these were transactions which were imprudent or unbusinesslike which no reasonable man would have entitled into and that therefore they were being disallowed. We cannot, therefore, accept or consider the contention now raised that the advances were imprudent or unbusinesslike. Then we turn to the other item of Rs. 35,000 being the payment made for settlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assessees were debited with that amount by the State Bank who had guaranteed the amount on their behalf. The letter from the State Bank of India, Bombay, to the assessee at Bombay, dated 1st August, 1955, communicating the telegram sent by the State Bank to their branch office at Bangalore shows that the guarantee was given by the assessee to the State Bank at Bangalore, because it was so directed by the Government of Mysore and, to that extent, the State Bank at Bombay had been given a lien of Rs. 50,000 on the assessee's cash credit account for the period of their liability under the guarantee. On the next day after the above letter was written, the State Bank, Bangalore, wrote to the Minister for Law and Education of the Government of Mysore undertaking to indemnify the Rajpramukh of Mysore on demand to the extent not exceeding Rs. 50,000 against any claim that may possibly arise on Messrs. Amco Ltd. " by their failure to provide for payment of dues to their employees as may be adjudicated or directed by the Mysore Government ". It may be noticed that this was the very day on which the memorandum of settlement with the workers was signed. Thus, the settlement and the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either case it would not be a business expenditure or one laid out wholly and exclusively for the purposes of the assessee's business, but a disbursement on capital account. He urged that it was no part of the assessee's business to guarantee payments on behalf of Amco Ltd. though he agreed that, if it had been an outright loan, it might be supportable on that ground. It is clear that one of the businesses of the assessee was to be managing agents of companies. In the course of that business they undertook to be the managing agents of the business of Amco Ltd. Moreover, we have already said that it is now settled law that in Bombay it is the practice or custom for managing agents in the course of their duties as managing agents to procure finance for the companies which they manage. Therefore, if the managing agents advanced moneys, that would be in the Course of their business as managing agents. Because the advance was made through a bank guarantee we do not see how, for the purposes of the point before us, the position is at all different from the position of managing agents directly providing finance to the company which they manage. It is clear that, unless the amount payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f settlement is at exhibit G. It is signed on behalf of Amco Ltd. by its manager and by a director of the assessee-company oil behalf of the managing agents of Amco Ltd. The provisions of the Industrial Disputes Act shows that this agreement or settlement with the workers was absolutely binding on Amco Ltd. as well as its managing agents, and that non-fulfilment of that settlement would have resulted in the prosecution both of the company's officials as also of the managing agents, the assessees. This is clear from a consideration of the provisions of section 29 read with section 32 of the Industrial Disputes Act. Section 32 makes a special provision for offences by companies and it provides that where a person committing an offence under the Act is a company, every director, manager, secretary, agent or other officer or person concerned with the management thereof shall be deemed to be guilty of such offence. The only exception is that created by the words " unless he proves that the offence was committed without his knowledge or consent ", which upon the facts of the present case cannot obviously be taken advantage of by the assessee. Therefore the agent concerned with the manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and they explained what was meant by that passage. They pointed out that what was said in that passage was in connection with the business of a money-lender and did not deal with a public company carrying on banking business. The same view was taken by the Supreme Court in Indore Malwa United Mills Ltd. v. State of Madhya Pradesh, where their Lordships referred to the passage which we have quoted above with approval. That was a case where the managing agents of a mill had borrowed large sums of money from outsiders, had entered them in the company's books of account but had withdrawn the sums and utilised them for their own purpose. Later on the company who were the managing agents went into liquidation and the question was whether the mills could claim deductions for the sums which they could not thus recover from the managing agents as bad debts or trading loss. It was held that it was a trading loss deductible in computing the profis of the managed company in the assessment year. At page 741 the Supreme Court said: " We, therefore, find no di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is under any obligation to pay retrenchment compensation to the workman. The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then. At page 649 they stressed what in our opinion is the distinguishing feature of that case from the present case by the following words : " As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business. "Of course, we do not say that a liability for retrenchment compensation always arises on the closure of the business. That would be true under section 25FF but not under section 25F. Under section 25F it is possible that a running business may also retrench its workers. That is what was to happen in the present case for which the expenditure of Rs. 35,000 was incurred. The argument that this was a capital loss can only be sustained upon the contention with which we have already d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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