TMI Blog1968 (12) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Income-tax Act ? (3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to a deduction from his total income of the proportionate legal expenses disallowed in respect of Suit No. 14 of 1954 ?" The assessee is a dealer and commission agent in paper on a large scale. Since the 2nd of June, 1942, he entered into substantial transactions with Ebrahim Lookmanji, proprietor of Famous Cine Litho Works, in the course of his business. Lookmanji was a big consumer of paper and in his Famous Cine Litho Works he was printing wrappers for soap and other products. He also had huge import licences for paper. The assessee assisted Ebrahim Lookmanji to fully exploit his import licences by providing all the finance necessary and also by actually handling all his imports through his own bank guarantee. On these transactions the assessee received a commission at 7 1/2 per cent. on the landed costs of the imports. On or about the 17th of June, 1950, three agreements came to be entered into between the assessee and Ebrahim Lookmanji. Under the first, which is marked as exhibit A-1 to the statement of the case, the assessee agreed to be a financial adviser of Eb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 954. The assessee, it may be pointed out, had maintained these two accounts of his dealings with Lookmanji. Lookmanji, however, had not made any distinction in the finances, which were advanced to him by the assessee find had kept only one general account. In respect of these outstandings, which totalled Rs. 7,54,951, two suits were brought by the assessee against Lookmanji in the Bombay High Court, the first of them, which was Suit No. 14 of 1954, was in respect of the loan account and the other suit, which was Suit No. 145 of 1954, was in respect of the goods account. A consolidated decree in the two suits was passed by consent of the parties by the High Court on the 11 th February, 1954. In execution of the said decree, properties of the debtor were attached and brought up for auction. Since the maxmum bid reached at the said auction was Rs. 2,10,000, which was less than the reserved bid, the auction was abandoned and the properties were sold piecemeal by auction for various amounts. The amount actually realised by the auction was even less than Rs. 2,10,000, and ultimately, Lookmanji was adjudged an insolvent in February, 1956. The assessee estimated the total amount of Rs. 7,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted on the same day, on which the agreement to advance the loan was entered into between the parties. Since the loss pertaining to the loan account was not deductible, the legal expenses pertaining to the said loss were also not deductible. The assessee took a second appeal to the Income-tax Appellate Tribunal. At the first hearing of the said appeal which was on the 29th December, 1958, it was argued on behalf of the assessee that he was giving financial help to Lookmanji to carry on his business as a part of his trading activity to earn more profits in his goods account with him and the loan of Rs. 6 lakhs was an item in the said trading activity of financing Lookmanji. It was also stated that the loan account was a part of the general finances account and had to be treated on the same footing as the other advances made by him. The Tribunal was of the view that the case required to be further investigated in view of the said contention of the assessee, and accordingly, sent it back to the Income-tax Officer for a further investigation and remand report. The Income-tax Officer made his remand report as required by the Tribunal. The facts recorded by him in the said report were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 6,32,560 as a result of these financing transactions consisting of commission on imports, foreign commission, profit on sale of goods and interest. The assessee had maintained two accounts in the name of Famous Cine Litho Works in his books of account. One of them was called "loan account" and the other was "the ordinary trading account". Famous Cine Litho Works, however, had only one account in its books of account in the name of the assessee and there was no distinction made by Famous Cine Litho Works in the transactions with the assessee in respect of the financing of purchases and in respect of the loan of Rs. 6 lakhs. It was found further by the Income-tax Officer that in the trading account some amounts had been advanced by the assessee to Lookmanji as short-term loans. In view of the manner in which the trading account was maintained and the manner in which the transactions in respect of the trading account were carried on between the parties and in view of the fact that the advance of Rs. 6 lakhs in the, loan account was kept separate by the assessee and not mixed up with his trading account with Ebrahim Lookmanji, the Income-tax Officer was of the view that, in so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion to be considered in the present case is whether, on the facts and circumstances of the present case, the loan of Rs. 6 lakhs advanced by the assessee to Lookmanji could be said to have been advanced in the course of his business. There can be no doubt whatsoever that unless the deduction, which the assessee has claimed, can be treated as a loss, which is connected with his business and incidental to it, it will not be claimable as a revenue loss. As has been observed in Badridas Daga v. Commissioner of Income-tax the loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and not any loss sustained by the assessee even if it has some connection with business. In that case the loss in question was caused by the embezzlement by an agent of the assessee. It was held that the loss sustained by the assessee as a result of the misappropriation by the agent was one which was incidental to the carrying on of the business and, therefore, deductible in computing the profits of the assessee under section 10(1) of the Act, In Commissioner of Income-tax v. Nainital Bank Ltd. the Supreme Court observed : "Under section 10(1) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not mix it up with the other finances is not sufficient to warrant a conclusion that the said loan was not for a purpose connected with business but for some other business or personal activity of Lookmanji. Mr. Kolah complains that the Tribunal's view, that the loss is not connected with the business or incidental to it, proceeds from its erroneous conclusion that the loan of Rs. 6 lakhs was advanced by the assessee to Lookmanji for some other business or personal activities of the debtor. There is no evidence whatsoever for the said finding of the Tribunal and Mr. Kolah says that it is nothing but a mere surmise on the part of the Tribunal. Not only that, says the learned counsel, but the said finding is contrary to the facts found by the Income-tax Officer which are that the loan was advanced by the assessee for the business of Lookmanji, by which is meant the business of the Famous Cine Litho Works. There is nothing in the report of the Income-tax Officer, says Mr. Kolah, which would show that Lookmanji had any other business or activity or that the assessee was concerned with any of them. The Tribunal's view that because the loan originated independently of the regular busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stributors. An agreement was entered into between the assessee and the firm under which a further sum of Rs. 60,000 was agreed to be advanced in addition to the original sum of Rs. 40,000 on certain terms in respect of distribution and exploitation as also exhibition of a certain picture. In view of this agreement, the original sum and the further advance were not to carry any interest but the firm was to share with the assessee profit and loss from the exhibition of the picture, two-thirds going to the assessee and one-third to the firm. There was a clause, however, in the agreement, which provided that if the picture was not released as stipulated in the agreement, the entire amount was to be returned with interest at 9 per cent. The picture was not released for exhibition during the stipulated period and, later on, when it was released, it proved unsuccessful. The matter was then taken to a civil court and a consent decree was obtained and ultimately a sum of Rs. 80,759 became irrecoverable, which the assessee wrote off as a bad debt on 31st December, 1955, in his accounts and claimed a deduction in his assessment in the year 1956-57. It was argued in that case that under the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion that the advance in question has benefited the debtor for his other business or personal activities and certainly not the import business. In our opinion the two circumstances mentioned by the Tribunal or either of them is not sufficient to warrant such a conclusion and there is, therefore, no evidence for the finding recorded by the Tribunal that the loss in question had not been incurred by the assessee in the course of his business so as to be deductible under the provisions of the Indian Income-tax Act. Mr. Joshi, the learned counsel appearing for the department, has contended that the mere circumstance that the loan had been advanced for Lookmanji's business or that the advance of the loan had some remote or indirect connection with the assessee's own business would not be sufficient to hold that the loan was advanced in connection with the assessee's business or was incidental to it. It is necessary, he says, as observed by the Supreme Court in Badridas Daga v. Commissioner of Income-tax, that the loss must spring directly from the carrying on of the business and must be incidental to it and not any loss sustained by the assessee even if it has some connection wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance against goods to be delivered but an investment of capital in the Welsh company. In Stott v. Hoddinott, the appellant carried on the business of an architect, surveyor and engineer at Oldham, and in order to secure contracts for the erection of mills it was necessary for him to take up shares of the milling companies granting the contracts. The shares taken up were subsequently sold at various-dates at a loss. The sale of the shares was necessary to provide funds for securing new contracts. The loss on the sale of shares was claimed as a revenue loss. It was held that the loss was a loss of capital and not an admissible revenue loss and, therefore, could not properly be allowed to be deducted in the appellant's assessment. It was held on the facts of that case that the payment of shares were investments made from time to time in the companies by which the appellant was employed. There was no doubt that because of his having held the shares of the company, he was given the contracts ; still, however, the transaction of the purchase and sale of shares in effect remained a transaction of investment in the share capital of a company. In Charles Marsden Sons Ltd. v. Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioners was upheld by the Court of Appeal. The assessee's business in that case was to canvass for and accept contracts for asphalt work. The guarantee, which they were required to give, was for the purpose of facilitating their obtaining the contracts, because in the matter of allotment of contracts preference was given to the guarantors. The expenditure, therefore, which was incurred by them, though not directly arising out of any contract work done by them, was intimately connected with the conduct of their business, and, consequently, was treated as a revenue expenditure. Mr. Joshi's argument, therefore, that the loan in question had no direct connection with the exploitation of any of the import licences nor with any of the sale of goods by the assessee to Lookmanji and, therefore, could not be treated as a loan in connection with the assessee's business cannot be accepted. It is not necessary that in order that an expenditure should be in connection with the carrying out of a business or incidental to it, it must be necessarily referable to any specific or direct transaction in the course of the carrying on of his business. The financing by the assessee of the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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