TMI Blog1962 (10) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... gencies Ltd. was, however, terminated on and from July 16, 1950. The shareholders of the company (Amer Hind Manufactures Ltd.) passed a resolution on June 17, 1950, terminating the managing agency of American Agencies Ltd., and appointing the assessee as their managing agents on and from July 16, 1950. It appears that the managed company was in need of funds and the assessee advanced moneys from time to time on what is stated to be a current account . The fact of this advance is not disputed. The assessee also guaranteed the loan of about ₹ 2 lakhs obtained by the managed company from the Indian Overseas Bank Ltd. A guarantee letter was passed on June 23, 1953. On October 22, 1954, the Indian Overseas Bank claimed payment of their dues in full and the assessee paid in fulfilment of the terms of the guarantee the sum of ₹ 81,599-8-0. The fortunes of the managed company steadily declined and the result was that the assessee not merely lost the expected earning from the managing agency business, but also failed to recoup the advance made on current account and the amount paid to the Indian Overseas Bank as guarantors. The assessee had apparently not much hopes of recoveri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,346-13-6 to ₹ 3,40,956-1-1 advanced on current account . The Tribunal upheld the assessee's claim on grounds which are not clear and which are of course not self-explanatory. The view of the Tribunal seems to be that the loans and advances which admittedly became irrecoverable constitute trading expenses within the purview of section 10(2)(xi) of the Act. It is against this decision of the Tribunal that the Commissioner applied for a reference to this court, and as stated already, the question set out above stands referred to us. Learned counsel for the department raises the following contentions : (1) The written off debt is not a business debt of the assessee which arose in the course of its managing agency business. (2) The alleged bad debt is really in the nature of a capital loss. (3) The debt even if it is an admissible bad debt under section 10(2)(xi) became bad not in the year of account but in the years prior to the previous year . (4) The particular managing agency business in respect of which the claim is made became extinct by termination of the agency on November 27, 1954, and was not carried on in the accounting year, and that, therefore, the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee that the managing agency relationship is sufficient to constitute the sums lent or advanced as business debt is in our opinion too broadly stated. We do not subscribe to the view that it is part of the managing agent's business, necessarily or incidentally, to lend money to the managed company, and that every such lending, whatever be its nature or purpose, would amount to a trade or business debt. Nor can we agree to treat it as a business debt by merely calling it a scheme of financing. Mere words cannot afford any solution to the question of the real character of the payment. A close scrutiny of the facts is essential, as appearances and stock phrases are often deceptive. We shall now refer to the findings recorded by the department and the Tribunal. The Income-tax Officer found that it was not necessary for the assessee to advance moneys for obtaining or earning the managing agency remuneration, and that therefore the expenditure could not be regarded as relating to the assessee's business, and that the advances were merely capital advances which even if recovered would not go to the credit side of the assessee's profit and loss account to enhance its prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndum of association to lend moneys and to stand as guarantors to secure third parties' debts . The inference drawn is that the debts in question were incurred in the course of business. Which business the Tribunal does not say. If it meant the agency business then the reference to the particular clause in the memorandum is misleading. If it had in mind some other business besides the agency business like money-lending business or the business of guaranteeing, then it decided a point not urged by the assessee and not supported by a title of evidence. The Tribunal failed to take a proper perspective of the real question in issue in the case, and has clearly misdirected itself in upholding the assessee's claim disregarding the findings recorded by the department which appear to be amply borne out by the evidence on record. We are not concerned in this case directly with the question whether the payments made by the assessee would be a proper allowance under section 10(2)(xv) of the Act. The question now before us is whether the assessee's claim to write off these debts as bad debts is legitimate and proper. It is indisputable that if the loss suffered by the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down the test to discriminate between a capital outlay and a revenue expense. At page 653, Hidayatullah J. observes: To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses. Applying this test, which we would respectfully adopt, the nature of the payment in the present case is quite clearly of a capital kind. Though the above conclusion reached by us would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bookselling trade. More recently the Supreme Court has considered the question in Commissioner of Income-tax v. Abdullabhai Abdulkadar [1961] 41 ITR 545. The principle is laid down in these terms at page 551 : Under clause (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money-lending trade, debts can only be so described if they are due from customers for goods supplied or loans to constituents or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. On the facts of the present case these loans and outstandings were shown as outstandings to the assessee in its balance-sheet as doubtful asset in the year 1954. It is true it was treated as an asset but it was not at any time brought into the profit and loss account. It cannot be pretended that if the moneys had been recovered by the assessee from the managed company it would have in any way augmented its income or, to use the familiar expression, gone to swell its profits of the business . We are, therefore, of the opinion that the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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