TMI Blog1985 (8) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... td. was also entitled to a commission. On account of the aforesaid, on December 31,1964, a sum of Rs. 33,49,366 became payable by the Rivers Steam Navigation Co. Ltd. to the assessee and remained outstanding. On February 6, 1965, an agreement, in writing, was entered into amongst the Government of India, the Inchcape Co. Ltd., Rivers Steam Navigation Co. (Holdings) Ltd., the assessee, and two other companies namely, the Ganges Transport and Trading Company Ltd., an Indian company which was a wholly owned subsidiary of Inchcape Company Ltd. and India General Navigation and Railway Company Ltd., another company incorporated in the United Kingdom. Under the said agreement, the Government of India agreed to purchase from Rivers Steam Navigation Co. (Holdings) Ltd. 29,660 fully paid up and 4,70,340 partly paid up ordinary shares of the Rivers Steam Navigation Company Ltd. aggregating to 5,00,000 ordinary shares at a nominal price of pounds 1. The said agreement provided further as follows: " 11. (a) If desired by the Rivers Steam Navigation Co. Ltd., the assessee would accept in discharge of the existing indebtedness of the Rivers Steam Navigation Company Ltd. to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue in business. In spite of the aforesaid, the financial position of the Rivers Steam Navigation Company Ltd. did not improve. On the other hand, as a result of outbreak of hostilities between India and Pakistan in September, 1965, a number of inland vessels of the Rivers Steam Navigation Company Ltd. were seized in Pakistan waters and its business declined further. Proceedings were initiated thereafter in this court in its company jurisdiction under sections 391 and 394 of the Companies Act, 1956, for obtaining sanction for a scheme of arrangement proposed to be entered into by the Rivers Steam Navigation Co. Ltd. with its secured and unsecured creditors as also the Government of India. An order was passed in the said application on May 3, 1967, inter alia, as follows: (a) A new Government of India company would be incorporated within about six weeks with power to acquire the properties and assets of the Rivers Steam Navigation Co. Ltd. with sufficient capital as fixed by the Government of India. (b) The Rivers Steam Navigation Co. Ltd. would transfer to the new company all its properties and assets. Uncalled capital amounting to pounds 117,585 would be paid in rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the debt was extinguished by the transaction. The bad debt was reduced by Rs. 28,52,010 calculated at the rate of exchange prevailing on May 3, 1967. On an appeal by the assessee against the assessment, the Appellate Assistant Commissioner found that on the execution of the agreement dated February 6, 1965, the debt due to the assessee should be deemed to have been discharged. The facts that the shares were delivered much later or that the value of the shares fell subsequently as a result of the subsequent unforeseen circumstances would not affect the position. He noted that the High Court made it compulsory for the assessee to take the shares and found that the assessee was not a dealer in shares. It was held that the shares were acquired for investment and their fall in value did not entitle the assessee to claim a loss or bad debt. The loss, if any, was a capital loss. From the order of the Appellate Assistant Commissioner, the assessee went up on further appeal before the Income-tax Appellate Tribunal. The Tribunal noted that under the agreement dated February 6, 1965, the shares of Rivers Steam Navigation Co. Ltd. allotted to the assessee were to be retained until De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rise to any claim for bad debt or business loss ? " At the instance of the parties, the above two references were consolidated and heard together. Learned advocate for the assessee contended that the order of this court passed in the company proceedings on May 3, 1967, did not ratify or incorporate the earlier memorandum of agreement dated February 6, 1965. The said order, in any event, introduced substantial modifications and gave a go-by to the earlier agreement. Under the scheme approved by the court, all properties and assets of the Rivers Steam Navigation Co. Ltd. vested in the new company. It was declared by the court that the assessee having agreed earlier to accept the shares of the Rivers Steam Navigation Co. Ltd. in full satisfaction of the latter's trading liability, no amount would be payable to the assessee. The assessee had entered into the said agreement in a completely different situation but in view of the court's order, the assessee was not left with any option in the matter. It was not a case of voluntary acceptance of the shares of the Rivers Steam Navigation Co. Ltd. by the assessee. It was contended further that the shares allotted to the assessee purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Magor and Co. Ltd. [1979] 117 ITR 858 (Cal). In this case, the assessee acting as the secretary of a company furnished guarantee on the basis of which overdraft facilities were obtained by the company from bank. Subsequently, when the assessee ceased to act as such secretary, the guarantee was enforced against the assessee. Thereafter both the company and the assessee filed suits against each other claiming money which were ultimately settled and withdrawn. In the relevant assessment year, the assessee claimed deduction of the amount which was realised by the bank from the assessee on the guarantee. The claim was rejected by the Income-tax Officer and the Appellate Assistant Commissioner but was accepted by the Tribunal which found that the assessee was, in fact, managing the other company and that the guarantee was furnished on business considerations as incidental to the assessee's business. A Division Bench of this court upheld the decision of the Tribunal and held that deduction of the amount was allowable as a bad debt. (c) Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom). Here, the assessee who as a selling agent of its principal financed purchase of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1971] 82 ITR 642. Here, the assessee in the course of its business had advanced a loan to a firm. Subsequently, the firm was converted into a limited company and the assessee was allotted and accepted a number of fully paid up preference shares and ordinary shares in the company in full satisfaction of the amounts outstanding against the firm and its successor-in-interest, the company. The assessee was also allotted and accepted a number of fully paid up shares in another limited company which was appointed as the managing agent of the debtor company. Three years thereafter, the debtor company was directed to be wound up by court. Six years thereafter, the assessee wrote off the entire amount invested in the shares of the debtor company and claimed deduction of the amount in that assessment year as a bad debt. On these facts, it was held by the Bombay High Court that the assessee was not entitled to claim either a bad debt or a trading loss as the shares in the new company bad been accepted in full satisfaction of the loan long time ago. The loan was extinguished by the receipt of the shares. It appears to us from the order of the Tribunal that the Tribunal has proceeded o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le against the assessee. After the scheme was sanctioned, the Rivers Steam Navigation Co. Ltd., unilaterally passed a resolution on December 23, 1967, allotting fully paid up shares to the assessee, without any reference to the latter and without being required to do so by the Government as envisaged in the order dated May 3, 1967, sanctioning the scheme. For the reasons as aforesaid and in the facts before us, it cannot be held that the assessee accepted shares of Rivers Steam Navigation Co. Ltd. in satisfaction of the debt owed by the latter to the assessee. The trading debt ceased to be payable by the order dated May 3, 1967, before any shares were allotted or agreed to be accepted by the assessee. The matter stood concluded by the order of the court. For the reasons above, we hold that the assessee suffered a trading loss of Rs. 28,52,010. The questions referred are answered as follows Income-tax Reference No. 88 of 1978: Question No. 1 answered in the affirmative and in favour of the assessee. In view of the answer to question No. 1, question No. 2 does not call for any answer. Income-tax Reference No. 98 of 1981 In view of the answer given to questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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