TMI Blog1977 (11) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to the memorandum of association of the company, the main object of the assessee was to acquire certain managing agency business from the predecessor firm as also to carry on business as managing agents of Wallace Flour Mills Co., and also to carry on business as managing agents, selling agents, commission agents, muccadams and brokers of any other company, concern or person. The memorandum of association also enabled the assessee-company further to carry on business of money lending, discounting and purchasing of bills and other negotiable instruments. The assessee-company along with two others promoted a company called Navanagar Industries Ltd. The assessee and the two others, whom the Tribunal has, in the statement of the case, designated as partners, also started another company called V. H. D. Agencies Ltd., to manage Navanagar Industries as its managing agents. The shares in this company, i.e., V. H. D. Agencies Ltd., were held equally by the three parties, viz., the assessee-company and the two others. These three parties, who were shareholders in V. H. D. Agencies Ltd., also acquired certain shares in Navanagar Industries Ltd., which was promoted by the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry on the business of money-lending. It was, however, contended that this must be regarded as lending in the course of the carrying on of the business of the assessee as shareholders in a company which carried on the business of managing agency. Reliance was placed on the first part of s. 10(2)(xi) of the Act in support of the contention that this must be regarded as a business loss. The Tribunal found it difficult to accept the submission of the assessee as the assessee was not the managing agent of Navanagar Industries Ltd., but only a shareholder of the company which had acted as managing agent of Navanagar Industries Ltd. The connection, according to the Tribunal, was remote and the claim could not be said to have arisen or sprung directly from any business activity of the assessee. It may be mentioned that the Tribunal went on to observe that even on the assumption that it was a lending by a managing agent to the managed company, the amount loaned could not be allowed as a deduction in view of the decision of the Madras High Court in the case of CIT v. Essen P. Ltd.[1963] 50 ITR 569. In the view of the Tribunal, therefore, the reasons given by the ITO and the AAC for reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that it had to examine the material on record for itself and come to a proper conclusion and could not be bound by the earlier observations which were of a casual nature. The Tribunal then noted the circumstances in which the assessee had come to purchase the shares of Navanagar Industries Ltd. It further observed that it had never traded in these shares and it rightly concluded that there was nothing to show that they had been acquired by the assessee with a view to trade in them. In view of these findings, the Tribunal held that the department was justified in rejecting the assessee's claim regarding the write-off of the value of the shares held by the assessee in Navanagar Industries Ltd. We are in full agreement with the approach and the ultimate decision of the Tribunal on this point. The second question, however, requires serious consideration. Relying upon the decision of the Madras High Court in CIT v. Essen P. Ltd. [1963] 50 ITR 569, the Tribunal observed that even where the managing agent has lent certain amount to the managed company and the amount was subsequently lost, it could not be allowed as a deduction. It may be pointed out that the Madras decision has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e write-off was allowable as a deduction. The earlier decisions of this court in CIT v. Tata Sons Ltd. [1939] 7 ITR 195 and of the Supreme Court in Essen P. Ltd. v. CIT [1967] 65 ITR 625 were noted and applied. It was further observed that when the managed company went into liquidation, the advances would become irrecoverable and in such circumstances the loss must be regarded as a trading loss and allowed as a deduction in computing the income of the assessee although at the time when the advances became irrecoverable the assessee-company was not the managing agent of the debtor-company. Mr. Joshi very strenuously contended that the principle which was directly applicable to a managing agent or an erstwhile managing agent cannot and ought not to be extended further and applied where the assessee-company was merely a shareholder of V. H. D. Agencies Ltd. (the managing agents). It was submitted by him that in order to be allowed under s. 10(2)(xi) the business or trading debt should spring directly from the carrying on of the business or trade and should be incidental to it and it cannot be just any loss sustained by the assessee even if it has some connection with its business. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y business. It undertook that business in the instant case and in the case of Navanagar Industries Ltd. but not directly and wholly but acting in concert with two other parties and through the device of a limited company, viz., V. H. D. Agencies Ltd. We do not see how the moneys lent by the assessee-company to the managed company could not be regarded as finances provided for a company in which the assessee was substantially interested. This is in fact the very phraseology employed by the ITO who was of the opinion that even if this be so unless this was part of the money-lending activity of the assessee, the deduction had to be disallowed. We are of opinion that it was not necessary for the assessee-company to have undertaken any money-lending activity. If the object of the advancing of money was to provide finance for a company in which the assessee was substantially interested, the debt must be regarded as directly springing from its business activity and the connection cannot be considered to be too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman and on that approach we are of opinion ..... 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