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T.J. Lalvani Vs. Commissioner of Income-tax, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 10 of 1963
Judge
Reported in[1970]78ITR176(Bom)
ActsIncome Tax Act, 1922 - Sections 10(1) and 10(2)
AppellantT.J. Lalvani
RespondentCommissioner of Income-tax, Bombay
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - bad-debts - sections 10 (1) and 10 (2) of income tax act, 1922 - assessee extended loan to 'x' to facilitate contract - amount became irrecoverable - whether amount to be treated as bad-debts and allowable as deduction - question to be answered on facts whether loan was in connection with carrying out of business of assessee - it is not necessary that expenditure must refer to any specific transaction in order that expenditure is in connection with carrying out of business of assessee - financing by assessee to 'x' be regarded as activity in course of business - consequently loss suffered allowable as deduction. - section 31(4) (since repealed) :[tarun chatterjee & h.l.dattu, jj] jurisdiction of high court - respondent, a government company, chartered appellants.....v.s. desai, j.1. the following three questions have been referred to us on this reference under section 66(2) of the indian income-tax act : '(1) whether there is any evidence to justify the finding of the tribunal that the advances in question as mentioned in the petition were not made by the assessee in the course of his business '(2) whether, on the facts and in the circumstances of the case, the applicant is entitled to claim a deduction of rs. 1,90,000 (rupees one lakh and ninety thousand) under section 10(1) and or section 10(2)(xi) and/or section 10(2)(xv) of the indian income-tax act as a bad debt or as a trading loss in the assessee's business or on general principles of accounting in ascertaining profits and gains of a business concern under section 10(1) of the indian.....
Judgment:

V.S. Desai, J.

1. The following three questions have been referred to us on this reference under section 66(2) of the Indian Income-tax Act :

'(1) Whether there is any evidence to justify the finding of the Tribunal that the advances in question as mentioned in the petition were not made by the assessee in the course of his business

'(2) Whether, on the facts and in the circumstances of the case, the applicant is entitled to claim a deduction of Rs. 1,90,000 (Rupees one lakh and ninety thousand) under section 10(1) and or section 10(2)(xi) and/or section 10(2)(xv) of the Indian Income-tax Act as a bad debt or as a trading loss in the assessee's business or on general principles of accounting in ascertaining profits and gains of a business concern under section 10(1) of the Indian 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 ?'

2. 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 courts 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 gurantee. 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 Ebrahim Lookmanji's business carried on under the name of Famous Cine Litho Works. The second agreement, exhibit A-2, purported to appoint the assessee as the lawful attorney of Ebrahim Lookmanji to manage Lookmanji's business carried on in the name of Famous Cine Litho Works and under the third agreement, which is exhibit, A-3, the assessee agreed to advance a loan of Rs. 6 lakhs to Ebrahim Lookmanji, as the agent for his Highness the Gaikwad of Baroda. The loan advanced under this agreement was to be repaid at 6 per cent. interest by annual instalments as specified therein, and as a security for the loan and interest, the plant and machinery including tools and equipment as well as the business assets and the stock-in-trade were hypothecated under the agreement. It appears, however that the scheme as conceived under these three agreements underwent a change. The first two agreements, viz., the one relating to the assessee being the financial adviser and the second, under which he was to manage Ebrahim Lookmanji's business as his lawful attorney, were not implemented and given effect to. As to the third, the loan under the agreement was advanced under diverse payments made by tge assessee to Ebrahim Lookmanji between the 6th July, 1950, and 7th of September, 1950. The Maharaja of Baroda, however, as whose agent the assessee was to advance the said loan, changed his mind and did not actually advance any monies to the assessee and the assessee made the advance contemplated by the agreement dated 17th June, 1950, out of his own funds and resources. Accordingly a subsequent agreement, exhibit A-4, was entered into between the assessee and Ebrahim Lookmanji on the 5th March, 1951, modifying the original agreement, exhibit A-3, by deleting the reference therein that the loan was being advanced as the agent of the Maharaja of Baroda and treating it as a loan advanced by the assessee himself. Two repayments of Rs, 1 lakh each were made by Ebrahim Lookmanji out of this advance in the months of June and July, 1951. The rest of the amount together with interest thereon remained outstanding and on the 31st March, 1953, a sum of Rs. 4,43,498 was due and payable by Lookmanji to the assessee in respect of the said advance in the finance account. In the general goods account, which the assessee had with Lookmanji, there was a balance of Rs. 3,11,453 on the 27th February, 1954. The assesse, 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 and 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 11th February, 1954. In execution of the said decree, properties of the debtor were attached and brought up for auction. Since the maximum 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 that Rs. 2,10,000, and ultimately, Lookmanji was adjudged an insolvent in February, 1956. The assessee estimated the total amount of Rs. 7,54,951, which was due to him from Lookmanji under the said two accounts as realisable only to the extend of Rs. 2,10,100, which was the highest bid recorded in the auction of Lookmanji's properties in December, 1954, and wrote off the balance of Rs. 5,44,951 in his accounts on the 21st March, 1955 and in his assessment for the assessment year 1955-56, corresponding to the previous year ended 31st March, 1955, claimed the said amount of Rs. 5,44,951 together with a further sum of Rs. 18,667 towards legal expenses as deductions. His claim was negatived by the Income-tax Officer, who took the view that a part of the said deduction which pertained to the loss on the loan account was not capable of being allowed since the loan of Rs. 6 lakhs advanced on the 6th Jult, 1950, was not advanced in the course of assessee's business and the other part of the deduction, which pertained to the loss in the goods account could not be treated as claimable in the year of account since the transactions in the goods account were noticeable even after the close of the account year and the piecemeal auctions of the property had also not been all completed before the end of the account year and the claim of the assessee was, therefore, premature. As to the deduction in respect of the legal expenses, he allowed a proportionate part thereof corresponding to the legal expenses pertaining to the recovery of the outstanding in the goods account and disallowed the rest. The assesse appealed to the Appellate Assistant Commissioner, who allowed the loss of Rs, 3,11,453, which pertained to the goods account, He, however disallowed the remaining part of Rs. 4,43,498, which pertained to the loan account and he also disallowed the legal expenses apportionable to the said loss. In disallowing the loss pertaining to the loan account, the Appellate Assistance Commissioner agreed with the view taken by the Income-tax Officer that the loan of Rs. 6 lakhs was not advanced in the normal course of business of the assessee. According to him the said advance was not connected with the assessee's business but had been made by him to keep up the promise to procure funds for Lookmanji. According to him in making he said advance, the assessee had acted as a financing partner with power to carry on the business for a reward of 50% of the net profits on the basis of the two other agreements, which were executed 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 that the assessee was a dealer in paper and Shri Ebrahim Lookmanji was a big consumer of paper; that the assessee had come to know Ebrahim Lookmanji after he had started his business with him in 1949-50, and had no other relations with him. Ebrahim Lookmanji was carrying on business in the name of Famous Cine Litho Works for printing Wrappers for soaps and other products, and he had large import licences. The assessee had no import licences in his own name, but he had contacts with foreign exporters of wrapping paper. The assessee, apart from selling his own goods to Lookmanji, was also financing Ebrahim Lookmanji for his import of foreign paper. The assessee had an account with the Chartered Bank of India, Australia and China, in which Ebrahim Lookmanji used to open letters of credit in favour of the foreign exporters for the import of his goods on his licences. Since the assessee enjoyed the confidence of this bank and had the facility of a huge overdraft from the bank, he guranteed the letters of credit opened by Ebrahim Lookmanji for the goods imported by him. In view of the said guarantee Ebrahim Lookmanji intimated to the bank that all documents and letters of credit opened by him should be presented to the assessee for payment. Accordingly, the bank used to debit the assessee's account with foreign imports made by ebrahim Lookmanji. The goods, when they arrived, used to be cleared by the assessee and kept in his own godowns, Whenever Lookmanji wanted to sell the goods he issued sale memos to the assessee and the assessee collected the amount from the purchasers and delivered the goods to them. In the account of Lookmanji maintained by the assessee, monies paid by the assessee to the bank were debited to his account and debit note submitted to him. When the goods were sold and monies were recovered by the assessee, he gave credit in respect of the sale proceeds in the account of Shri Ebrahim Lookmanji. The financing of imports provided by the assessee amounted to Rs. 7,10,000 for the year 1950-51; Rs. 30,81,000 for the year 1951-52 and Rs. 24,21,00o for the year 1952-53. The assessee charged a commission of 7 1/2 % on the landed cost to Shri Ebrahim Lookmanji. He also got commission from the foreign exporters on orders placed by him on behalf of Ebrahim Lookmanji. For the years 1950-51, 1951-52 and 1952-53 the assessee had earned a total amount of 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 som amounts had been advanced by the assessee to Lookmanji as short-term loans. In vies 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 as the loan account was concerned, the connection between the assessee and Shri Lookmanji was something more than a mere relationship between a supplier and customer, and, hence, the loan to the business of Shri Lookmanji was not in the course of the assessee's ordinary business as a trader. On a further hearing of the assessee's appeal, after the receipt of the remand report, the Tribunal held that the loss pertaining to the loan account had not been incurred by the assessee in the course of its business, and, consequently, was not deductible under any of the provisions of the Indian Income-tax Act. In coming to the said conclusion the Tribunal held that the trading activity of the assessee in connection with his dealings with Lookmanji was mainly concerned with the financing of the imports on Lookmanji's licences and handling the imports on their arrival in India. The loan advanced, according to the Tribunal, and nothing to do with the said financing activity. It had originated independently of the regular business of the assessee and in consequence of the scheme contemplated under the three agreements, which were executed simultaneously on the 17th June, 1950. According to the Tribunal, the trading activity of the assessee in his dealings with Lookmanji was not connected in any way with the loan of Rs. 6 lakhs nor was the said trading activity or the earning of profits therein in any way affected either favourably or adversely by the said loan of Rs. 6 lakhs. It may be that the advance of the loan had benefited Lookmanji for his other business or personal activities, but it had not benefited the import business of Lookmanji with which the trading activity of the assessee was concerned. According to the Tribunal, therefore, the loss pertaining to the loan account of Rs. 6 lakhs could not be said to have been incurred by the assessee in the course of his business. The assessee made an application under section 66(1) to the Tribunal for raising certain questions of law on its order. The said application having been rejected by the Tribunal, the assessee came to this court on an application under section 66(2) and on the said application this court directed the Tribunal to frame the three questions, which have already been set out abobe, and refer them to this court. The Tribunal, accordingly, referred the said three questions to this court.

3. Now, the main question 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 assesse 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 Dage 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 assesse 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 Indian Income-tax Actt, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material.'

4. It is argued in the present case by Mr. Kolah, the learned counsel who appears for the assessee, that on the facts and circumstances of the present case, the loss in question is clearly a loss connected with the assessee's business and incidental to it. The assessee had no other connection with Lookmanji excepting his trade relations with him. The assessee was a trader in paper; Lookmanji was a big consumer of paper and had also the facility of having huge import licenses for the import of paper. The assessee, though a trader in paper himself, had no import licence and he had started financing Lookmanji for his import licences and by controlling the imported goods, advanced and carried on his own business in paper. Huge finances have been made by the assessee to Lookmanji in the course of these dealings and the assessee has made considerable profits amounting to about Rs. 6 lakhs in a period of three years through Lookmanji. The present advance of Rs. 6 lakhs, which has been made by the assessee to Lookmanji. The present advance of Rs. 6 lakhs, which has been made by the assessee to Lookmanji, has no other connection or significance except the furthering of his trading activities with Lookmanji. It is no doubt true that the manner in which the other finance was advanced is different from the manner in which this amount was advanced. Whereas the other finance was advanced by supplying bank guarantee and controlling the imported goods, this finance was advanced by paying in cash the aforesaid amount of Rs. 6 lakhs to Lookmanji. But the essential idea in making this finance was to nurse the trading relations with Lookmanji, to keep him in business and thus have the uninterrupted exploitation of his import licenses. Mr. Kolah has argued that the mere circumstance that the assessee kept the monies advanced in a separate account and did 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 originate independently of the regular business and in view of the scheme contemplated by the three agreements dated 17th June, 1950, taken together it had nothing to do with the business of the assessee as such, is again clearly erroneous. It is no doubt true that the three agreements might have contemplated a scheme for working out the transactions between the assessee and Lookmanji in a different manner. It may also be, says Mr. Kolah, that if the scheme contemplated by the three agreements had been implemented and put into action and the loan when advanced in fact had been in implementation of the said scheme, different considerations might have arisen. It is found, however, as a fact that the scheme as contemplated by the three agreements was never implemented and put into effect and the assessee never became the financial adviser, nor did he act as a lawful attorney of Lookmanji in respect of the conduct of his business. now, under the scheme as contemplated, the finances were to be obtained from the Maharaja of Baroda. Even that part of the scheme did not work out although a loan came to be advanced by the assessee himself. Mr. Kolah says that it may be that different method of carrying on the business relations between the assessee and Lookmanji might have been contemplated by the parties, but the same having fallen through, the old method of carrying out the said transactions was continued and Lookmanji, as a matter of fact, treated the present advance as an item in the general financing of the trading account, which he had with the assessee and made no distinction between the loan and the other finances. The mere circumstances that the idea of this item of finance had occurred in contemplation of some other scheme entertained by the parties at one time would not make the loan unconnected with the business, if, as a matter of fact, the loan, when it came to be advanced, was in circumstances different from those originally contemplated and in circumstances showing that it was connected with the business and for the purpose of its further expansion. Mr. Kolah has, in this connection, invited out attention to a decision in B. D. Barucha v. Commissioner of Income-tax. The assessee in that case was doing the business of cinema exhibition and financing film producers and distributors. In the course of his business he had advanced a sum of Rs. 40,000 between March and November, 1952, to a firm of distributors. 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 vies of this agreement, the original sum and the further advance were not to cart 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 as 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 agreement the assessee had advanced a sum of Rs/ 1,00,000 not with a view to earn interest thereon but with a view to making an investment in the business of Tarachand Pictures and get a return on the said investment by way of a share of profits in the said business, and, consequently, the loss was a capital loss and not a trading loss. Its was held by the Supreme Court that although a clause in the agreement had provided that the assessee undertook to share the profits and loss which could take the transaction out of the category of money-lending transaction and the loss suffered by the assessee would, therefore, be a capital loss, there was another clause in the said agreement, which provided that in case the picture was not released, the transaction was to be treated as a loan advanced to be returned with interest at 9 per cent. per annum. Since the picture had not been released, the contract, therefore, worked out in terms of clause (7) of the agreement and the principal amount became payable from that date with interest at 9 % per annum. Mr. Kolah says that in the present case although on the 17th June, 1950, when the three agreements were entered into between the parties, a different scheme was contemplated by the parties, that scheme not having been put into effect, the present transaction must be considered as it actually took place and not as a part of the abandoned scheme. Mr. Kolah says that the loan advanced by the assessee to Lookmanji at the time when it was actually advanced was an item of the financing of Lookmanji by the assessee and was of the same nature as the other financing items. Even after the scheme was abandoned and the Maharaj declined to provide the monies to be advanced to Lookmanji, the assessee in the interest of his own trade supplied the advance to ensure his earning of profits in his trade of paper and the exploitation of the import licences of Lookmanji.

5. In our opinion Mr. Kolah is right in the submission which he has made. The Tribunal's conclusion that the loan transaction is not in the course of the assessee's business is based, firstky, on its historic association with the other two agreements, and, secondly, on its not being an item of any direct finance in the matter of importation of goods on the licence of Lookmanji. It is on the basis of this view, which the Tribunal has taken of the facts, that it has come to the conclusion 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.

6. 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 with his business. The earning of profits by the assessee from his business transactions with Lookmanji was substantially out of the financing of his import licences and also out of the direct sale of goods of the assessee to Lookmanji, who was a huge consumer of paper. The financing of the import licence was done through the bank guarantee and the loan of Rs. 6 lakhs had no connection with it. Nor had it any connection with the direct sale of goods by the assessee to Lookmanji. The loan, therefore, could not be said to be connected with the carrying on of the business of the assessee. It may be that the advance of the loan might have been motivated by business considerations, out the loss arising form the advances could not be said to be springing from the carrying out of the assessee's business nor incidental dental to his trade or business. Mr. Joshi in that connection has invited our attention to the English cases in English Crown Spelter Co. Ltd. v. Baker, Stott v. Hoddinott and Charles Marsden and Sons Ltd. v. Commissioner of Inland Revenue. In English Crown Spelter Co. Ltd. v. Baker, the appellant-company carried on the business of zimc smelting, for which purpose it required large quantities of 'blende'. To supply the 'blende' a new company was formed, which from time to time received assistance from the appellant-company in the form of advances on loan. The new company proved unsuccessful and went into liquidation and the amount due from it to the appellant-company was written off as bad debt. It was held that the advances were an investment of capital and that the loss was not deductible in arriving at the profits of the company for assessment. Mr. Joshi says that it was held in that case that although the appellant-company had advanced the loans out of business motives so that it may get a supply of 'blende' from the new company, the financing of the new company could not be treated as expenditure incurred in the course of carrying out of the business of the assessee. The case, however, has been explained by the Supreme Court in Commissioner of Income-tax v. Mysore Sugar Co. Ltd. The decision in that case, it was pointed out, was based on the finding that the transaction in the case was not an ordinary business transaction of a contract by which the Welsh company were to deliver certain quantity of blende, and the real nature of the transaction was not an 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 date 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.

7. In Charles Marsden & Sons Ltd. v. Commissioners of Inland Revenue, the appellant-company, which carried on the business of paper making, arranged for supplies of wood pulp, its chief raw material, from a new source of supply in Canada, and, accordingly, entered into an agreement with a Canadian company in 1916 for the supply of 30,000 tons of pulp, to be delivered at the rate of 3,000 tons per annum from 1917 to 1927. In accordance with the agreement, the appellant-company made an immediate advance of Pounds 30,000 to the Canadian company against future deliveries of pulp to enable the latter company to develop its business. Subsequently, the importation of wood pulp was forbidden by British Government and the Canadian company was unable to deliver any pulp whatsoever in 1917 or indeed up to March, 1919. The Canadian company disclaimed any liability with respect to the sum advanced and failed to pay interest thereon. The loss thus occasioned was claimed as a deduction but was disallowed on the ground that it was in the nature of a loan or capital expenditure and was not admissible as a deduction in computing the profits of the appelellant-company. It was held by the court that the transaction was a venture by the company to establish a source of pulp supply and not a loan transaction as such, and the expenditure, therefore, was a capital expenditure and not a trade expenditure of the year.

8. In our opinion the present case before us does not belong to the line of these cases referred to by Mr. Joshi, but falls in the line of cases in Morley v. Lawford an Co. In that case a firm of asphalt contractors were guarantors for Pounds 500 to the British Empire Exhibition and claimed to deduct from their assessable profits a sum of Pounds 375 paid in 1925 under the gurantee. The respondents showed that they had been informed by a representative of the exhibition authorities that guarantors would be given preference in tha allotment of contracts for work at the exhibition and that they gave the guarantee with the sole object of obtaining a contract. They were not in fact given an opportunity of tendering and did no work at the exhibition. It was held by the General Commissioners that the amount paid under the guarantee was money expended wholly and exclusively for the purpose of the respondents' trade and was an admissible deduction from their profits for income-tax purposes, and this decision of the General Commissioners 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 Famous Cine Litho Works and of all its import of goods on Lookmanji's licences was an activity of the assessee in the course of his business and the loss arising on the loan, therefore, was a loss, which had occurred in connection with the business of the assessee and incidental to it and was, therefore, claimable by the assessee as a deduction.

9. The assessee had claimed it as a loss under all the three provisions of section 10, viz., sections 10(1), 10(2)(xi) and 10(2)(xv). It is difficult to treat it as coming under section 10(2)(xv) and Mr. Kolah for the assessee has frankly conceded that he does not press his claim for deduction under section 10(2)(xv). In our opinion, it is claimable both as a trading loss under section 10(1) or as a debt of the business which has become irrecoverable under section 10(2)(xi).

10. In the view that we are taking of the loss claimed by the assessee on the loan transaction, it is obvious that his claim for the legal expenses corresponding to the said loss must also be allowed as a deduction to him.

11. In the result, therefore, our answers to the three questions are as follows :

Answer to question No. 1 is in the negative and answers to questions Nos. 2 and 3 are in the affirmative.

Assessee will get costs from the Commissioner.


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