1. This is a reference under s. 256(1) of the I. T. Act, 1961 (referred to hereinafter 'the said Act'). The question referred to us for our determination in this reference are as follows:
'(1). Whether, on the facts and in the circumstances of the case, the ship, S. S. Sheela Margaret, which the assessee-company acquired from Gill Amin Steamship Co.Pvt. Ltd. towards satisfaction of the amount of Rs. 4,00,000 out of its loan of Rs. 4,06,492 outstanding against Gill Amin Steamship Co. Pvt. Ltd., was stock-in-trade of the assessee-company ?
(2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 11,618, Rs. 10,847, Rs. 49,073, Rs. 42,209, Rs. 23,837 and Rs. 17,411 incurred on the maintenance of the ship S. S.Sheela Margaret during the accounting years relevant to the assessment years were admissible deductions in computing the income of the assessee-company for the respective assessments ?'
2. The facts giving rise to this reference are set out in a statement of case which is a common statement drawn up by the Income-tax Appellate Tribunal on six reference applications by the Department. The relevant assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69 and 1969-70, the relevant previous years being the calendar years 1963 to 1968 respectively. The assessee-company is a trading concern engaged in the business of import and sale of commodities. It had advanced a sum of Rs. 2,30,000 to a sister concern, M/s. Gill Amin and Company, in 1959. No interest was charged on this loan for that year. For the next year interest was charged in the sum of Rs. 12,937 and was brought to tax as income under the head 'Business'. The closing balance of Rs. 2,42,937 was transferred to a new account styled as Gill Amin Steamship Co. Pvt. Ltd. Loan Account during the succeeding year 1961. Interest of Rs. 17,250 was charge on this account for that year and brought to tax in the same manner as aforesaid. For the calendar year 1962 the interest credited to the account was Rs. 8,625. It seems that the said interest of Rs. 17,250 and of Rs. 8,625 was either recovered or adjusted against some other amounts due from the assessee to the debtor concern. That, however, is not material. The only relevant fact in this regard is that the debit balance to the account of Gill Amin Steamship Co.Pvt. Ltd. stood at Rs. 2,42,937 in 1963. This figure comprised of the original advance of Rs. 2,30,000 and interest of Rs. 12,937 charged on 1960. In the assessee's books there was another current account in the name of Gill Amin and Company Private Ltd., for 1959 onwards. The debit balance in this account as on July 5, 1963, stood at Rs. 1,63,555. This balance was transferred to the aforesaid loan account, thus raising the debit balance in the said account from Rs. 2,42,937 to Rs. 4,06,492. The loan of Rs. 2,42,937, as it stood at the beginning of 1963, was secured by the first mortgage of the ship, S. S. Sheela Margaret, belonging to Gill Amin Steamship Company Private Ltd., since 1959, when the original advance of Rs. 2,30,000 was made. On July 9, 1963, the directors of the assessee decided to purchase the said ship for Rs. 4 lakhs. The offer was accepted by Gill Amin Steamship Company Private Ltd. After the sale was effected the said Gill Amin Steamship Company Pvt. Ltd., went into liquidation. The assessee adjusted the value of Rs. 4 lakhs against the outstanding loan of Rs. 4,06,492 and wrote off the balance of Rs. 6,492. The writing off of this bad debt was allowed by the ITO in that year. The assessee did not carry on the business of plying the said ship. It, however, remained in possession of the ship and was obliged to incur expenditure towards its maintenance. During the accounting periods relevant to the assessment years 1964-65 to 1969-70, expenditure of Rs. 11,618, Rs. 10,847, Rs. 49,073, Rs. 42,209, Rs. 23,837 and Rs. 17,411 respectively was incurred towards the maintenance of the ship. The assessee claimed deduction of these expenses out of its income from the business which it was carrying on. The ITO rejected this claim on the ground that the ownership of the vessel was not transferred to the assessee and the assessee did not carry on any shipping business. On an appeal preferred by the assessee the AAC confirmed these disallowances by the ITO. The AAC held that there was undue haste in finalising the transaction of the sale of the ship to the assessee and he implied that it was a colourable transaction. The AAC held that there was nothing to show that the money was advanced to Gill Amin steamship Co.Pvt. Ltd., in the course of money-lending business, as no such business was carried on by the assessee and held that, consequently, the acquisition of the said ship was not in the course of any business as a financier. On these conclusions, he held that the expenditure incurred by the assessee in the maintenance of the ship did not constitute a revenue deduction and could not be allowed to be deducted an held that the said ship did not constitute the assessee's stock-in-trade. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal, after considering the submissions made before it, held that the said ship, which was placed as security with the assessee who later on acquired it in the settlement of the loan advanced by it, constituted stock-in-trade of the assessee and the amount spent for preservation of stock-in-trade would naturally be expenditure allowable as revenue expenditure. The Tribunal rejected the finding of the AAC that the transaction was a colourable one and held that the aforesaid expenditure should be allowed as a deduction in the computation of the assessee's business income. It is from this decision of the Tribunal that the aforesaid questions have been framed.
3. Before discussing the submissions advanced before us, we may point our that. 28 of the said Act, inter alia, provides that profits and gains of business or profession shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. Section 36 of the said Act, deals with certain deductions in computing the income referred to in s. 28, Clause (vii) of s. 36(1) provides that the amount of any debt or part thereof, which is established to have become a bad debt in the precious year can be allowed as a deduction subject to the provisions of sub-s. (2) Clause (i)(a) of sub-s. 36(2) runs as follows:
'(i) no such deduction shall be allowed unless such debt or part thereof -
(a) has been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year, or represents money lent in the ordinary course of the business of banking g or money-lending which is carried on by the assessee.'
4. Dealing first with question No. 1, the submission of Mr. Joshi, the learned counsel for the Department, is that the aforesaid ship could not be regarded as the stock-in-trade of the assessee, unless, in the first place, there was a finding that the assessee was carrying on money-lending business. It was contended by him that the business of the assessee was that of import and sale of commodities and an isolated loan to a sister concern and even the charging of interest thereon could not lead to the conclusion that the assessee carried on money-lending business. It was further urged by him that even if the view was taken that the assessee did carry on money-lending business, the aforesaid ship, which was purchased by the assessee, as set out aforesaid, could not be regarded as the stock-in-trade of any, business of the assessee but was a capital asset could not be allowed as a revenue deduction. In support of these submissions Mr. Joshi placed strong reliance on certain observations made by Mahajan J., as he then was, in A. H. Wadia v. CIT  17 ITR 63 . It may be pointed out that this decision is a decision of the Federal Court of India. In his judgment Mahajan J. (as he then was), cited with approval the decision of this court if Himatlal Motilal and Ramanlal Lallubhai v. CIT  6 ITC 159, and held that the said decision was authority for the proposition that where, in part satisfaction of a mortgage debt, the mortgage purchased mortgaged property and sells it later on, he cannot claim the loss as an allowable business loss in the loan transaction. In that case it was held by the Bombay High Court that the loss was of capital invested in the purchase of the property. Mahajan J. went on to observe that ownership of properties, even if purchased from a source which originally was employed in the money-lending business, does not automatically make such properties part of such business, in the absence of any finding that the income of these properties was being used in that business or that those properties were subsequently treated as stock-in-trade of that business except perhaps in the case of banking institutions. Reliance was also placed by Mr. Joshi on the decision of the Gujarat High Court in H.Mohmed & Company v. CIT : 107ITR637(Guj) , where it was held, inter alia, that the stock-in-trade is something in which a trader of a businessman deals, whereas his capital asset is something with which he deals. It is possible that the same commodity may in the case of one assessee be his stock-in-trade, whereas in the case of another assessee it may be his capital asset. As against this, the submission of Mr. Vyas, the learned counsel for the assessee, was that in the present case the assessee had in earlier years shown the interest earned by the assessee on the aid loan as his business income and as shown by the facts set out in the statement of case that interest income had been brought to tax as income under the head 'Business'. Moreover, in the assessment year 1964-65 the assessee-company had adjusted the price of the ship, namely, Rs. 4 lakhs, against the outstanding loan of Rs. 4,06,492 and had written off the balance of Rs. 6,492 asa bad debt. This had been allowed by the ITO. It was urged by him that this showed that the assessee had treated the said ship acquired by it as a part of its stock-in-trade and that the said position had been accepted by the Department. It further showed, according to Mr. Vyas, that the assessee carried on money-lending business or financing business, because the said ship could never have been stock-in-trade in respect of the other business of the assessee. In support of his contention Mr. Vyas placed strong reliance on the decision of the Supreme Court in Pandit Narain Dutt Chhimwal v. CIT : 83ITR413(SC) . In that case the assessee, an HUF, carrying on money-lending business, lent Rs. 40,000 in the course of that business, in September, 1930, to two brothers on a simple mortgage of certain immovable properties. In September, 1933, the assessee purchased a portion of the mortgaged properties. Out of the consideration a sum of Rs. 32,000 was adjusted against the mortgage debt, leaving Rs. 8,000 outstanding. Between these two dates the mortgagor had effected further encumbrances on the property, which was the subject-matter of the mortgage. The assessee had to pay Rs. 17,500 to the mesne encumbrances. In October, 1946, the assessee obtained a decree for Rs. 25,000 against the mortgagors to be realised by selling that portion of the mortgaged property, which had not been sold to the assessee in 1933. Even after the sale, there was a shortfall of Rs. 4,758. The assessee claimed this amount as a bad debt, which was allowed in a previous assessment. In 1948 the assessee sold half the area of the land purchased by him in 1933 for Rs. 93,313. The ITO held that the property purchased by the assessee in 1933 was stock-in-trade of his money-lending business and the excess amount realised by the assessee over the cost was business income. This view was upheld by the Income-tax Appellate Tribunal as well as the Allahabad High Court. On appeal to the Supreme Court, it was held, affirming the decision of the High Court, that there was no infirmity in the reasoning or the conclusion of the Tribunal of the facts. The Supreme Court in that case cited with approval the reasoning given by the Tribunal. That reasoning runs as follows (p. 415):
'It is impossible now to allocate the sum of Rs. 4,763, written off as a bad debt between the various items which went up to make the total of Rs. 29,000 and odd due to the assessee and in respect of which he was able to secure a decree only for Rs. 25,000. There can be no doubt, however, that at least some part of this bad debt related to monies laid out in connection with the property purchased by the assessee in 1933. That is enough to stamp that acquisition which was, as already said, in the course of the assessee's money-lending business, as continuing to retain its character as a business asset and stock-in-trade of money-lending business, almost right up to the date when half the area of the property so purchased was sold by the assessee at a profit in 1948.'
5. This decision undoubtedly lends complete support to the submissions of Mr. Vyas in this connection. In the present case also the assessee wrote off the balance of Rs. 6,492 as a bad debt. This could have been only on the footing that the assessee carried on money-lending business and that the amount lent as well as the said ship, which was purchased by the assessee in realisation of the loan, constituted stock-in-trade of that business. In view of this, the above-stated observations from the decision of A. H. Wadia v. CIT  17 ITR 63 , relied on by Mr. Joshi, are of no assistance to him, because it appears from the facts that the said ship has been treated as stock-in- trade of the business of the assessee, whatever that business was. For the same reasons the decision in H. Mohmed & Co. v. CIT : 107ITR637(Guj) , is also of no assistance to Mr. Joshi. In our view, on the facts of this case, and particularly in view of the aforesaid sum of Rs. 6,492 having been allowed to be written off as a bad debt by the Department, it must be held that the aforesaid ship was a part of the stock-in-trade of the assessee, and question No. 1 must be answered in the affirmative and in favour of the assessee.
6. We may point out that some authorities have been cited before us by Mr. Joshi to show that an isolated transaction cannot constitute a business nor would it constitute an adventure in the nature of trade, except in some special circumstances. Mr. Vyas, the learned counsel for the assessee on the other hand, cited several decisions to show that once the Department proceeds in an earlier year on the footing that the assessee carries on a certain business, in the present case the business of money-lending, it was not open to the Department to change that stand in the absence of facts and circumstances, which would justify it in doing so, although the principle of res judicata does not apply as such in respect of different assessment years. It is wholly unnecessary for us to enter into this controversy in view of what we have already held earlier.
7. Coming now to question No. 2, it is common ground that, in view of what we held with respect to question No. 1, the same must be answered in favour of the assessee. We may, however, further point out, in regard to this question that, on the facts of this case, it would have to be answered in favour of the assessee, irrespective of the view taken by us on question No. 1. The facts clearly show that the aforesaid ship was acquired by the assessee in the course of the business of the assessee, irrespective of the fact whether that business was of money-lending or not, the dispute only being as to whether it constituted a capital asset or stock-in-trade. Even on the assumption that the said ship was a capital asset of the said business, we fail to see how expenditure incurred in maintaining and preserving the same could be considered not to be revenue expenditure. In this regard we may refer to the decision of a Division Bench of this court in All India Reporter Ltd. v. CIT : 49ITR196(Bom) , where it was held that the expenditure incurred by a company in defending itself in a petition filed by a shareholder for winding up the company, is expenditure which enables the company to continue to run and earn profits from business and a such is an expenditure incurred wholly and exclusively for the purposes of business and deductible under s. 10(2)(xv) of the Indian I.T. Act, 1922. After considering several decisions, the Division Bench of this court observed that the principal deducible was that an expenditure bona fide incurred by a businessman either in conducting a litigation or otherwise for the purpose of defending his title to his stock-in-trade or capital assets or to prevent the seizure of his capital assets or the stock-in-trade would be an expenditure wholly and exclusively laid out for the purpose of his business. In CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , it has been held by the Supreme Court that the expression 'for the purpose of the business' used in s. 10(2)(xv) of the India I.T. Act, 1922, is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide. It may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title. In Saharanpur Electric Supply Co. Ltd. v. CIT : 82ITR405(All) , which again dealt with s. 10(2)(xv) of the Indian I.T. Act, 1922, it was held by a Division Bench of the Allahabad High Court that so far as the expenditure incurred for the protection of assets is concerned, the distinction between a capital asset and a revenue asset is irrelevant. It was observed that in a company, which is formed for business, all its assets represent business assets.
8. In the result, both the questions referred to us are answered in the affirmative. The Commissioner to pay to the assessee the costs of the reference.