1. The assessee is a limited company which was incorporated in the year 1939 and the object of the company is manufacture and sale of sugar. On 26th October 1943, the assessee company advanced a sum of Rs. 5,00,000 to Messrs. Agarwal and Co., on a demand promissory note. The managing agents of the assessee company are partners in this firm. It is found as a fact by the Tribunal and it is admitted by the assessee company that the assessee company had not in the past advanced any such sum in similar circumstances to any other person.
2. The question that arises for our determination is whether this sum of Rs. 6,00,000 constitutes, within the meaning of Rule 1 (1) (b) of Schedule II to the Excess Profits Tax Act, a debt due to the assessee. If so, it would go to increase its capital as contemplated by schedule II of that Act, The Tribunal took the view that the business of the company was not money-lending business and therefore the advance made by the assessee company was not in the course of its business and therefore was not a debt contemplated by Rule 1 (1) (b) of schedule II to the Excess Profits Tax Act. Sir Jamshedji for the assessee has relied on the memorandum of association of the company and in that memorandum among the objects permissible for the company to carry out is the object mentioned Under clause (3) (g) (ix), and that is, 'to lend money, with or without security, and to invest money of the company in such manner (other than in the shares of this company) as the directors think fit.' Sir Jamshedji has distinguished 'lending' and 'investing' contemplated under this sub clause, and according to Sir Jamshedji, according to the plain meaning of this clause what the company was doing was lending money. According to Sir Jamshedji, if the company lends money, then it is doing the business of money-lending which it is empowered to do under the memorandum of association, and therefore Sir Jamshedji contends that the sum of Rs. 5,00,000 advanced by the company to Agrawal and Co., was in the course of its business and therefore he is entitled to the benefit of Rule 1 (1) (b) of Schedule II, Excess Profits Tax Act. I am not prepared to accept the proposition for which Sir Jamshedji is contending that if a particular act is permissible to a company under its memorandum of association and the company performs the act, necessarily that act must be deemed to have been performed in the course of its business. Of course, company can never perform an act which it is not permissible to do under its memorandum of association, because if it does so, it would be ultra vires. But I am not prepared to accept that every act which is intra vires of the company is necessarily done in the course of the business of the company. Whether a particular act is done in the course of business or not is really to my mind & question of fact and that fact must be determined according to the evidence led and the circumstances of the case. It must be found as to whether the particular act has any connection with the normal business that the company is carrying on and whether it is so related to the business of the company that it can be considered to be performed in the ordinary course of the business of that company.
3. Now, on the facts of this case which the Tribunal has found, the normal activity and business of the company is the manufacture and sale of sugar. It has never in the past lent moneys to any outside party. Further, the particular party to which this money is lent happens to be a firm in which its own managing agents are partners. On these facts, the Tribunal came to the conclusion that the particular sum was not a debt due to the company within the meaning of Rule 1 (1) (b) of Schedule II, Excess Profits Tax Act. It strikes me that this particular conclusion of the Tribunal was really a finding of fact arrived at on the evidence before it and the materials that were placed before it.
4. Sir Jamshedji has relied on a decision of the Patna High Court in support of the proposition that as it was permissible to the company to lend moneys and as the company lent moneys pursuant to its memorandum of association, even though the lending of money may be an isolated and solitary act, it must be considered to be a part of the business of the company. I do not frankly read the judgment on which Sir Jamshedji relies as laying down any such broad or wide proposition. The case on which Sir Jamshedji relies is Dalmia Cement Ltd, v. Commr. of Income-tax, B. & O. : 12ITR50(Patna) . In order to understand that decision, it is necessary to emphasise the special facts that were found in that case. The company sold certain shares at a profit and the contention of the Department was that they were entitled to assess the company on the profits made between the cost price and the sale price of those shares. The contention of the assessee on the other hand was that the sale of the shares merely represented a capital appreciation. The facts there were that the assessee company purchased a large amount of shares of the Rohtas Industries Ltd. The price of these shares went up and then the assessee company sold them at a profit. Thus the Rohtas Industries, Ltd., was benefited as the market value of its shares was enhanced. It was also found that the Rohtas Industries, Ltd., were working in co-operation with the assessee company in competition with the Associated Cement Co. Ltd., which was a rival cement company. In coming to the conclusion that they did, the learned Judges of the Patna High Court relied on the articles of association of the company which set out the objects of the company, and one of the objects was to acquire and deal in shares or stock or securities in or of any company or undertaking, the acquisition of which might promote or advance the interest of the company. Sir Jamshedji says that the Patna High Court came to the conclusion that the profits accrued by reason of the sale of those shares and were assessable to tax because under the articles of association the company was empowered to deal in shares. As I pointed out, the Patna High Court did not come to the conclusion that the mere fact that dealing in shares was one of the objects enumerated in the articles of association was sufficient to constitute this particular transaction as in the ordinary business of the company. It was in the light of the facts found that the Court came to the conclusion that the shares were sold as part of the business of the company and the resulting profits were assessable to tax. The Patna High Court relies on various English decisions, and when we look at the English decisions they bear out the proposition, which I suggest is the true proposition of law, viz., that in every particular case you have to determine whether in doing what the company did it was taking step which was a normal step in carrying on its business, and further whether the particular act can be described as being in pursuance of the objects enumerated in the memorandum or articles of association. As Lord Sumner pointed out in the case of Smith v. Anderson 1879 (18) ch. D. 247 : 50 L. J. Ch. 39, which is cited in the particular judgment, 'to ascertain the business of a limited liability company one must look first at its memorandum and see for what business that provides and whether its objects are still being pursued.' (Page 247). Therefore, it is not sufficient merely to look at the memorandum and to find out for what business it provides; one must look further and determine whether the objects set out in the memorandum are still being pursued by the company.
5. It is perfectly true that in the case of the company before us, one of its objects is money-lending; it could have carried on the business of money-lending. But what we have to determine is whether the company has been pursuing that object and carrying on that business or not, and it is impossible to hold on the facts of this case that by a solitary transaction of an advance of Rs. 6,00,000 to Agrawal and Co,, it could be said that in doing so it was pursuing one of its. objects and carrying out that business. Therefore, in my opinion, even if we assume that the question referred to us is a question of law, on the facts and circumstances of this case the Tribunal was right in coming to the conclusion that the moneys lent by the company to Agarwal and Co., were not in the ordinary course of business, that that transaction did not constitute part of the business of the company, and therefore the company was not entitled to rely on Rule 1 (1) (b) of Schedule II Excess Profits Tax Act.
6. The answer therefore to the question submitted to us will be in the negative. The assessee to pay the costs.
7. Notice of motion dismissed with costs.