1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922.
2. The assessee is a private limited company. It carries on business as a money-lender and also of an art silk mill. The relevant assessment year is 1956-57, the corresponding accounting year being the year ended on 31st March, 1956.
3. The question of law referred is :
'Whether, on the facts and in the circumstances of this case, the assessee is entitled to a deduction of Rs. 6,15,000 against business income of the relevant accounting year under section 10(1) and/or section 10(2) (xi) of the Indian Income-tax Act ?'
4. One Shamboolal Govindji Jobanputra was carrying one the business of distributing cinema films in the name and style of Sunrich Pictures and of doing publicity in the name and style of Crescent Publicity. He was also the owner of a cinema theatre known as the Kamal Talkies and was carrying on business of exhibiting cinema pictures in that theatre.
5. By an agreement dated 18th October, 1945, the assessee-company, jointly with five others, agreed to advance loans to the said Sunrich Pictures. Under that agreement the assessee-company was to advance a loan of Rs. 6,00,000. Under the agreement the assessee-company was to be paid 15% of the profits of Shamboolal's said three businesses, as also interest at the rate of 6 per cent. per annum, on certain terms and conditions more particularly mentioned in the said agreement. The agreement contains certain terms and conditions giving certain powers of control to the assessee-company over the said three business to be exercised for safeguarding the finance provided by the assessee-company and the other five others.
6. On the 7th of June, 1949, a new public limited company of the name of Sunrich Pictures Ltd. was incorporated with the object of taking over the said business of distribution of cinema films of Shamboolal carried on in the name of Sunrich Pictures.
7. In April, 1947, there was due by the Sunrich Pictures to the assessee-company the said sum of Rs. 6,00,000 together with certain interest. On 12th April, 1947, the board of directors of the assessee-company passed a resolution resolving that a sum of Rs. 6,15,000 out of the amount due from Sunrich Pictures in respect of the said loan by converted into 4,500 preference shares and 1,650 ordinary shares, each of Rs. 100 fully paid-up, of Sunrich Pictures Ltd. and that the necessary agreement by entered into for that purpose. On the 24th April, 1947, the assessee-company, along with the five other financiers, entered into an agreement with Shamboolal. The agreement provides that the said 4,500 preference and 1,650 ordinary shares shall be taken up by the assessee-company in full satisfaction of the amount due to the assessee-company in respect of the said original loan of Rs. 6,00,000. Another private limited company was intended to be incorporated to act as the managing agents of Sunrich Pictures Ltd. and by the said agreement it was agreed that the assessee-company should be allotted 515 fully paid-up shares of Rs. 10 each in that company. A private limited company of the name of Cinema Services Ltd. was incorporated. The assessee-company was allotted 515 shares of Rs. 10 each in that company and the company was appointed managing agents of Sunrich Pictures Private Ltd.
8. The assessee-company had, in the account of Messrs. Sunrich Pictures maintained in its ledger for its accounting year 1947-48 a debit of Rs. 6,00,000 being the amount of the said loan and of Rs. 18,000 for interest due thereon up to February, 1947. By two hawala entries the assessee-company debited the sum of Rs. 6,15,000 to the purchase of shares of Sunrich Pictures Ltd. and a sum of Rs. 2,650 for the purchase of 515 shares of Cinema Services Ltd. The assessee-company opened a new account, inter alia, of 'M/s. Sunrich Pictures Ltd. (Shares)' and debited the sum of Rs. 6,15,000 to the purchase of 4,600 preference and 1,550 ordinary shares of Sunrich Pictures Ltd.
9. It is stated in the statement of the case that, thereafter, some negotiations appeared to have taken place for the assessee-company taking over certain films and surrendering the shares as was apparent from the entries in the assessee-company's books of accounts. The account 'Sunrich Pictures Ltd. (Shares)' was credited on the 1st of April, 1948, with the said sum of Rs. 6,15,000 and the particulars mentioned in the entry show that the shares account was intended to be closed and certain films of Sunrich Pictures Ltd. were intended to be taken over in full satisfaction jointly by the assessee-company and the said five other financiers in certain shares. Thereafter, during the accounting years 1948-49, 1949-50, 1950-51 and 1951-52, the assessee-company wrote off in installments a sum of Rs. 5,15,000 on the ground that the said films had depreciated in value. Thereafter, only a balance of Rs. 1,00,000 remained to the debit of that account. On 13th January, 1949, a petition for winding up of Sunrich Pictures Ltd. was filed in this High Court and an order was made thereon on 18th February, 1950, ordering that the company be wound up. The official liquidator as liquidator of the said company thereafter called upon the assessee-company and the said five other parties to return the said films to him. The assessee-company and the said five others retrained the said films to the official liquidator. The directors of the assessee-company, as a matter of fact, passed a resolution on 14th March, 1952, for return of the said films. The resolution also resolved to write back the amount of Rs. 1,00,000 standing to the debit of Sunrich Pictures and to write back the loss of Rs. 5,15,000 debited to the profit and loss account of Sunrich Pictures Ltd. (Shares) Account. The net effect of these proceedings was that whatever had been done in pursuance of the negotiations for the purchase of the said films was completely reversed and the assessee-company continued to hold the said 4,500 preference and 1,650 ordinary shares of Sunrich Pictures Ltd. as if it had continued to do so since it acquired those shares.
10. On the 31st of March, 1956, the assessee-company wrote off the said entire amount of Rs. 6,15,000 in the Sunrich Pictures (Shares) Account. In the assessment proceedings for the assessment year 1956-57 the assessee-company claimed to deduct the said sum of Rs. 6,15,000 against its business income of the relevant accounting year under section 10(1) and/or under section 10(2) (xi) of the Income-tax Act. The Income-tax Appellate Tribunal has negatived the contention of the assessee-company for the deduction claimed by it under both the said sub-sections of section 10. The Tribunal held that the original agreement was a financing agreement pure and simple and that the monies were advanced by the assessee-company in the course of its money-lending business. The Tribunal held that the assessee-company, however, thereafter, converted that loan into a capital investment by taking the shares in the Sunrich Pictures Ltd. as also in its managing agency accompany without intending to acquire them as its stock-in-trade of its business. The Tribunal has held that the assessee-company did not carry on any share business at the time when the debt was written off, that the debt did not subsist after the assessee-company acquired the said shares in Sunrich Pictures Ltd. and Cinema Services Ltd. and that the said shares were held by the assessee-company as a capital investment and not as a trade investment.
11. Now, Mr. Mehta, the learned counsel for the assessee-company, has not seriously pressed the claim for deduction under section 10(2) (xi). The reason is quite obvious. After the assessee-company acquired the said shares there was no debt remaining outstanding against Shamboolal. As there was no debt outstanding, no question of writing it off as a bad or doubtful debt could possibly arise and the provisions of section 10(2) (xi) would not at all be attracted.
12. The only point which survives for consideration is whether the said shares can be held to be an investment by way of capital asset as has been held by the Tribunal or whether they were in the nature of a trading asset as contended by Mr. Mehta. Now, these shares could not be a trading asset of a trade of dealing in shares because the assessee-company did not have any business of trading in shares. What Mr. Mehta has contended is that the shares were acquired and held by the assessee-company in the course of its money-lending business. He contended that a money-lender, like a banker, may have spare funds which he has no immediate prospect of giving out by way of loans and, therefore, he may invest those spare funds in the course of his money-lending business. He contended that a money-lender, like banker, may have spare funds which he has no immediate prospect of giving out by way of loans and, therefore, he may invest those spare funds in the course of his money-lending business for purchasing shares. We are not concerned with deciding that general point whether a money-lender can be said to have purchased shares in the way Mr. Mehta has contended, in the course and for the purposes of his money-lending business. What we are concerned with is whether in this particular case the said shares were acquired by the assessee-company in the course and for the purpose of its money-lending business.
13. Now, a money-lender who has advanced loans and taken the security of, say, shares of a company, may, in the course of his business, be compelled to himself take over the shares which were only his security if he finds difficulty in otherwise recovering his loan from his debtor. But, such is not the case here. As a matter of fact, the said shares were not the security of the assessee-company in respect of the amounts due by Shamboolal in respect of the said loan of Rs. 6,00,000. The question, therefore, of the assessee-company being compelled to take over the said shares in the course of its money-lending business for the purpose of recovering its dues does not arise. The second factor to be borne in mind is that Sunrich Pictures Ltd. and Cinema Services Ltd. were new companies floated a considerable time after the loan was advanced by the assessee-company to Shamboolal. Nothing has been shown by way of any compulsion or obligation on the assessee to acquire shares of those two companies by way of or for recovering its dues from Shamboolal, one can well imagine, would have insisted on taking the shares only by way of security. The assessee-company, however, acquired the said shares not outright. It is also significant that the assessee-company acquired shares not only in the main company, but also in the managing agency company, i.e., Cinema Services Ltd. The fact that the assessee-company's investment in the managing agency company was of a few thousands only discloses an intention on the part of the assessee-company to close the loan transaction and substitute it by acquiring shares in the newly floated main company for carrying on business and by acquiring shares in the managing agency company for taking part in the management of the main company. The contention of Mr. Mehta that the acquisition of these shares must be treated as having been made only in the course of money-lending business in negatived by the fact that the assessee-company acquired the shares with the monies which were already usefully engaged by way of an loan and were, therefore, not spare funds. Moreover, a money-lender would, if at all, acquire shares by way of investment of his spare funds only temporarily because its main object would be to make funds available whenever business by way of money-lending came its way. The shares which the assessee-company, however, acquired were not only in a newly floated company, but were not even quoted in the market and it would be difficult for the assessee-company to dispose of those shares within any reasonably short time and the acquisition cannot therefore be said to be temporary.
14. Mr. Mehta relied upon a decision of this High Court in Bansilal Gangaram v. Commissioner of Income-tax. The principle which that decision lays down is that whether a particular acquired by a money-lender is his capital asset or trading asset is always a question of fact to be determined on the facts of each case, depending on the manner in which the money-lender deals with the property after acquiring it in the course of money-lending. The ratio of that decision, however, has no application to the facts before us for the simple reason that there is no conduct of the assessee-company having a bearing on this point subsequent to its acquisition of the said shares. The only conduct is of the infructuous attempt made by the assessee-company to acquire the films as referred to earlier.
15. As the attempt failed, it cannot be relied upon. But, in any event, that attempt by itself is unhelpful in deciding the question before us either way.
16. In the circumstances, we are of the opinion that the said shares were acquired by the assessee-company, as and by way of capital investment and not in the course of its business or trade. We, therefore, answer the question in the negative.
17. The assessee-company to pay the department's costs of this reference.
18. Question answered in the negative.