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Macneill and Barry Limited (Now Known as Macneill and Magor Ltd.) Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference Nos. 88 of 1978 and 98 of 1981
Judge
Reported in(1986)51CTR(Cal)293,[1986]158ITR374(Cal)
ActsCompanies Act, 1956 - Sections 391 and 394; ;Income Tax Act, 1961 - Sections 36, 256(1) and 256(2)
AppellantMacneill and Barry Limited (Now Known as Macneill and Magor Ltd.)
RespondentCommissioner of Income-tax
Appellant AdvocateSunil K. Mitra and ;S.K. Chakraborty, Advs.
Respondent AdvocateD. Pal and ;M. Seal, Advs.
Excerpt:
- .....are that m/s. macneill & barry ltd., the assessee, was at the material time the agent of rivers steam navigation co. ltd., a company incorporated in the united kingdom which carried on business of inland navigation in and around india. at the material time, the assessee was a partly owned subsidiary of inchcape & co. ltd., a company also incorporated in the united kingdom. the majority of the shares of the rivers steam navigation co. ltd. was held by the rivers steam navigation co. (holdings) ltd. which was also a company incorporated in the united kingdom.2. rivers steam navigation co. ltd. had been incurring loss over successive years and fell into financial difficulties. the assessee had been incurring expenditure on behalf of rivers steam navigation co. ltd. the assessee as the.....
Judgment:

Dipak Kumar Sen, J.

1. The facts found and on record in the above references are that M/s. Macneill & Barry Ltd., the assessee, was at the material time the agent of Rivers Steam Navigation Co. Ltd., a company incorporated in the United Kingdom which carried on business of inland navigation in and around India. At the material time, the assessee was a partly owned subsidiary of Inchcape & Co. Ltd., a company also incorporated in the United Kingdom. The majority of the shares of the Rivers Steam Navigation Co. Ltd. was held by the Rivers Steam Navigation Co. (Holdings) Ltd. which was also a company incorporated in the United Kingdom.

2. Rivers Steam Navigation Co. Ltd. had been incurring loss over successive years and fell into financial difficulties. The assessee had been incurring expenditure on behalf of Rivers Steam Navigation Co. Ltd. The assessee as the agent of the Rivers Steam Navigation Co. Ltd. was also entitled to a commission. On account of the aforesaid, on December 31, 1964, a sum of Rs. 33,49,366 became payable by the Rivers Steam Navigation Co. Ltd. to the assessee and remained outstanding.

3. On February 6, 1965, an agreement, in writing, was entered into amongst the Government of India, the Inchcape & Co. Ltd., Rivers Steam Navigation Co. (Holdings) Ltd., the assessee, and two other companies, namely, the Ganges Transport and Trading Company Ltd., an Indian company which was a wholly owned subsidiary of Inchcape & Company Ltd. and India General Navigation and Railway Company Ltd., another company incorporated in the United Kingdom.

4. Under the said agreement, the Government of India agreed to purchase from Rivers Steam Navigation Co. (Holdings) Ltd. 29,660 fully paid up and 4,70,340 partly paid up ordinary shares of the Rivers Steam Navigation Company Ltd. aggregating to 5,00,000 ordinary shares at a nominal price of 1.

5. The said agreement provided further as follows:

'11. (a) If desired by the Rivers Steam Navigation Co. Ltd., the assessee would accept in discharge of the existing indebtedness of the Rivers Steam Navigation Company Ltd. to the assessee as at December 31, 1964, an allotment of ordinary shares in Rivers Steam Navigation Company Ltd. as fully paid up of an equivalent nominal value.

(b) To the extent that the Rivers Steam Navigation Company Ltd. would make payment to its unsecured creditors other than the assessee as on December 31, 1965, the Rivers Steam Navigation Company Ltd. would either issue a proportionate amount of fully paid up shares or at its option pay a proportionate amount in cash to the assessee.

(c) The quantum of the first allocation of the shares or payment would be calculated as on March 31, 1966, and thereafter on the expiry of period of three months.

(d) The allocation of shares or payment to be paid to the assessee would be made within a fortnight of the expiry of such period until the indebtedness of the Rivers Steam Navigation Company Ltd. to the assessee would be fully discharged.

(e) In any event, if the Rivers Steam Navigation Company Ltd. intends to issue fully paid up shares in discharge of its indebtedness to the assessee, the full allotment would be completed by December 31, 1967.

(f) The assessee would enter into an agreement with the Rivers Steam Navigation Company Ltd. in this regard whenever required by the Government.

(g) It was recorded that it was the desire of the Government of India that all shares of the Rivers Steam Navigation Co. Ltd. allotted under the above terms would be retained by the assessee in beneficial ownership until December 31, 1974, and would not be transferred without the written consent of the Government provided the Government would retain the beneficial ownership of 5,00,000 shares purchased by it.

(h) If at any time, the assessee wanted to sell the said shares of the Rivers Steam Navigation Co. Ltd. or any part thereof, the assessee would in the first instance offer the same to the Government of India on the same terms and conditions of the intended sale and if the Government declined to accept the offer within two months from the receipt of the offer, the assessee would be entitled to sell the said shares to others on the terms and conditions as offered to the Government. In any event, the assessee would not be entitled to sell any share before December 31, 1974.'

The object of the aforesaid agreement was to help the Rivers Steam Navigation Company Ltd. to tide over its financial difficulties and continue in business. In spite of the aforesaid, the financial position of the Rivers Steam Navigation Company Ltd. did not improve. On the other hand, as a result of outbreak of hostilities between India and Pakistan in September, 1965, a number of inland vessels of the Rivers Steam Navigation Company Ltd. were seized in Pakistan waters and its business declined further.

6. Proceedings were initiated thereafter in this court in its company jurisdiction under Sections 391 and 394 of the Companies Act, 1956, for obtaining sanction for a scheme of arrangement proposed to be entered into by the Rivers Steam Navigation Co. Ltd. with its secured and unsecured creditors as also the Government of India.

7. An order was passed in the said application on May 3, 1967, inter alia, as follows :

(a) A new Government of India company would be incorporated within about six weeks with power to acquire the properties and assets of the Rivers Steam Navigation Co. Ltd. with sufficient capital as fixed by the Government of India.

(b) The Rivers Steam Navigation Co, Ltd. would transfer to the new company all its properties and assets. Uncalled capital amounting to 117,585 would be paid in rupees by the Government of India to the existing company.

(c) No amount would be payable to any creditor of the Rivers Steam Navigation Co. Ltd. who had directly or indirectly agreed with any person to accept the shares of the Rivers Steam Navigation Co. Ltd. in payment or satisfaction of his dues in whole or in part. The Rivers Steam Navigation Co. Ltd., if so required, would allot the shares agreed to be taken as aforesaid to the creditor concerned.

(d) The Government of India would pay the amount due to other secured and unsecured creditors as indicated in the proposed scheme.

(e) Upon the approval of the scheme by the court, the Rivers Steam Navigation Co. Ltd. would be closed and upon payment to all its creditors in terms of the scheme, it would be dissolved without winding up under an order to be obtained from this court.

On November 7, and on December 21, 1967, the board of directors of the Rivers Steam Navigation Co. Ltd. passed the following two resolutions:

(a) Resolved that the capital of the company be increased to 764,135 by the creation of 1,35,810 new ordinary shares of 1 each ranking pari passu in all respects with the existing ordinary shares.

(b) It is resolved that 1,35,810 ordinary shares of 1 each in the capital of the company be and are hereby allotted and credited as fully paid up to Macneill & Barry Limited in terms of Clause (d) of the memorandum of agreement dated February 6, 1965......

The assessee was assessed to income-tax for the assessment year 1968-69, the relevant accounting year ending on December 31, 1967. In its assessment, the assessee claimed as business loss the debt outstanding from the Rivers Steam Navigation Co. Ltd. being Rs. 28,52,010 which was claimed to be a bad debt. It was contended that the shares of Rivers Steam Navigation Co. Ltd., ultimately allotted to the assessee, did not have any market value and as such only Re. 1 was shown to be the value of the entire block of shares in the books of the assessee. The debt of Rs. 33,33,432 as reduced by rupee 1 became irrecoverable and was wiped out by transfer to the profit and loss account.

8. The Income-tax Officer did not accept the contentions of the assessee. He held that the assessee had received the repayment of the debt in specie under an arrangement of repayment as confirmed by the order of the High Court dated May 3, 1967, and the debt was extinguished by the transaction. The bad debt was reduced by Rs. 28,52,010 calculated at the rate of exchange prevailing on May 3, 1967.

9. On an appeal by the assessee against the assessment, the Appellate Assistant Commissioner found that on the execution of the agreement dated February 6, 1965, the debt due to the assessee should be deemed to have been discharged. The facts that the shares were delivered much later or that the value of the shares fell subsequently as a result of the subsequent unforeseen circumstances would not affect the position. He noted that the High Court made it compulsory for the assessee to take the shares and found that the assessee was not a dealer in shares. It was held that the shares were acquired for investment and their fall in value did not entitle the assessee to claim a loss or bad debt. The loss, if any, was a capital loss.

10. From the order of the Appellate Assistant Commissioner, the assessee went up on further appeal before the Income-tax Appellate Tribunal. The Tribunal noted that under the agreement dated February 6, 1965, the shares of Rivers Steam Navigation Co. Ltd. allotted to the assessee were to be retained until December 31, 1974, in the assessee's beneficial ownership and could not be sold except to the Government which had the first option to purchase the same till that date. Therewas no evidence that the assessee attempted to sell the shares to the Government at any time and the shares remained with the assessee.

11. The Tribunal held that the shares had some value, that the same were received by the assessee as capital and what happened to the shares subsequently would not give rise to a bad debt or a business loss. The alternative contention of the assessee that the allotment of shares would result in discharge of the debts due to the assessee to the extent of the value of the shares at the rate of exchange prevailing on the date of the allotment, namely, December 23, 1967, was also rejected by the Tribunal as irrelevant, as the assessee's claim was for a bad debt or business loss.

12. At the instance of the assessee, the Tribunal has referred the following questions in Income-tax Reference No. 88 of 1978 under Section 256(1) of the Income-tax Act, 1961, as questions of law arising from its order for the opinion of this court I

'1. Whether, on the facts and in the circumstances of the case, the bad debt of Rs. 28,52,010 is allowable as a deduction either as a bad debt or as business loss in computing the assessee's total income for the assessment year 1968-69?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the assessee's alternative contention that even on the assumption that the assessee can be said to have received 135,810 being the face value of 'Rivers' shares, the amount that could be disallowed would be Rs. 24,44,480 ?'

In the other Income-tax Reference being No. 98 of 1981, the Tribunal has referred the following questions pursuant to the directions of this court under Section 256(2) of the Income-tax Act, 1961 :

'1. Whether the Tribunal's finding that the shares of 'Rivers' allotted to the assessee on December 23, 1967, could not be said to have no value whatsoever was vitiated by consideration of irrelevant circumstances and non-consideration of relevant circumstances or was otherwise perverse ?

2. Whether the Tribunal was right in holding that what was received by the assessee, viz., the shares of ' Rivers' was capital and what happened to the shares subsequently could not give rise to any claim for bad debt or business loss ?'

At the instance of the parties, the above two references were consolidated and heard together.

13. Learned advocate for the assessee contended that the order of this court passed in the company proceedings on May 3, 1967, did notratify or incorporate the earlier memorandum of agreement dated February 6, 1965. The said order, in any event, introduced substantial modifications and gave a go-by to the earlier agreement. Under the scheme approved by the court, all properties and assets of the Rivers Steam Navigation Co. Ltd. vested in the new company. It was declared by the court that the assessee having agreed earlier to accept the shares of the Rivers Steam Navigation Co. Ltd. in full satisfaction of the latter's trading liability, no amount would be payable to the assessee. The assessee had entered into the said agreement in a completely different situation but in view of the court's order, the assessee was not left with any option in the matter. It was not a case of voluntary acceptance of the shares of the Rivers Steam Navigation Co. Ltd. by the assessee.

14. It was contended further that the shares allotted to the assessee pursuant to the aforesaid had no value whatsoever and there was no possibility of the shares having any value in future as the Rivers Steam Navigation Co. Ltd. closed its business from the date of the order of the court and transferred its assets to the new company. The Rivers Steam Navigation Co. Ltd. was kept alive only on paper as it was directed by this court that it would stand dissolved without winding up after all the creditors were paid.

15. In view of the aforesaid finding of the Tribunal that the shares of the Rivers Steam Navigation Co. Ltd. had some notional value was perverse and without any basis. This finding has been challenged by the assessee.

16. In the shares allotted in terms of the scheme, the assessee got something whose value was nil and had no reasonable chance of realising its trading dues which must be held to have become a bad debt. Alternatively, the assessee would be entitled to a loss which it had suffered as a result of shares of no value being allotted to it in satisfaction of its trading dues. This would be a trading loss which arose in the relevant year. There was or could have been no further fall in the value of the shares in subsequent years.

17. In support of his contentions, learned advocate for the assessee relied on and cited the following decisions:

(a) CIT v. F.M. Chinoy and Co. (P.) Ltd. : [1969]74ITR780(Bom) . The assessee in this case while acting as the managing agent of another company lent and advanced money to the managed company. The agreement of agency permitted such loans and advances and it was provided that the agency would continue as long as the same remained outstanding. The business of the managed company declined, it suffered heavy losses and it was ultimately wound up.

In the relevant assessment year, the assessee wrote off in its books the amounts advanced to the managed company and claimed deduction of the same from its taxable income unsuccessfully before the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal.

On a reference, the Bombay High Court held that though the loans could be held to be imprudent or unbusinesslike, the fact that it was optional on the part of the assessee to advance the loans could not be held to be a ground for holding that the amount was not a loss in the course of the business or incidental to the business of the assessee.

(b) CIT v. Williamson Magor and Co. Ltd. : [1979]117ITR858(Cal) . In this case, the assessee acting as the secretary of a company furnished guarantee on the basis of which overdraft facilities were obtained by the company from bank. Subsequently, when the assessee ceased to act as such secretary, the guarantee was enforced against the asseseee. Thereafter both the company and the assessee filed suits against each other claiming money which were ultimately settled and withdrawn.

In the relevant assessment year, the assessee claimed deduction of the amount which was realised by the bank from the assessee on the guarantee. The claim was rejected by the Income-tax Officer and the Appellate Assistant Commissioner but was accepted by the Tribunal which found that the assessee was, in fact, managing the other company and that the guarantee was furnished on business considerations as incidental to the assessee's business. A Division Bench of this court upheld the decision of the Tribunal and held that deduction of the amount was allowable as a bad debt.

(c) Jethabhai Hirji and Jethabhai Ramdas v. CIT : [1979]120ITR792(Bom) . Here, the assessee who as a selling agent of its principal financed purchase of goods of the principal by a third party and failed to recover the full amount advanced. In a subsequent year, the assessee filed a suit against the third party for recovery of the balance. Subsequently, a decree on admission was passed in the suit which provided for payment in instalments.

The assessee claimed deduction of the debt and the legal expenses in the suit. On these facts, it was held by the Bombay High Court that the Tribunal was not justified in disallowing the bad debt claimed.

(d) CIT v. Gillanders Arbuthnot & Co. Ltd. : [1982]138ITR763(Cal) . In this case, the assessee had a running account with one of its subsidiaries. The outstanding balance in this account was written off by the assessee in the assessment year concerned as a bad debt. The claim of the assessee was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner but the Tribunal held that even if the amount could not be treated as a bad debt, it should be allowed as trading loss. The finding of the Tribunal was upheld by this court on a reference and it was held that the loss claimed by the assessee was a trading loss.

Learned advocate for the Revenue contended, on the other hand, that, admittedly, the shares had been allotted to the assessee which was not a dealer in shares and the assessee received the shares in discharge of its outstanding dues. The shares were also not the stock-in-trade of the assessee.

18. The assessee agreed to receive the shares in lieu of its dues under the agreement dated February 6, 1965. This agreement was ratified by the order of this court dated May 3, 1967. By reason of the aforesaid, the debt was fully discharged on the receipt of the shares.

19. The assessee took no steps to sell the shares at any material time. As the debt was discharged and the liability of the debtor was extinguished by the allotment of the shares, the debt could not be treated as a bad debt and allowed as such under Section 36 of the Income-tax Act, 1961.

20. Learned advocate for the Revenue also submitted that to ascertain the amount of debt discharged, the rate of exchange as prevailing on May 3, 1967, i.e., the date of the order of this court, should be taken into account and not the date when the shares were actually allotted.

21. In support of his contentions, learned advocate for the Revenue cited Industrial Development and Investment Co. Pvt. Ltd. v. CIT : [1971]82ITR642(Bom) . Here, the assessee in the course of its business had advanced a loan to a firm. Subsequently, the firm was converted into a limited company and the assessee was allotted and accepted a number of fully paid up preference shares and ordinary shares in the company in full satisfaction of the amounts outstanding against the firm and its successor-in-interest, the company. The assessee was also allotted and accepted a number of fully paid up shares in another limited company which was appointed as the managing agent of the debtor company.

22. Three years thereafter, the debtor company was directed to be wound up by court. Six years thereafter, the assessee wrote off the entire amount invested in the shares of the debtor company and claimed deduction of the amount in that assessment year as a bad debt.

23. On these facts, it was held by the Bombay High Court that the assessee was not entitled to claim either a bad debt or a trading loss as the shares in the new company had been accepted in full satisfaction of the loan long time ago. The loan was extinguished by the receipt of the shares.

24. It appears to us from the order of the Tribunal that the Tribunal has proceeded on the basis that the assessee accepted the shares of the Rivers Steam Navigation Co. Ltd. in satisfaction of the amount due to the assessee from the latter under the agreement dated February 6, 1965. The Tribunal has found that as the assessee was not a dealer in shares, the shares received by the assessee in discharge of its outstanding dues was not stock-in-trade but capital. The Tribunal held on the basis of the aforesaid that the fact that the shares had a nominal or no value would not give rise to any claim for bad debt or business loss.

25. It appears to us that the Tribunal fell into a fundamental error in taking into account the said agreement dated February 6, 1965, without any reference to the order of this court passed on May 3, 1967.

26. Up till that date, viz., May 3, 1967, the agreement dated February 6, 1965, had not been given any effect whatsoever. By the said order dated May 3, 1967, it was directed that no amount would be payable to any creditor of the Rivers Steam Navigation Co. Ltd., who had directly or indirectly agreed with any person to accept the shares of the former in payment or satisfaction of his dues in whole or in part. By this clause in the scheme, sanctioned by the court, the dues of the assessee from the Rivers Steam Navigation Co. Ltd., in our view, stood immediately extinguished .

27. Under the scheme, the court did not ratify or direct specific performance of the agreement dated February 6, 1965, or any other agreement. All that the court directed was that the Rivers Steam Navigation Company Ltd. if so required, shall allot the shares as agreed to be taken.

28. Under the scheme, all properties and assets of the Rivers Steam Navigation Co. Ltd., stood transferred to the new company. Upon approval of the scheme by the court, the River Steam Navigation Co, Ltd. was directed to be closed and after the creditors who have been allowed payment under the scheme have been paid, it was directed that the Rivers Steam Navigation Co. Ltd. would be dissolved without winding up. In view of the above, it appears to us that by the order sanctioning the scheme, the substratum of the agreement dated February 6, 1965, ceased to exist. The main object of the agreement that the Rivers Steam Navigation Co. Ltd. would be revived with the aid and under the control of the Government could never be achieved. In law, the agreement was no longer enforceable against the assessee.

29. After the scheme was sanctioned, the Rivers Steam Navigation Co. Ltd., unilaterally passed a resolution on December 23, 1967, allotting fully paid up shares to the assessee, without any reference to the latter and without being required to do so by the Government as envisaged in the order dated May 3, 1967, sanctioning the scheme.

30. For the reasons as aforesaid and in the facts before us, it cannot be held that the assessee accepted shares of Rivers Steam Navigation Co. Ltd.in satisfaction of the debt owed by the latter to the assessee. The trading debt ceased to be payable by the order dated May 3, 1967, before any shares were allotted or agreed to be accepted by the assessee. The matter stood concluded by the order of the court.

31. For the reasons above, we hold that the assessee suffered a trading loss of Rs. 28,52,010.

32. The questions referred are answered as follows :

Income-tax Reference No. 88 of 1978 :

Question No. 1 answered in the affirmative and in favour of the assessee.

In view of the answer to question No. 1, question No. 2 does not call for any answer.

Income-tax Reference No. 98 of 1981 :

In view of the answer given to question No. 1 in Income-tax Reference No. 88 of 1978 no answer is required to be given to any of the questions in this reference. We make it clear that the shares of the company ultimately allotted to the assessee may be capital and may or may not be of any value but the acquisition of the same has no nexus with the extinguishment of the debt of the Rivers Steam Navigation Co. Ltd. to the assessee.

In the facts and circumstances, there will be no order as to costs.

G.N. Ray, J.

33. I agree.


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