Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, which relates to the assessment year 1965-66, the assesseeposed two questions before the Tribunal for reference to this court. The questions were as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal had any materials or had relied on irrelevant or partly irrelevant materials to come to the finding that a loss of Rs. 87,546 had accrued or arisen to the assessee during the previous year relevant to the assessment year 1965-66 and whether such finding was not otherwise unreasonable or perverse ?
2. If the answer to question No. 1 is in the affirmative, then whether, on the facts and in the circumstances of the case, the loss of Rs. 87,546 was a trading loss incurred by the assessee in the course of its business and was not a capital loss arising from the loss of capital invested in the subsidiary company ?'
2. The Tribunal, however, has referred one question refraining it as follows :
'Whether the Tribunal was justified in law in treating the loss of Rs. 87,546 as a trading loss and not as a capital loss for the assessment year 1965-66?'
3. The Revenue did not come up in an application for reference before this court. It appears that the only point involved related to the amount of Rs. 87,546 treated by the ITO as not admissible as an item of business expenditure. The assessee-company which at all material times, according to the Tribunal, had diverse lines of business like managing agency, imports and distributorship, purchase and sale, on its own account, etc., had a wide net work of subsidiaries to which it advanced loans from time to time. The list of loans and advances to subsidiaries as on March 31,1964, showed that the assessee was a creditor to the extent of over Rs. 20 lakhs. The corresponding figure for the year ended March 31,1965, i.e., accounting year under appeal, was about Rs. 7,43,000. The subsidiaries to which the loans were advanced by the assessee were all controlled by the assessee-company and some of them had actually appointed the assessee-company as their managing agents. There was one company called Group Marketing (India) Pvt. Ltd., which was a hundred per cent. subsidiary of the assessee-company. The balance-sheet of Group Marketing (India) Pvt. Ltd. as on December 31, 1965, showed that there were outstanding loans due to the two directors, Mr. Khan and Mr. Crawley, to the extent of Rs. 38,384. The assessee bought up the share capital of this company thereafter and advanced unsecured loans to the company. Thereafter, the balance-sheet as on December 31, 1965, of the subsidiary showed that the unsecured loans due to the assessee were of the order of Rs. 47,976. The amounts due to the directors mentioned earlier had been repaid. The two directors mentioned were not connected with the assessee-company. Therewas a running account between the assessee-company and Group Marketing (India) Pvt. Ltd. on account of which there was a debit balance of about Rs. 87,546 at the beginning of April 1, 1965. This amount was written off by the assessee during the assessment year 1965-66 and was claimed as a bad debt. The ITO considered the facts as pointed out above and also noted that some of the office establishment charges of the subsidiary were transferred to the loan account with the assessee-company after the discontinuance of the activities of that subsidiary. As the financial position of the subsidiary was not sound at the time the loans were advanced and as no interest was charged by the assessee-company to the subsidiary, the ITO inferred that the loan was connected with the assessee's participating in the capital of the subsidiary company and that the claim was not allowable. In that view of the matter, he disallowed the sum of Rs. 87,546.
4. The AAC held, on appeal, that the amount was not allowable Under Section 36(2) as the amount could not be said to have been advanced in the course of any money-lending business in a normal or prudent manner. There was an appeal before the Tribunal and the Tribunal considered the rival contentions and the authorities cited before the Tribunal and thereafter observed as follows :
'We have given careful and anxious thought to the rival submissions made by both the sides. In our opinion, the assessee's case is well founded. From the facts as narrated in the earlier portion of this order, it would be clear that the assessee-company was engaged in various business activities, one of which was to guide the destinies of the subsidiaries by financing them or advancing loans to them in a sustained fashion and over a period of time. The loans advanced to the subsidiary concerned in this case were not an isolated instance but were a part of the formidable list of such advances made by the assessee-company to its subsidiaries, some of which were managed by it as managing agent. It may be repeated here that the employees of the assessee-company were on the board of directors of the subsidiary company concerned and it is also a fact that the income of the subsidiary showed an upward trend after the share capital of the subsidiary company was taken over by the assessee-company. No doubt, the balance-sheet of the subsidiary as on 31st December, 1965, does not inspire much confidence. However, the subsidiary was engaged in the business of consulting engineers and, by its very nature, the share capital and the assets were not formidable. The financial position was undoubtedly weak but the assessee did its very best to prop up the sagging finances of the subsidiary and bolster up its declining business. The assessee was intimately connected with the various subsidiaries and the interests of the subsidiaries were, therefore, vitally connected with theassessee's business interests which were diverse. The memorandum of association permitted the assessee-company to advance the loans and the fact that the assessee did not charge any interest to this particular subsidiary, in fact, speaks well of the business prudence of the assessee-company and does not indicate any mala fides. It was only when the subsidiary concern went into liquidation and when the liquidator clearly wrote on 31st March, 1965, to the assessee-company that there were absolutely no chance of effecting any recovery from the subsidiary that the assessee chose to write off this debt and claim it in its assessment.
Since we have held that the assessee was engaged in the business as a holding company of financing its subsidiaries, the other arguments of the departmental representative that the assessee's claim cannot be allowed against the dividend income, if at all, loses its significance. Even if the amount cannot be treated as a bad debt in the sense that it was not an advance in the course of money-lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of its business. This alternative claim definitely is reasonable and can be entertained as it is not necessary to make further investigation into the facts for entertaining it. We agree with the assessee's representative, Dr. Pal, that some of the observations of the Supreme Court in the two decisions relied upon by him are of assistance to him. No doubt in the cases decided by the Supreme Court the question was about the allowability of the loss in respect of the managing agency income but here we have given a finding that the assessee was engaged in the business of financing its subsidiaries or that, at any rate, financing the subsidiaries was incidental to the assessee's main business activities which were diverse in nature. Therefore, the loss incurred by the assessee has to be allowed as on business account.' .
5. As the Tribunal held that the assessee was engaged in the business as a holding company for financing its subsidiaries and on that basis and the other facts found by the Tribunal and the fact that the loan was in fact given, which is also a finding of fact, and in the usual course of business the assessee gave loans, the question now posed before us is really a question based on facts. But no question of challenging the finding of fact as perverse or based on no materials has been referred to this court. In fact, that question has been refused and if the findings stand then the conclusion of the Tribunal on those findings become irresistible.
6. In that view of the matter, the question posed before us must be answered in the affirmative and in favour of the assessee. There will, however, be no order as to costs.
Sudhindra Mohan Guha, J.
7. I agree.