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Commissioner of Income-tax (Central) Vs. Rohtas Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference Nos. 370 and 408 of 1969
Judge
Reported in[1979]120ITR110(Cal)
ActsIndian Income Tax Act, 1922 - Sections 10(2), 15C and 15C(6)
AppellantCommissioner of Income-tax (Central)
RespondentRohtas Industries Ltd.
Appellant AdvocateB.L. Pal and ;Ajit Sengupta, Advs.
Respondent AdvocateD. Pal, ;R.K. Murarka and ;A.K. De, Advs.
Excerpt:
- sen, j.1. pursuant to the directions of this court under section 66(2) of the indian i.t. act, 1922, the tribunal in these references has drawn up a consolidated statement of case and referred the following questions :1955-56 : 'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the cement unit, the new power house, the chemical factory and the paper plants nos. 2 and 3 all constituted new industrial undertakings within the meaning of section 15c of the indian income-tax act, 1922, in respect of which the assessee was entitled to exemption from tax to the extent indicated in the tribunal's order ?' 1956-57: '1. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the cement unit, the new power.....
Judgment:

Sen, J.

1. Pursuant to the directions of this court under Section 66(2) of the Indian I.T. Act, 1922, the Tribunal in these references has drawn up a consolidated statement of case and referred the following questions :

1955-56 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cement unit, the new power house, the chemical factory and the paper plants Nos. 2 and 3 all constituted new industrial undertakings within the meaning of Section 15C of the Indian Income-tax Act, 1922, in respect of which the assessee was entitled to exemption from tax to the extent indicated in the Tribunal's order ?' 1956-57:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cement unit, the new power house, the chemical factory and the paper plants Nos. 2 and 3 all constituted new industrial undertakings within the meaning of Section 15C of the Indian Income-tax Act, 1922, in respect of which the assessee wag entitled to exemption from tax to the extent indicated in the Tribunal's order ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the sum of Rs. 10,47,422 was allowable as a bad debt under Section 10(2)(xi) of the Indian Income-tax Act, 1922?'

2. The facts admitted and/or found in the proceedings are that Rohtas Industries Ltd., Dalmianagar, the assessee, is a public limited company. It carries on the manufacture of paper, cement, sugar, chemicals, etc. In its assessment for income-tax for the assessment year 1955-56, it claimed relief under Section 15C of the Indian I.T. Act, 1922, by way of rebate in respect of two new undertakings, namely, paper machine No. 2 and a cement factory. The assessee also claimed to have written off a bad debt of Rs. 10,47,398 due from one Rohtas Quarries Ltd.

3. The ITO disallowed the claim under Section 15C on the ground that past depreciation in respect of the said new undertakings would have been carried forward had the same not been set off against the profit of other units to which the provisions of Section 15C did not apply. It was held that no profit was derived from these new undertakings in this year as depreciation relating to these units had to be set of against such profits.

4. In respect of the claim for the said bad debt the ITO found that the amount thereof had been carried forward to the next accounting year and not been written off during this year. The ITO also found that there was a close connection between the assessee and its debtor and that substantial amounts had been advanced by the assessee to the debtor which essentially were not in connection with the assessee's business. The advances were continued to be made even when the amount of such advances exceeded the entire capital of the debtor, and no legal steps were taken at any time for recovery of the balance due. Accordingly, the ITO also disallowed the claim for this bad debt.

5. For the assessment year 1956-57, the assessee again preferred a claim under Section 15C of the Act in respect of the said paper machinery and the cement factory. The ITO found in this year that the profits of the new undertakings have not been correctly determined inasmuch as the said profits have been computed on the basis of proportionate allocation of expenses. The ITO also found that after adjustment of depreciation it could not be shown that there was any surplus or profit available for Section 15C to be applied. Accordingly, the claim was disallowed in this assessment year.

6. The assessee reiterated its claim for the said debt of Rs. 10,47,411 in the account of Rohtas Quarries Ltd., which was stated to have been written off this year pursuant to a resolution of the board of directors of the assessee. The ITO found that the rates of supply of Rohtas Quarries Ltd. were not favourable to the assessee and by 1946-47 the amount due from this concern was about Rs. 10 lakhs. The ITO found that the assessee had a non-commercial relationship with Rohtas Quarries Ltd., a sister concern, and the amount sought to be written off was found to have no connection with the business dealings of the assessee. The claim was accordingly disallowed.

7. Being aggrieved, the assessee preferred appeals against both the assessments before the AAC.

8. In the appeal relating to the assessment year 1955-56, the AAC upheld the disallowance of the relief claimed under Section 15C of the Act on the grounds relied on by the ITO as also on the further grounds that no separate profit had been worked out for the new industrial units and that the paper machine No. 2 was not a new industrial unit. The AAC held that the assessee had been manufacturing papers all along and had introduced the new machinery for use in the final stage of production of paper. The machine No. 2 was connected with the production effected by the old machinery. Similarly, in the case of the cement factory, new machinery purchased were found to have augmented the production of cement which was being carried on previously and it was held that the machinery for the factory did not constitute a new industrial unit. It was found that the receipts and expenses of the new cement factory had not been accounted for separately.

9. The disallowance of the bad debt was also upheld by the AAC following the order of the Tribunal for the assessment year 1953-54 on the ground that the said debt had not been written off in the books during the relevant year.

10. In the appeal relating to the assessment year 1956-57, the AAC recorded the assessee's claim for relief under Section 15C in respect of the paper machinery, as follows :

Rs.1.Loan2,37,5922.Buildings5,74,7833.Pulp machinery8,90,3464.Power house machinery17,92,3775.Yankee Paper Machine No. 39,38,4946.Paper Machine No. 217,56,387

61,89,979

11. Out of these items, only items Nos. 5 and 6 were found to be new additions. The other items were held to be old assets utilised earlier.

12. Similarly in respect of the cement industry it was found that only a portion of the total investment represented addition of new assets, viz.; machinery. It was found that the industrial undertaking as was formed by transfer to a new business asset, e.g., building, machinery, plant, etc., previously used in the other business. This barred the assessee's claim under Section 15C(2)(i). The alternative claim for relief in respect of capital invested in the paper and cement industries was disallowed on the ground that the two paper machines Nos. 2 and 3 were additions to the production of paper in the final stage and did not constitute a separate composite unit. It was found that no raw material, power or technical assistance were specially allotted for the same two machines and no separate account of profits were maintained.

13. Similarly, in the cement industry it was found that the machinery had been purchased for only two different stages of production of cement. The power supply; stores, raw materials and technical personnel were common to all the stages of production and the same did not constitute a separate industrial undertaking.

14. As regards the bad debt which had been written off during the year, the AAC analysed the transactions between the assessee and Rohtas Quarries Ltd, in detail from 1947-48 till 1954-55, and found as follows :

(a) after 1948, though the amount due to the assessee covered more than the value of the materials received from the debtor yet the assessee continued to advance further sums and increased the debt, (b) two separate accounts were maintained in respect of Rohtas Quarries Ltd., one relating to the supply of limestone, the other being purely a loan and advance account. The deficit in the second account had been transferred to the supply account and claimed as a bad debt. (c) Rohtas Quarries Ltd., a sister concern of the assessee, had been financed by the assessee by the advances though the assessee had no legal obligation to do so, (d) the paid up capital of Rohtas Quarries Ltd. were wiped out by its losses in 1950, it closed its business in 1952 and went into voluntary liquidation in 1955 and no attempts were made by the assessee to recover its debt. By'reason of the aforesaid, the AAC held that the amounts were advanced for extra-commercial considerations and did not constitute trading debt. He confirmed the disallowance.

15. Being aggrieved by the orders of the AAC, the assessee preferred further appeals to the Income-tax Appellate Tribunal, In the appeal relating to the assessment year 1955-56, statements were filed by the assessee showing additions in building and machinery in the years ending the 31st October, 1951, and 31st October, 1954, and depreciation in the value thereof. It was pointed out that the new paper machines acquired produced a type of paper out of raw material which was different from the type of paper produced by the older machines which also used different raw materials. It was contended further that the new cement unit consisted of imported machinery from Denmark which were of a different make from the machinery in the old unit.

16. The Tribunal remanded the matter to the ITO for further investigation into the aforesaid facts. The ITO after due investigation on remand submitted a report.

17. On consideration of the remand report and the documentary evidence the Tribunal came to the conclusion that the paper machines Nos. 2 and 3 constituted independent units different from the old paper plant for the following reasons:

(a) The paper machines Nos. 2 and 3 acquired in 1952 and 1953 were respectively a German Yankee machine and a Japanese Yankee machine whereas the old machine was of a different German make manufactured in 1938.

(b) The old machine produced only duplex and triplex board measuring 124' in breadth whereas the machines Nos. 2 and 3 produced machine glazed papers of breadths of 100' and 40'.

(c) The old machine used bamboo pulp as raw material whereas the machines Nos. 2 and 3 used only bagasse pulp.

(d) The old machine worked on sulphate process of manufacture whereas the new machines Nos. 2 and 3 employed the soda chlorine process.

18. From the above, the Tribunal concluded that machines Nos. 2 and 3 formed a self-contained industrial unit employing a different kind of raw material, a different process of production and turning out different products. The said machines were found to be new as normal and additional depreciation had been allowed on them from 1952-53 onwards.

19. The Tribunal also found that the new power house had been set up in the year ending 31st October, 1951. Additional machinery were installed in the said power house during the year ending 31st October, 1954. The old power house had Skoda boilers, each generating 45 lbs. of steam per hour, with two German steam turbines of a limited capacity. The new power house had three boilers manufactured in U. K. each generating 5,600 Ibs. of steam per hour with a new turbine of much higher capacity. The new power house was also found to have been put up in a new building with a new control board.

20. Machinery installed in a chemical factory were also claimed to be a new industrial unit. These machinery were installed for the production of caustic soda used in the paper industry for bleaching.

21. The Tribunal found that the new cement unit was installed in December, 1950. New factory buildings were put up and new machineries were obtained. The parts of the new unit, i.e., raw mill, kiln, cement mill, etc., were imported from Denmark, This new unit had a capacity of 500 tons per day which was the same as that of the existing old unit.

22. Photographs were produced before the Tribunal to show that the power house and the cement factory were housed in new buildings. For the paper factory, photographs were produced to show that there were new constructions and the digester house, the pulp factory and the machine No. 2 had been put up in the new building.

23. On these facts, the Tribunal held that the new power house, the chemical factory, the new cement unit and the paper plants Nos. 2 and 3 all constituted new industrial undertakings and qualified for relief under Section 15C of the Act. The Tribunal further held that these units were not set up by transfer of building or machinery or plant previously used in the old units of production. The Tribunal also held that the chemical factory could be regarded as a part of the new paper unit and the new power house was a part of the new paper and cement units.

24. The contention of the revenue that separate accounts had not been kept for the new industrial undertakings was rejected by the Tribunal on the ground that it was not a requirement of Section 15C, that separate accounts had to be kept for new industrial units. The Tribunal found that in any event the statements filed by the assessee showing computation of capital employed and profits earned in the new industrial undertakings had not been challenged by the revenue.

25. As to the unabsorbed depreciation in the cement unit the Tribunal, following the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. : [1966]59ITR555(SC) , held that such unabsorbed depreciation had to be treated as part and parcel of the current depreciation for the purpose of working out profits under Section 15C for the assessment year 1955-56 treating the unit as a separate unit. The Tribunal concluded that the relief under Section I5C was accordingly available in respect of the cement unit for Rs. 2,77,780 and to the extent of 6% of the capital employed in the other industrial units.

26. The Tribunal, however, confirmed the disallowance of the claim of the assessee in respect of the bad debts due from Rohtas Quarries Ltd., on the ground that the debt had not become bad and had not been written off in the books of the assessee in the relevant year as a bad debt.

27. In the appeal relating to the assessment year 1956-57, the Tribunal allowed the assessee's claim for relief under Section 15C of the Act as in the earlier year and also considered the other claim of the assessee in respect of the bad debt of Rs. 10,47,422. The assessee contended before the Tribunal that in whatever way Rohtas Quarries Ltd. might have utilised the advances, the purpose of the assessee in giving the said advance was the supply of raw materials. The assessee submitted that additional finances were made available to the supplier so that new quarries may be opened up.

28. On the consideration of the entire transactions, the Tribunal came to the conclusion that there was nothing unusual in the assessee making large advances to Rohtas Quarries Ltd., when the entire output of the latter was being supplied to the assessee. The Tribunal held that the advances made during the assessment year 1948-49 which inflated the amount already due were for the purpose of securing supply of raw materials and were wholly and exclusively for purposes of the assessee's business. In the assessment year 1949-50, though the advances aggregated Rs. 8,30,775, it could not be said that they were made for non-business reasons. The advances beyond the value of supplies made were in fact utilised by the debtor in opening up new quarries. The Tribunal held further that advances made in 1949-50 onwards were wholly for business purposes of the assessee in the absence of any material to the contrary and the said debt represented a trade debt and qualified for bad debt, in the year under appeal and that the same was allowable under Section 10(2)(xi). The appeals of the assessee were accordingly allowed, At the hearing Mr. B. L. Pal, learned counsel for the revenue, has drawn our attention to the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT : [1977]107ITR195(SC) .

29. He submitted that the Supreme Court has laid down tests to determine whether an undertaking would be a new undertaking within the meaning of Section 15C of the Act. He submitted that a new undertaking must be a new and identifiable undertaking, separate and distinct from the existing business. A new undertaking must also be an undertaking which could be carried on independently of the old unit. Mr. Pal contended that in the instant case the units or undertakings in respect of which the assessee claimed relief under the said section did not satisfy such tests. The paper machines Nos. 2 and 3 could not be stated to be new or identifiable undertakings inasmuch as they also produced paper, though of a different kind, and, therefore, could not be held to be separate or distinct from the existing business of the assessee, of manufacture of paper.

30. Mr. Pal contended that the assessee had not established that the said power house could be carried on independently as an electricity supply unit; The assessee did not carry on the business of manufacture or supply of electricity and, therefore, this item could not come within the definition of a new undertaking.

31. Mr. Pal also drew our attention to another decision of the Supreme Court in CIT v. Indian Aluminium Company Ltd. : [1977]108ITR367(SC) , where the principles laid down in the case of Textile Machinery Corporation Ltd. : [1977]107ITR195(SC) were reiterated.

32. Dr. Debi Pal, learned counsel for the assessee, contended on the other hand that in the instant case the items in respect of which the assessee claimed relief under Section 15C fulfilled all the tests laid down by the Supreme Court in the aforesaid decisions and the assessee was lawfully entitled to claim such relief. Dr, Pal submitted that in the case of Indian Aluminium Company Ltd. : [1977]108ITR367(SC) , the Supreme Court has held that a unit which brought into existence the same product which was being produced by an existing unit, could still be a new undertaking for the purposes of Section 15C. Dr. Pal submitted that in the instant case the products obtained from the new paper machines Nos. 2 and 3 were entirely different and, therefore, the tests laid down by the Supreme Court applied a fortiori to the said machines. Dr. Pal, lastly, contended that none of the facts found by the Tribunal on the basis of which it held that the said units constituted new undertakings have been challenged and, therefore, the question was an academic one.

33. Dr. Pal cited a decision of this court in CIT v. Dunlop Rubber Co. (I) Ltd. : [1977]107ITR182(Cal) . In that case, the assessee had claimed relief under ss. 84 and 101 of the I.T, Act, 1961, on the ground that it had established new industrial undertakings. The ITO disallowed such claim on the ground that the assessee not having maintained separate accounts in respect of the new undertakings could not claim apportionment on the basis of the total sales. The AAC and the Tribunal negatived the contentions of the ITO. On a reference, this court held that it was the duty of the ITO to determine the total income of the assessee and the tax payable thereon even if the income could not be deduced from the books due to the method of accounting employed. Difficulty of computation could not be a ground for rejecting a claim. Under Section 84 the assessee did not have to pay tax on 6% of the capital employed in the undertaking and this exemption must be granted.

34. In order to appreciate the respective contentions of the parties it is necessary to consider the two Supreme Court decisions. In the case of Textile Machinery Corporation Ltd. : [1977]107ITR195(SC) the assessee was a heavy engineering concern and manufactured boilers, machinery parts, wagons, etc. In the assessment years in question the assessee claimed exemption from tax under Section 15C of the Act in respect of profits and gains derived from its steel foundry division which was started in the assessment year 1958-59 and continued thereafter. In the assessment year 1959-60, the assessee had also started a jute mill division where the parts made out of the raw materials supplied by the boiler division by machining and forging were given back to the boiler division of the assessee. The major part of the production of the steel foundry division and the jute mill division were consumed by the existing units of the assessee. On these facts both the ITO and the AAC held that the undertakings were expansions and reconstructions of the existing business and the assessee was not entitled to relief under Section 15C of the Act, The Tribunal, however, allowed the appeal of the assessee and accepted the claim for such exemption. The High Court found that the assessee, instead of purchasing goods from outside, produced and manufactured the same from within the assessee's own business and, therefore, it was only, a reconstruction of the business already in existence and that the newness of the machinery of the said two divisions could not by themselves make them new industrial undertakings. Similarly, separate housing, separate accounts and grant of separate licences for the said divisions did not necessarily indicate that a new industrial undertaking was being set up.

35. The Supreme Court found that the assessee was producing commodities in the disputed undertakings different from those manufactured or processed in its existing business. Such commodities produced in the new undertakings had also been sold in the open market. The Supreme Court also found that the principal business of the assessee, i.e., heavy engineering, manufacturing boilers, wagons, etc., could be carried on even if the said two additional undertakings ceased to function and the converse was also true. The Supreme Court held as follows (p. 207) :

'The business of the assessee is of heavy engineering. The two new undertakings are independently producing articles which may be of aid to the principal business but yet the undertakings are distinct and not reconstruction out of the existing business of the assessee. Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in construing Section 15C. The High Court is not right in holding the two undertakings as formed by reconstruction of the existing business of the assessee.'

36. The Supreme Court also made the following observations which are relevant for the purpose of construing Section 15C (pp. 201, 202, 203, 204, 206).

'Section 15C is an exemption section. The benefit granted under this section is a partial benefit so far as the quantum of the exempted profits of the new industrial undertaking as also for a limited period or periods as specified in the section. If the two industrial undertakings, about the existence of which there can be no controversy, as found by the Tribunal, cannot be held to be formed by the reconstruction of the business already in existence, the benefit of Section I5C will be available to the assessee.....

Again the new undertaking must not be substantially the same old existing business.....Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words 'the capital employed' in the principal clause of Section 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital.....Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under Section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial.undertaking on account of which the assessee claims exemption under Section 15C. No hard and fast rule can be laid down .....The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under Section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business.....In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved.....The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business.....In order to be entitled to the benefit under Section 15C, the following facts have, to be established by the assessee, subject always to time schedule in the section :

(1) investment of substantial fresh capital in the industrial undertaking set up,

(2) employment of requisite labour therein,

(3) manufacture or production of articles in the said undertaking,

(4) earning of profits clearly attributable to the said new undertaking, and

(5) above all, a separate and distinct identity of the industrial unit set up.'

37. In our opinion, the matter is entirely covered by the above decision of the Supreme Court. It appears to us that from the facts found by the Tribunal which are not challenged, it is clear that the undertakings on which the assessee has claimed exemption under Section 15C of the Indian I.T. Act, 1922, fulfil all the tests laid down by the Supreme Court. It has been found that the new paper machinery, the chemical factory, the power house and the cement factory of the assessee are engaged in manufacture or production of articles yielding additional profit and these undertakings have been set up by fresh outlay of capital in separate and distinct units. The Tribunal Has specifically found the amount of fresh capital employed for the setting up of these particular units.

38. The Tribunal has also categorically found that the new industrial units are physically separate from the old units, they are using a separate building and they are fed with power from a new power house. No one challenged that they cannot exist on their own and function independently.

39. At no earlier stage in the proceedings it was challenged by the revenue that the productions which were the results of these new undertakings were being used by the assessee in its old undertaking. But even if the products are being so used, it would really make little difference to the position because such products have been found by the Tribunal to be distinct marketable products though used for the purpose of feeding the old business. So far as electricity is concerned, it appears from the order of the AAC for the assessment year 1955-56 that the assessee was supplying electricity to the Government of Bihar under an agreement whereunder the Government of Bihar was claiming rebate on the electricity charges. The assessee's claim for deduction of this rebate granted was disallowed by the ITO. This would show that the assessee was supplying electricity to other consumers.

40. The contention of Mr. Pal that no separate accounts are maintained for the new industrial undertakings is also of little substance in view of the decision of this court in the case of Dunlop Rubber Co. (I.) Ltd. : [1977]107ITR182(Cal) . In the absence of accounts, computation of the claim of the assessee may be difficult but that is a question with which we are not concerned in the present reference.

41. On the bad debts claimed, Mr. Pal contended that in order to be entitled to make a claim for a bad debt it would be necessary for the assessee to show that the debt is of such a nature that if realised in the year in question it must reach the hands of the assessee as income subject to levy of income-tax. Mr. Pal further contended that it followed that the assessee had to establish that lending of money was part of the assessee's business.

42. In support of his contentions Mr. Pal cited CIT v. Abdullabhai Abdul-kadar : [1961]41ITR545(SC) . The facts in this case were that the assessee, a registered firm, carried on business as commission agent. It was treated as an agent of a non-resident principal for several assessment years, under Section 43 of the Indian I.T. Act, 1922, and as such had to pay taxes assessed on the non-resident. After adjusting the amounts which were in the hands of the assessee on account of foreign principal against the taxes paid there was a debit balance. The assessee treated this amount in the subsequent year as a bad debt and claimed it as a deductible loss to be set off against the profits. The ITO and the AAC disallowed this claim. The Tribunal and the High Court, however, held it to be a bad debt and allowed! the deduction. The Supreme Court set aside the judgment of the High Court and held that Section 10(2)(xi) of the Indian I.T. Act, 1922, did not apply in the facts. The Supreme Court observed as follows (page 551):

'It was next contended that the matter falls within Section 10(2)(xi) of the Act, i.e., it is in respect of the business. This contention has even less substance than the claim of deduction under Section 10(1). Under clause (xi) also a debt is only allowable when it is a debt and aiises out of and as an incident to the trade. Except in money-lending trade, debts can only be so described if they are due from customers for goods supplied or loans to constituents or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. Thus a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal adviser is not deductible on its becoming irrecoverable.....'

43. Dr. Pal contended on the other hand that the position in law is now well settled by the subsequent decision of the Supreme Court in CIT v. Mysore Sugar Co. Ltd. : [1962]46ITR649(SC) , where the facts were that the assessee was a manufacturer of sugar. In the course of its business the assessee used to advance seedlings, fertilizer and money to sugarcane growers under an agreement whereby the growers agreed to sell the next crop of sugarcane to the assessee at current market rates and to have such advances adjusted towards the price of the sugarcane to be so delivered. In a certain year, owing to drought, the growers could not grow sugarcane and the advances remained unrecovered. On the recommendation of a committee set up by the State Government concerned, the assessee, ex gratia, waived its rights in respect of a part of such advance and claimed the same as a deduction under Sub-clauses (2)(xv) and (2)(xi) of Section 10 of the Indian I.T. Act, 1922. The Supreme Court affirming the decision of the Mysore High Court held that as the amount was an advance against price of a particular crop, it was in the nature of revenue expenditure and was allowable as a loss. The Supreme Court observed as follows (page 655) I

'The amount, so far as the assessee company was concerned, represented the current expenditure towards the purchase of sugarcane, and it makes no difference that the sugarcane thus purchased was grown by the Oppigedars with the seedlings, fertilizer and money taken on account from the assessee company. In so far as the assessee company was concerned, it was doing no more than making a forward arrangement for the next year's crop and paying an amount in advance out of the price, so that the growing of the crop may not suffer due to want of funds in the hands of the growers. There was hardly any element of investment which contemplates more than payment of advance price. The resulting loss to the assessee company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.'

44. Dr. Pal contended that, in the instant case, the assessee had similarly advanced moneys to Rohtas Quarries Ltd., by way of advance towards the price for supply of raw material and, therefore, this was in the nature of a revenue expenditure and could be claimed as a bad debt in the year it was written off.

45. It has been found by the Tribunal in this case that the advances made by the assessee were for the purpose of securing raw materials and that the same were advanced wholly and exclusively for the purpose of the assessee's business. The Tribunal has found further that there was nothing unusual in the assessee making such advances when the entire output of Rohtas Quarries Ltd. was being supplied to the assessee. These findings have not been challenged. Therefore, the conclusion is inescapable that the said amounts were a debt due to the assessee from Rohtas Quarries Ltd., and the same arose out of and as an incident of the business of the assessee. On the authority of Abdullabhai Abdulkadar's case : [1961]41ITR545(SC) , it must be held that the loss of this sum was not a capital loss.

46. The contention of Mr. Pal for the revenue that the assessee could not claim this amount to be a bad debt as it was not the business of the assessee to lend money is of little substance. It is nobody's case that it was the business of the assessee to lend money, but it is also undisputed that it was a part of the business of the assessee to secure raw materials for the manufacture of its products and it is in the course of obtaining such raw materials that these amounts were advanced to the supplier. Therefore, the amounts were in the nature of a trade debt to be realised by the assessee from its supplier.

47. For the above reasons, we answer the questions referred as follows : The question relating to the year 1955-56 is answered in the affirmative and in favour of the assessee. Question No. 1 relating to the assessment year 1956-57 is answered in the affirmative and in favour of the assessee. Question No. 2 for the said assessment year is answered in the negative and in favour of the assessee. The reference is disposed of accordingly. There will be no order as to costs.

C.K. Banerji, J.

48. I agree.


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