1962 (10) TMI 52 - SC - Income Tax

Whether the amount claimed by the assessee company as a deduction was not admissible either under section 10(2)(xi) or 10(2)(xv) ? Held that - Appeal dismissed. An advance paid by the assessee company to another to purchase shares cannot be said to be incidental to the trading activities of the assessee company. It was more in the nature of a price paid in advance for the shares which the Southern Agencies had a right to allot in the Rodier Textile Mills Ltd. This cannot therefore be described as a debt and indeed the changes in the books of account of the assessee company clearly show that the assessee company itself was altering the entries to convert the advance into a debt so as to write it off and claim the benefit of section 10(2)(Xi). Thus section 10(2)(xi) was inapplicable to the facts of this case.

Issues Involved:
1. Claim of deduction as a bad debt under Section 10(2)(xi) of the Income-tax Act.
2. Claim of deduction as an expenditure under Section 10(2)(xv) of the Income-tax Act.
3. Whether the advance was made in the ordinary course of business or out of personal motives.

Detailed Analysis:

1. Claim of Deduction as a Bad Debt under Section 10(2)(xi):
The assessee company claimed a deduction of Rs. 4,05,072-8-6 as a bad debt written off in its books on December 31, 1951, for the assessment year 1952-53. The Income-tax Officer disallowed this claim, stating that the debt was written off prematurely when it was neither bad nor doubtful. The Appellate Assistant Commissioner upheld this decision, noting that the advance was for purchasing shares of a new company in formation, which constituted a capital asset. The Tribunal further supported this view, concluding that the advance was made out of personal motives rather than in the normal course of business. The High Court also ruled against the assessee, leading to the appeal to the Supreme Court.

The Supreme Court emphasized that for a debt to qualify as a bad debt under Section 10(2)(xi), it must first be a proper debt, meaning it should have been a trading debt that would have swelled the profits if recovered. The Court referred to the principles laid down in Curtis v. J. & G. Oldfield Ltd. and Arunachalam Chettiar v. Commissioner of Income-tax, which clarified that a debt in this context means an outstanding amount that directly results from business activities. The Court concluded that the advance given by the assessee company to Southern Agencies Ltd. for purchasing shares did not meet this criterion, as it was more in the nature of a price paid in advance for shares, not a trading debt. Therefore, Section 10(2)(xi) was deemed inapplicable.

2. Claim of Deduction as an Expenditure under Section 10(2)(xv):
The assessee company alternatively claimed the amount as an expenditure laid out wholly and exclusively for the purpose of its business under Section 10(2)(xv). The Tribunal held that the advance was not made in the normal course of business but was motivated by personal interests, particularly due to the common ownership of the assessee company and Southern Agencies Ltd. by two individuals, A. V. Thomas and S. S. Natarajan. The High Court also rejected the claim under Section 10(2)(xv), noting that the expenditure was of a capital nature and was not laid out in the year of account ending December 31, 1951.

The Supreme Court agreed with the High Court's assessment, citing the chairman of the assessee company's statement that the advance was made to acquire shares in Rodier Textile Mills Ltd. to secure their agency for handling goods. This indicated an intention to acquire a capital asset, which disqualified the expenditure from being claimed under Section 10(2)(xv) as it was not a revenue expenditure.

3. Whether the Advance was Made in the Ordinary Course of Business or Out of Personal Motives:
The Tribunal and the High Court both found that the advance was not made in the ordinary course of business but was influenced by personal motives. The Supreme Court upheld this finding, noting that the assessee company did not apply for any shares during the subscription period and only later altered its books to show the advance as a debt. The Court emphasized that a memorandum of association is not conclusive of the nature of a transaction; rather, the actual circumstances and conduct of the parties must be considered.

The Supreme Court concluded that the advance was not a business transaction but was driven by personal interests, affirming the Tribunal's and the High Court's decisions. Consequently, the appeal was dismissed, and the assessee company was ordered to pay the costs of the respondent.

Conclusion:
The Supreme Court dismissed the appeal, holding that the deduction could not be claimed either as a bad debt under Section 10(2)(xi) or as an expenditure under Section 10(2)(xv) of the Income-tax Act. The Court found that the advance was not made in the ordinary course of business but was influenced by personal motives, and thus did not qualify for the claimed deductions.

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