1991 (3) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal's finding that the loan of Rs. 48,52,951 was advanced by the assessee-company in the ordinary course of its business is based on relevant and adequate evidence and is reasonable.
2. Whether the Tribunal was justified in holding that the sum of Rs. 21,96,390 out of the aforesaid amount was allowable as a bad debt while computing the assessee's total income and that it was not a capital loss.

Summary:

Issue 1: Tribunal's Finding on Loan Advancement
The Tribunal found that the loan of Rs. 48,52,951 was advanced by the assessee-company in the ordinary course of its business. The assessee-company, engaged in managing agency and other business activities, managed Air-conditioning Corporation Limited and had a 100% subsidiary, Burlow and Co. Ltd. The loan was initially advanced by the assessee-company and later taken over by Burlow and Co. Ltd. The Tribunal concluded that the loan was granted in the course of the managing agency business and that the transaction was part of the business activity of the assessee-company. The Department did not dispute the genuineness of the letter dated April 10, 1956, which facilitated the loan's purchase by Orient Paper Mills Limited for a lesser amount.

Issue 2: Justification of Bad Debt Allowance
The Tribunal held that the sum of Rs. 21,96,390, which remained unrealized after the loan was purchased by Orient Paper Mills Ltd., was allowable as a bad debt or trading loss. The Tribunal reasoned that the loan was not a capital loss as it was part of the business activity of the assessee-company. The Tribunal also noted that the acquisition of shares and the selling of the loan were separate transactions. The assessee-company's business included financing, and the loan to Air-conditioning Corporation Limited was in line with this business activity. The Tribunal's findings were based on relevant materials, and the Revenue did not point out any irrelevant materials relied upon by the Tribunal.

Additional Considerations:
The court considered the agreement dated June 28, 1949, between Burlow and Co. Ltd. and the assessee, which provided for financial accommodation up to Rs. 45 lakhs. The agreement and the memorandum of association empowered the assessee to raise finance and engage in financing activities. The court also noted that Burlow and Co. Ltd. acted as a conduit for financing by the assessee-company due to certain restrictions on direct financing.

Conclusion:
The court held that the loss incurred by the assessee in financing its subsidiary must be allowed as a business loss. Both questions were answered in the affirmative and in favor of the assessee. There was no order as to costs.

Separate Judgment:
Shyamal Kumar Sen J. agreed with the judgment.