9911796707
TMI Blog1981 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... the share capital on account of the 7 partners. Thereafter, further advances made to the aforesaid company and the balances due on different dates from the above company were as under: Date Amount Rs. 31-3-1966 4,54,447 31-3-1967 5,65,471 31-3-1968 2,44,290 31-3-1969 2,44,490 31-3-1970 2,44,490 31-3-1971 2,29,990 The aforesaid balance of Rs. 2,29,990 was not considered, to be recoverable and was, therefore, written off as a bad debt during the previous year relevant to the assessment year 1971-72. It may be stated that the aforesaid company was incorporated to run a hard board paper mill. It went into production in November 1965 but due to losses the factory along with the land, plant and machinery, etc., were sold to Swarup Textile Ltd., M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come forming part of the income of the paper board and plywood business. Along with the above agency the assessee had taken the agency of Hansore Plywood with whom a deposit of Rs. 1 lakh was made as a security as goods were purchased on credit. The interest income from this deposit was also considered as business income. The assessee took another agency of Straw Products Ltd. and gave a security of Rs. 20,000 as goods were purchased on credit. The arrangement with Rohtas Industries Ltd. was terminated and thereafter the arrangement with Straw Products Ltd. was also terminated. The breaking of these arrangements upset the business of the assessee. 4. Thereafter, the assessee changed its pattern of doing business and instead of giving security deposits the assessee started advancing moneys in a running account which was adjusted against the goods purchased. By making advances in a running account goods were purchased from Swatantra Bharat Paper Mills (P.) Ltd. Interest was charged from Swatantra Bharat Paper Mills (P.) Ltd. on the outstanding balances and such interest was shown as income from paper business. After the year 1967 the business of Swatantra Bharat Paper Mills Ltd. de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who were the same persons who were the partners of the assessee-firm. She submitted that the assessee-firm had trade advances even to the promoters of the aforesaid company as would be evident from the fact that even on13-4-1964the assessee had advanced Rs. 36,892 to the promoters of the said company. Thereafter out of the advances made by the assessee-firm to the aforesaid company a sum of Rs. 1,75,000 was transferred to the share capital account on16-3-1965. According to the learned departmental representative the advances made by the assessee to the aforesaid company were in the nature of capital and were made for setting up the factory of the aforesaid company. It was submitted that such advances a part of which could not be ultimately realised could neither be allowed as a bad debt or as a trading loss. It was pointed out that against the finding of the AAC that the aforesaid claim could not be allowed as a bad debt there was no appeal by the assessee and, therefore, the only question, for consideration was whether the claim of the assessee could be allowed as a trading loss. She submitted that the two judgments in the cases of B.D. Bharucha and T.J. Lalvani relied on by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods worth Rs. 27,046 on30-3-1966. Similarly, the assessee purchased goods from the aforesaid company for Rs. 34,388 on20-5-1966, Rs. 46,084 on29-6-1966and Rs. 40,999 on23-9-1966. These items of purchases and sales were pointed out to show the intention of the assessee in making advances to the aforesaid company. He submitted that the loss was not claimed earlier because after litigation with a party to whom money was advanced on behalf of the said company a sum of Rs. 14,500 was recovered in this year. He submitted that it was only in this year that the assessee lost all hopes of recovering any part of the sum of Rs. 2,29,990. When we put it to the learned counsel for the assessee that if the veil of incorporation was lifted, it would be apparent that the sum of Rs. 2,29,990 was due from the same persons who were the partners of the assessee-firm and as such the assessee could not claim any loss from its own partners, the learned counsel for the assessee submitted that such an argument should not be considered because such was not the case of the revenue. He also submitted that in law a partnership firm, the partners of the firm and a limited company were separate legal entities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20-11-1964the assessee had advanced a sum of more than Rs. 1,60,000 for the promotion of the aforesaid company. Out of the advances made up to16-3-1965a sum of Rs. 1,75,000 was transferred to the share capital account. When the assessee is found to have advanced a large amount even before the incorporation of the company, it cannot be said that the said advances were for the purpose of the assessee's business. Thereafter, the assessee had made substantial advances and these advances are apparently for the purpose of establishing a factory for manufacture of fibre board by the aforesaid company. The said company had started production in November 1965 but because of losses it was sold on16-11-1967. From the facts of this case, it is apparent that the advances were made by the assessee to the aforesaid company for the purpose of setting up a factory. The learned counsel for the assessee had argued that the advances were made to enable the assessee to sell the goods manufactured by the said company and thereby make profit. The assessee does appear to have purchased the goods worth Rs. 1,21,472 sold by the aforesaid company in the year ending 31-3-1977 but that by itself would not esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the assessee, the amount was not written off in that year because it was expecting that the partners of the firm would make up the loss and that a recovery of Rs. 14,500 was made in this year. No recovery proceedings have been taken against the limited company and it cannot be said that the limitation period had expired in this year for making the recovery. The assessee does not appear to have filed a suit against the said company apparently for the reason that the shareholders and the directors of the company are the same persons as the partners. On the facts of this case, we cannot record a finding that the loss of Rs. 2,29,990 became a loss of the assessee only during this year. 13. We may now briefly refer to the judgments relied on by the learned counsel for the assessee. In the case of Dhanalakshmi Corpn. advances were made during the course of the business and it was for that reason that the loss was allowed. The facts of that case are distinguishable. In the case of Indore Malwa United Mills, money was borrowed by the managing agents and the loss was held to be incidental to the company's business. There is no question of any loss by money borrowed by the man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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