Appeal No 214 of 1962
Appeal from the judgment dated July 8 1960 of the Kerala High Court Emakulam in Income tax Referred Case No 10 of 1957
section T Desai and Sardar Bahadur for the appellant
K N Rajagopal Sastry R N Sahthey and P D Menon for the respondent
October 25
The judgment of the Court was delivered by HIDAYATULLAH J
The assessee AV Thomas  Co Ltd Alleppey claimed a deduction of Rs 405072 8 6 in the assessment year 1952 53 as a bad debt which was written off in its books of account on December 31 1951
This claim was disallowed
After sundry procedure the following question was considered by the High Court of Kerala and answered against the assessee company  Whether on the facts and the circumstances of the case the Tribunal was correct in holding 778 that the amount of Rs 405071 8 6 claimed by the assessee Co as a deduction was not admis sible either under section 102 xi or 102 xv  The High Court certified the case as fit for appeal to this Court and this appeal has been filed by the assessee company
The Commissioner of Income tax Bangalore Kerala is the respondent
The assessee company was incorporated in 1935 and as is usual with companies its Memorandum of Association authorised it to do multifarious businesses
According to clauses 1 5 18 and 23 it was authorised to be interested in to promote and to undertake the formation and establishment of other companies to make investments and to assist any company financially or otherwise
At the material time the assessee company had three directors whose names are given below 1
A V Thomas 2 section Sankaranarayana lyer and 3
J Thomas
There was another private limited company known as the Southern Agencies Limited Pondicherry and its directors were  1
A V Thomas 2
section section Natarajan and 3
C section Ramakrishna Karayalar
There was a mill in Pondicherry known as Rodier Textile Mill belonging to the Anglo French Textiles Limited Pondicherry
The assessee company averred that the Southern Agencies Ltd took up in 1948 the promotion of a limited company to be known as Rodier Textile Mills Ltd Pondicherry with 779 a view to buying and developing the Rodier Textile Mill
The assessee company so it was stated financed the Southern Agencies Ltd Pondicherry by making over funds aggregating to the sum of Rs 605071 8 6
This amount was not given directly by the assessee company but at its instance by India Coffee and Tea Distributors Ltd Madras
The assessee company further stated that though an entry in its own books dated December 31 1948 showed this amount as an advance for purchase of 6000 shares of Rs 100 each in the Rodier Textile Mills Ltd the main intention of the assessee company was to assist and finance the Southern Agencies Ltd within the terms of the assessee company s Memorandum
The subscription list for the Rodier Textile Mills Ltd remained open from January 5 to January 20 1949
No application for shares was made on behalf of the assessee company and the shares were not acquired
The public took no interest in the new company which was being promoted and the whole project tailed
On September 1 1950 the assessee company approved of the action of Mr A V Thomas in making the said advance and on September 18 1950 a resolution was passed by the Board of Directors of The assessee company that the amount of Rs 600000 should be shown as an advance for purchase of shares in the Rodier Textile Mills Ltd in formation and the balance of Rs 5072 8 5 be shown under sundry advances due from the promoters of the new company
The Southern Agencies Ltd however did not return the  entire amount
On December 7 1951 it paid back Rs 200000 which appears to have been received in full satisfaction
Though as late as June 12 1951 the advance was considered to be good and recoverable the balance was written off on December 31 1951 which was the close of the year of account of the assessee company
It was this amount which was claimed in the assessment year 1952 53 as a bad 780 debt actually written off or alternatively as an expenditure not of a capital nature laid out or expended wholly and exclusively for the purpose of the assessee company s business
The Income tax Officer Alleppey held that the debt was written off at a time when it was neither bad nor doubtful and the claim to write it off was premature
He therefore disallowed it
An appeal was taken to the Appellate Assistant Commissioner and he upheld the order of the Income tax Officer though on a different ground
He held that the advance was made for the purpose of purchasing shares of the new company then in formation and it was thus made for the acquisition of a capital asset which was either the control of the new company or to gain its good will likely to result in the grant of agency rights to the assessee company
According to the Commissioner the loss if any was of a capital nature and the question whether the claim of bad debt was premature or otherwise did not arise for consideration
The Appellate Assistant Commissioner also held that the deduction could not be claimed as an allowance under section 102xv of the Income tax Act
The assessee company appealed to the Tribunal
The Tribunal upheld the order of the Appellate Assistant Commissioner but on a third ground
The Tribunal accepted that one of the objects of the assessee company was the promotion and financing of other companies for gain but this advance of Rs 600000 was not made by the assessee company in the normal course of its business
It was rather a transaction actuated only by personal motives
In reaching this conclusion the Tribunal observed that the advance was made to Southern Agencies Ltd which was not a company promoted by the assessee company that between these two companies there was no previous business connection and at the assessee company had no expectancy of a financial benefit
The Tribunal held that the 781 Rodier Textile Mills Ltd Pondicherry was not being financed or promoted by the assessee company and that the statement by the assessee company that it would have received some agency right was not supported by evidence
The Tribunal was of the opinion that this advance was probably due to the  substantially common ownership of the assessee company and the Southern Agencies Ltd of two individuals namely A V Thomas and section section Natarajan The Tribunal thus held that this deduction could not be claimed as it was given out of  personal motives and not as a part of the business of the assessee company
The assessee company demanded a case but it was refused by the Tribunal
The assessee company in its application for the case had propounded three questions as under  i Whether on the facts and in the circums tances of the case the sum of Rs 405072 8 5 can be claimed by the assessee as a bad debt written off under the provisions of Section 102 xi of the Act ii Whether on the facts and in the circums tances of the case the assessee can claim the sum of Rs 4 05072 8 5 as permissible deduction under Section 102 xv of the Act and iii Whether co the facts and in the circums tances of the case the assessee is permitted to claim the deduction of the said sum of Rs 405072 8 5 as a proper debit and charge it to the Profit and Loss account of the assessee company
 These questions show that the deduction was claimed i as a loss in the doing of the business under 782 section 101 ii as a bad debt actually written off under section 102xi and iii as an expenditure laid out wholly and exclusively for the purpose of the business under section 102xv of the Income tax Act
The assessee company applied to the High Court and the High Court directed a reference on the single question which has been quoted
That question shows that the High Court did not direct the case under section 101 of the Act
The Tribunal had considered the case from the point of view of the business and had held that this was not an advance in the normal course of business but one out of personal motives
The High Court apparently had not accepted that the matter could be considered under section 101 and framed the question under cls
xi and xv of section 102
The question as propounded and considered by the High Court related to the two clauses only
An attempt was made before us to raise the issue under section 101 and to claim the deduction as an ordinary business loss
We disallowed the argument because in our opinion the question as considered in the High Court does not embrace it
The assessee company should have requested the High Court at some stage to frame a question that there was no material for the Tribunal to reach the conclusion that this was not a business transaction but a case of an advance out of personal motives
It was contended before us that the High Court in calling for a reference on the single question had stated that that question would cover three matters
The first two here mentioned in the question and the third which was said to be implicit was whether the Tribunal was competent to decide a case which had not been made out by the Department at an earlier stage
But this was not the same thing as saying that the Tribunal had no material before it on which it could reach the conclusion that this was not an advance in the ordinary course of business by the assessee company
No doubt the High Court in its order calling for a statement of the case has observed that there was no dispute at any 783 earlier stage that this was not in the ordinary course of business but that conclusion of the High Court in the order it made under section 662 can have no relevance or binding force
Indeed the High Court was in error in giving a finding of its own and it is not surprising that the Tribunal protested against this finding
It was open to the High Court to frame a question whether there was any material to support the finding of the Tribunal and to ask the Tribunal to state a case thereon
Not having done so the question as framed drives the assessee company to prove its case either under section 102xi or under section 102xv and it is from these two angles that the case will be considered by us
Clauses xi and xv of section 102 read as follows  2 Such profits or gains shall be computed after making the following allowances namely x x x a xi when the assessee s accounts in respect of any part of his business profession or vocation are not kept on the cash basis such sum in respect of bad and doubtful debts due to the assessee in respect of that part of his business profession or vocation and in the case of an assessee carrying on a banking or money lending business such sum in respect of loans made in the ordinary course of such business as the Income tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee  Proviso omitted xv any expenditure not being an allowance of the nature described in any of the clauses i to xiv inclusive and not being in the nature of capital expenditure or 784 personal expenses laid out or expended wholly and exclusively for the purpose of such business profession or vocations
In support of its case the assessee company stated that as there was no dispute about the facts that this was an advance in the ordinary course of business it should be treated as a trading loss or alternatively as a bad debt or an expenditure claimable under section 102xv
The assesses company relied strongly upon certain Ledger entries of the Rodier Textile Mills Ltd in the books of the assessee company
These have been marked as Annexures A 1 to A 3
The High Court also referred to these accounts and they have been construed as showing that there was an attempt by the assessee company to acquire a capital asset
These accounts began in 1948 and ended on December 31 1951
The accounts are headed Personal Ledger
 In December 1948 sundry amounts totalling Rs 605071 8 5 are shown as amounts paid to you by Indian Coffee and Tea Distributors Ltd Madras towards purchase of shares
 On January 1 1949 the account opened with a debit balance of Rs 605071 8 5
Nothing appears from the accounts who this  you was
A number of reversing entries were made in respect of certain amounts and then on December 31 1949 the amount was shown as follows  By advance for sundry expenses due from the promoters of new company debited to this trans ferred 5071 8 5 By balance 600000 0 0 1950 opened with entry on January I To Balance 600000 0 0 and closed with an entry By Amount paid to Southern Agencies Ltd 600000 0 0 785 This was shown as an opening balance on January 1 1951
On December 7 a payment of Rs 200000 was shown and Rs 400000 were transferred for writing off
On December 31 1951 Rs 400000 were written off and so also the amount of Rs 5072 8 5
The last amount included a sum of Rupee 1 hire for carriage which was also written off after the entry had been reversed
From these accounts it is quite clear that to begin with the amount was shown as an advance for purchase of shares of the Rodier Textile Mills Ltd If this was the purpose it was not an expenditure on the revenue side
The High Court correctly pointed out that it was not the business of the assessee company to buy agencies and sell them
The shares were being acquired by the assessee company so that it might have the lucrative business of selling agency and similar other agencies from the Rodier Textile Mills Limited
As late as December 15 1952 the Chairman of the assessee company stated in his speech as follows  You are aware that an advance was made to the Southern Agencies Pondicherry Ltd to acquire for us shares in Rodier Textile Mills Ltd It was felt that when the promotion and working of Rodier Textile Mills Ltd became a fait ac compli our company stood considerably to gain by securing their agency for handling their goods
 This clearly shows that the assessee company intended to acquire a capital asset for itself This purpose takes the case of the assessee company out of section 102xv of the Income tax Act because no expenditure can be claimed under that clause which is of a capital nature
By the declaration of the Chairman of the assessee company the case under section 102xv becomes completely untenable
In any event the 786 amount was not expended in the year of account ending with December 31 1951  it was expended in 1948
It remains to consider the case under section 102xi
In this connection we were referred to the Memorandum of Association to show that it was one of the objects of the assessee company to promote other companies and this amount was paid to Southern Agencies Ltd to promote the Rodier Textile Mills Ltd There is no doubt that the objects mentioned in the Memorandum of Association of the assessee company include the promotion and financing of other companies
A Memorandum however is not conclusive as to the real nature of a transaction
That nature has to be deduced not from the Memorandum but from the circumstances in which the transaction took place
Here the different versions given in the books of account of the assessee company belie the assertion that this was an amount paid to promote the Rodier Textile Mills Ltd
Even though this money was available on December 31 194 8 and the subscription list for the shares remained open from January 5 to 20 1949 no application for a single share was made on behalf of the assessee company
The entry till the end of 1949 was that the amount was laid out for purchase of shares
It was only subsequently that it was shown to be an advance to the Southern Agencies Ltd In fact the entry comes only at the end of 1950 when it is set down By Amount paid to Southern Agencies Ltd The assessee company raised three contentions in support of the case that this became a bad and doubtful debt which was actually written off  a that the High Court was wrong in saying that before the assessee could claim the deduction under section 102xi it must prove that it had in the past purchased and sold agencies b that the object of the assessee company was to apply for shares but as it did not 787 apply for shares the transaction between it and the Southern Agencies remained an advance in the ordinary course of business and c Southern Agencies having failed to give back the money the assessee company was within its rights to write off this bad and doubtful debt
Now a question under section 102xi can only arise if there is a bad or doubtful debt
Before a debt can become bad or doubtful it must first be a debt
What is meant by debt in this connection was laid down by Rowlatt J in Curtis v1
 G Oldfield Ltd1 at p 330 as follows  When the Rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad
It does not really mean any debt which when it was a good debt would not have come in to swell the profits
 A debt in such cases is an outstanding which if recovered would have swelled the profits
It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made
In the section a debt means something more than a mere advance
It means something which is related to business or results from it
To be claimable as a bad or doubtful debt it must first be shown as a proper debt
The observations of Rowlatt J were applied by the Privy Council in Arunachalam Chettiar vs Commissioner of income tax2 at p 245 where their Lordships observed as follows Their Lordships moreover can give no countenance to a suggestion that upon a dissolution of partnership a partner s share of the losses for several preceding years can be accumulated and thrown into the scale against 1  330
2 1936 L R 63 I A 233 245 788 the income of another partner for a particular year
No principle of writing off a bad debt could justify such a course whether in the year following the dissolution or as logic would permit in some subsequent year in which the partner s insolvency has crystallised
The  bad debt would not if good have come in to swell the taxable profits of the other partner
 This Court also approved the dictum of Rowlatt J in COMMissioner of Income tax vs Abdullabhai Abdulkadar 1 at p 550 and referred to the observations of Venkatarama Ayyar J in Badridas Daga vs Commissioner of Income tax 2 where the learned judge speaking for this Court said that a business debt springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business Section 102xi is in two parts
One part deals with an assessee who carries on the business of a banker or money lender
Another part deals with business other than the aforesaid
Since this was not a loan by a banker or money lender the debt to be a debt proper had to be one which if good would have swelled the taxable profits
Applying these tests it is quite obvious that an advance paid by the assessee company to another to purchase the 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 be able to write it off and claim 1   954
2  789 the benefit of section 10 2 xi
In our opinion section 102xi was inapplicable to the facts of this case
In the result the appeal must fail and it is dismissed
The assessee company shall pay the costs of the respondent
Appeal dismissed


Summary:
The assessee company was incorporated in 1935 and its Memorandum of association authorised it inter alia to promote and to undertake the formation and establishment of other companies and to assist any company financially or otherwise
There was another company known as the Southern Agencies Ltd and Mr A V Thomas was director of both these companies
In 1948 the Southern Agencies Ltd began the promotion of a company to be known as the Rodier Textile Mills Ltd with a view to buying up a Mill known as the Rodier Textile Mills
The assessee company made an advance of Rs 6 lakhs odd to the promoter for the purchase of 6000 shares of the new company
The public took no interest in the new company and the whole project failed
No application for shares was made on behalf of the assesee company and no share was acquired
The Southern Agencies Ltd however did not return the entire amount
On December 7 1951 it paid back only Rs 2 lakhs which was received in full satisfaction
The balance of Rs 405071 8 6 was written off on December 31 195 1 which was the close of the year of account of the assessee company
For the assessment year 1952 33 the assessee company claimed a deduction of that amount as a bad debt actually written off or alternatively as an Expenditure not of a capital nature laid out or expended wholly and exclusively for the purpose of its business
777 Held 1 that the amount advanced for the purchase of shares was of a capital nature and therefore the balance was not allowable as an expenditure under s 10 2 xv of the Indian Income tax Act 1922 as it was not the business of the assessee company to buy agencies and sell them and in any event the amount was expended in 1948 and not in the year of account ending December 31 1951
2 that it was not a bad debt under section 10 2 xi
A debt in such cases is an outstanding which is recovered would have swelled the profits
It is not money handed over to some one for purchasing a thing which that person has failed to return even though no purchase was made
Curtis vs J  G Old field Ltd  Arunachalam Chettiar vs Commissioner of Income tax 1936 L R 63 I A 233 Badridas Daga vs Commissioner of Income tax  and Commissioner of Income tax vs Abdullabhi Abdulakadar   relied on