Case: Essen Private Limited Vs. Commissioner of Income Tax, Madras

1. This appeal is brought, by special leave, from the judgment of the Madras High Court dated October 9, 1962, in T.C. No. 136 of 1960 Theis a private limited company incorporated under the Indian Companies Act. It carries on business as managing agents of several concerns. It also derives income from insurance agency.Manufacturers Limited was one of the companies for which thewas appointed managing agents from July 16, 1950. It was previously managed by another company called "American Agencies Limited".Manufacturers Limited was engaged in the manufacture of carbon paper, ink and other allied products. It was in need of large funds for carrying on its manufacturing operations. The managing agency agreement between thend Manufacturers Limited provided that theshould lend or advance the necessary amounts required by theIn accordance with this agreement, theadvanced certain moneys to thefrom time to time. The total amount thus advanced up to December 31, 1954, amounted to Rs. 3, 40, 956 and odd. It appears further that thealong with S. N. N. Sankaralinga Iyer who was a director of the company guaranteed the loan of about Rs. 2 lakhs obtained by thefrom the Indian Overseas Bank Ltd., Madras.Manufacturers Ltd. later on failed in its business. The bank pressed for the repayment of the loan butManufacturers Ltd. was unable to repay. Hence, in accordance with its guarantee, thepaid the bank Rs. 81,representing the total amount due byManufacturers Ltd. On payment, the bank released to thethe stock pledged byManufacturers Ltd. from which thewas able to realise Rs. 44, 905 and odd. The balance due to the appellant company from the managed company under this account was Rs. 36, 693 and odd. The total amount thus due to the appellant company fromManufacturers Ltd, under the above account as well as in respect of advances under current account came to Rs. 4, 03, 203. Even thereafter the business ofManufacturers Ltd. did not improve and thefound that there was no prospect of realising the amount due fromManufacturers Ltd. It was written off in the books of account of theduring the previous year ending December 31, 1955. Thereafter, theclaimed allowance in respect of Rs. 4, 03, 203 in computing the profits of its business for the assessment yearWhile examining this claim, theOfficer held that there was no prospect of therecovering the amount fromManufacturers Ltd. But theOfficer observed that under the terms of the managing agency agreement it was not obligatory on the part of theto advance the amount and therefore the loss sustained by thewas a capital loss and it was not liable to be deducted as a business expenditure. Thepreferred an appeal to the Appellate Assistant Commissioner ofwho also rejected the claim. Thethereupon took the matter in further appeal to theAppellate Tribunal, Madras. The Appellate Tribunal found that thewas carrying on the business of managing agents, that the business of managing agency continued in the relevant year of account, that(19) of clause 13 of the memorandum of association of theempowered it to lend moneys and also to guarantee the performance of contracts, and that the advances in question and the agreement guaranteeing payment to the bank were only in pursuance of the aforesaid objects. The Tribunal accordingly held that the loans advanced and payments made to the bank under the guarantee were in the course of the business of theand allowed the claim. Thereafter, the Appellate Tribunal referred the following question of law for the decision of the High Court under section 66(1) of theAct" Whether there are materials for the Tribunal to hold that the debt in question was incurred in the course of the business so as to make its loss deductible under section 10(2)(xi)? "2. After hearing the reference, the High Court held that theacquired the managing agency on condition of giving loans and making advances and the loss arising out of such advances would only be capital loss as it related to the structure or framework of the managing agency business. The High Court accordingly answered the question against the assessee

Reasoning: In our opinion, the argument put forward on behalf of theed and must be accepted as correct. The scope of the question referred to the High Court was, " Whether there were materials for the Tribunal to hold that the debt in question was incurred in the course of the business of the appellant company ". On this point the High Court has accepted the finding of the Tribunal that large sums of money had been advanced by theon " current account " to theThe High Court also found that theguaranteed the borrowings of thefrom the Indian Overseas Bank Limited and sustained loss as a result of its fulfilling the terms of the guarantee. It has also been found by the Tribunal that according to19 of clause 13 of the memorandum of association thewas entitled to lend moneys and to guarantee the performance of contracts. Clause 14 of the agreement states as follows" That the agents may, at their option, lend and advance to and for the use of the company, money to the extent that may be necessary for the needs of the company from time to time, the same to run at a rate of interest to be fixed by the board of directors of the company from time to time.our opinion, the High Court was not justified in criticising the finding of the Tribunal as hazy and indecisive and thereafter upsetting the findings of fact recorded by the Tribunal. We consider that the High Court was in error in disregarding the findings of fact which the Appellate Tribunal has recorded. As we have already indicated, there was proper material before the Appellate Tribunal in support of its finding that the debt in question was incurred in the course of the business of theso as to make it deductible under section 10(2)(xi) of theAct. The Appellate Tribunal has found in this case that it was part of the managing agency business to provide funds to the managed company and there was no justification for the High Court to disregard the finding of the Tribunal on this aspect of the case. Reference has also been made to(19) of clause 13 of the memorandum of association which clearly indicates that the moneys advanced by theand the guarantee given by it in respect of the loans advanced to the managed company by the bank were all in the course of the managing agency business. We consider that the High Court has exceeded its jurisdiction in traversing into the findings of fact reached by the Appellate Tribunal in the present case. As regards the question actually referred to it, the High Court should have held that there was proper material in support of the finding of the Tribunal that the loans advanced by theany and the payments made by it under the terms of the guarantee given to the bank were in the course of thebusiness and the claim for allowance of the loss sustained by thewas therefore admissible under section 10(2)(xi) of the