A. V. Thomas & Co., Ltd., Alleppey
Vs. The Commissioner of Income-Tax, (Bangalore) Kerala  INSC 297 (25
CITATION: 1964 AIR 569 1963 SCR Supl. (2) 608
debt-Expenditure-Amount advanced for purchase of shares-Indian Income-tax Act,
1922 (11 of 1922), ss. 10(2) (xi) and (xv).
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. 4,05,071- 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 s. 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 someone for purchasing a
thing which that person has failed to return even though no purchase was made.
Curtis v. J. & G. Old field Ltd., (1925)
9 Tax Cas. 319, Arunachalam Chettiar v. Commissioner 'of Income-tax, (1936) L.
R. 63 I. A. 233, Badridas Daga v. Commissioner of Income- tax,  S. C. R.
690 and Commissioner of Income-tax v. Abdullabhi Abdulakadar,  2 S.C.R.
949, relied on.
CIVIL APPELLATE JURISDICTION: Civil 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.
S. T. Desai and Sardar Bahadur, for the
K. N. Rajagopal Sastry, R. N. Sahthey and P.
D. Menon, for the respondent.
1962. October 25. The judgment of the Court
was delivered by HIDAYATULLAH, J.-The assessee, A.V. Thomas & Co., Ltd.,
Alleppey, claimed a deduction of Rs. 4,05,072-8-6 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.
4,05,071-8-6 claimed by the assessee Co. as a deduction was not admis- sible
either under section 10(2) (xi) or 10(2) (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
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. S. 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. S. S. Natarajan, and 3. C, S. Ramakrishna
There was a mill in Pondicherry known as
Rodier Textile Mill belonging to the Anglo French Textiles Limited,
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. 6,05,071-8-6. 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 6,000 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
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. 6,00,000 should be shown as an advance
for purchase of shares in the Rodier Textile Mills Ltd. (information) and the
balance of Rs. 5,072-8-5 be shown under sundry advances due from the promoters
of the new company. The Southern Agencies Ltd. however, did not return the'
On December 7, 1951, it paid back Rs.
2,00,000 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 s. 10(2)(xv) 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.
6,00,000 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
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 S. S. 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. 4,05,072-8- 5 can be
claimed by the assessee as a bad debt written off under the provisions of
Section 10(2) (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 '.05,072-8-5 as
permissible deduction under Section 10(2) (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.
4,05,072-8-5 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 s. 10(1); (ii) as a bad debt actually written off under s. 10(2)(xi);
and (iii) as an expenditure laid out wholly and exclusively for the purpose of
the business under s. 10(2)(xv) 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 s. 10(1) 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 s. 10(1) and framed the question under cls. (xi) and (xv)
of s. 10(2). 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 s. 10(1) 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 s. 66(2) 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 s. 10(2)(xi) or under s. 10(2)(xv) and
it is from these two angles that the case will be considered by us. Clauses
(xi) and (xv) of s. 10(2) 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 s. 10(2)(xv). 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. 6,05,071-8-5 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. 6,05,071-8-5. 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 5,071-8-5 By balance 6,00,000-0-0
1950 opened with entry on January I- To Balance 6,00,000-0-0 and closed with an
entry By Amount paid to Southern Agencies Ltd, 6,00,000-0-0 785 This was shown
as an opening balance on January 1, 1951. On December 7, a payment of Rs.
2,00,000 was shown and Rs. 4,00,000 were transferred for writing off. On
December 31., 1951, Rs. 4,00,000 were written off and so also the amount of Rs.
5,072-8-5. 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 S.
10(2)(xv) 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 s. 10(2)(xv) 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 s.
10(2)(xi). 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 s. 10(2)(xi) 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 s. 10(2)(xi) 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 v.1. & G. Oldfield Ltd.,(1) 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 v. Commissioner
of income-tax(2), 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) (1925)
9 Tax Cas. 319, 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 v.
Abdullabhai Abdulkadar (1) at p. 550 and referred to the observations of
Venkatarama Ayyar, J., in Badridas Daga, v. 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 10(2)(xi) 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)  2 S.C.R. 949, 954.
(2)  S.C.R. 690.
789 the benefit of s. 10 (2) (xi). In our
opinion, s. 10(2)(xi) was inapplicable to t