TaxTMI 
TaxTMI 
1981 (12) TMI 71
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Out of this amount a sum of Rs. 1,75,000 was transferred to 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 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....36(1)(vii) or as a trading loss under section 28(i). The submission made before the ITO was that the advances made to the aforesaid company were for the purposes of the assessee's business. According to the assessee, by advancing different amounts to the aforesaid company, the assessee would be in a position to earn profit by selling the goods manufactured by the said company and the assessee would be in a position to sell raw material to the said company. It was pointed out that during the assessment year 1966-67 the assessee had earned interest of Rs. 26,331 and similarly during the assessment year 1967-68 the assessee had earned interest of Rs. 22,447. This interest had been taxed as income under the head "Business". No interest was charged subsequently because the said company had already sold its plant and machinery and had refunded a major part of the loan. The ITO did not accept either of the two submissions. According to the ITO, the claim of the assessee for allowing the aforesaid amount as bad debt could not be accepted because (i) the assessee did not possess the money lending licence, (ii) the partners of the assessee-firm and the shareholders of the said company were c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Jagan Nath (P.) Ltd. were on the same pattern as to Swatantra Bharat Mills (P.) Ltd. and the purpose of the advances was to earn interest, to sell the products of the aforesaid company and also sell raw material to the said company. Interest of Rs. 26,331 and Rs. 22,447 was received during the assessment years 1966-67 and 1967-68, respectively. Thereafter no interest was received as Gokal Chand Jagan Nath (P.) Ltd. sold their factory and made a repayment of Rs. 3,27,650 out of the outstanding balance of Rs. 5,65,470 as on1-4-1967. On these facts, the assessee claimed that the assessee was not only carrying on business of paper board but it was also carrying on business of money-lending for profit and gain which business was an integral part of the main business and was incidental to it. 5. The balance due from the aforesaid company as on1-4-1968was Rs. 2,44,290. The assessee was under the bona fide belief that the shareholders of the aforesaid company will make good the losses and would pay the entire amount to the assessee. Ultimately, a sum of Rs. 14,500 was received during the previous year relevant to this assessment and the balance sum of Rs. 2,29,990 should be allowed ei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... nature of the transaction is investment of capital rather than a loan, e.g., where the assessee buys shares in a company in order to provide the company with finances, the resulting loss would be a capital loss and cannot be allowed." She also referred to page 503 of the aforesaid Commentary wherein it has been observed that "financial help rendered by a manufacturer to concerns supplying him with raw materials by way of investment of capital and not as advance payment of price of goods" is a capital expenditure. She referred to judgments in the case of CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) and Blaze & Central (P.) Ltd. v. CIT [1979] 120 ITR 33 (Mad.) for the submission that payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time. She also referred to the decision of the Supreme Court in the case of M.K. Brothers (P.) Ltd. v. CIT [1972] 86 ITR 38 for the submission that if the subject of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even....
X X X X Extracts X X X X
X X X X Extracts X X X X
....areholders of the aforesaid company and the partners of the assessee-firm were the same the loss claimed by the assessee could not be allowed and as such the revenue was not making any new claim before us. She submitted that all the judgments relied on by the learned counsel for the assessee were distinguishable, on facts. 9. We have carefully considered the rival submissions. In our opinion, the AAC was in error in allowing the loss of Rs. 2,29,990 as a trading loss. It is not controverted before us that the 7 shareholders of Gokal Chand Jagan Nath Nahar (P.) Ltd. are the partners of the assessee-firm. The firm is a compendious name for the partners and if the veil of corporate entity is lifted it would be apparent that a sum of Rs. 2,29,990 was due by the partners to themselves. Though the ITO in his assessment order has not used the expression "lifting the veil of corporate entity", he himself has noted that the partners of the assessee-firm and the directors and the shareholders of the aforesaid company are common. The partners of the assessee-firm cannot claim a loss of an amount which is due from themselves. It is true that for the purpose of income-tax the partnership fir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....purchased. The creating a source for making purchases would be an enduring benefit and that the loss would be of a capital nature. Our finding, on the facts of this case, is that the advances to the aforesaid company were not made for facilitating the buying of goods manufactured by the said company but the advances were made for enabling the said company to establish a factory and create a source for making purchases, which was of an enduring nature. The advances made to the aforesaid company are entirely different from security deposits made to Rohtas Industries Ltd., Hansore Plywood or Straw Products Ltd. We would also not accept the assessee's submissions that the advances made to Gokal Chand Jagan Nath Nahar (P.) Ltd. were similar to the advance made to Swatantra Bharat Mills (P.) Ltd. because the latter company is in existence from September 1953 onwards and none of the partners of the assessee-firm is a shareholder of that company. We have to consider the totality of the circumstances and on such a consideration we are convinced that the loans given to Gokal Chand Jagan Nath Nahar (P.) Ltd. were not for facilitating the purchase of goods manufactured by them but were in the ....