TaxTMI 
TaxTMI 
TaxTMI 
1962 (10) TMI 84
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....n Agencies Ltd. The managing agency of the American Agencies Ltd. was, however, terminated on and from July 16, 1950. The shareholders of the company (Amer Hind Manufactures Ltd.) passed a resolution on June 17, 1950, terminating the managing agency of American Agencies Ltd., and appointing the assessee as their managing agents on and from July 16, 1950. It appears that the managed company was in need of funds and the assessee advanced moneys from time to time on what is stated to be a "current account". The fact of this advance is not disputed. The assessee also guaranteed the loan of about ₹ 2 lakhs obtained by the managed company from the Indian Overseas Bank Ltd. A guarantee letter was passed on June 23, 1953. On October 22, 1954, the Indian Overseas Bank claimed payment of their dues in full and the assessee paid in fulfilment of the terms of the guarantee the sum of ₹ 81,599-8-0. The fortunes of the managed company steadily declined and the result was that the assessee not merely lost the expected earning from the managing agency business, but also failed to recoup the advance made on current account and the amount paid to the Indian Overseas Bank as gua....
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.... assessee under section 10(2)(xi) was arrived at by adding this ₹ 18,346-13-6 to ₹ 3,40,956-1-1 advanced on "current account". The Tribunal upheld the assessee's claim on grounds which are not clear and which are of course not self-explanatory. The view of the Tribunal seems to be that the loans and advances which admittedly became irrecoverable constitute trading expenses within the purview of section 10(2)(xi) of the Act. It is against this decision of the Tribunal that the Commissioner applied for a reference to this court, and as stated already, the question set out above stands referred to us. Learned counsel for the department raises the following contentions : (1) The written off debt is not a business debt of the assessee which arose in the course of its managing agency business. (2) The alleged bad debt is really in the nature of a capital loss. (3) The debt even if it is an admissible bad debt under section 10(2)(xi) became bad not in the year of account but in the years prior to the "previous year". (4) The particular managing agency business in respect of which the claim is made became extinct by termination of the agency on Novembe....
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....levant, to determine the true character of the periodical advances that were made. The claim of the assessee that the managing agency relationship is sufficient to constitute the sums lent or advanced as business debt is in our opinion too broadly stated. We do not subscribe to the view that it is part of the managing agent's business, necessarily or incidentally, to lend money to the managed company, and that every such lending, whatever be its nature or purpose, would amount to a trade or business debt. Nor can we agree to treat it as a business debt by merely calling it a scheme of financing. Mere words cannot afford any solution to the question of the real character of the payment. A close scrutiny of the facts is essential, as appearances and stock phrases are often deceptive. We shall now refer to the findings recorded by the department and the Tribunal. The Income-tax Officer found that it was not necessary for the assessee to advance moneys for obtaining or earning the managing agency remuneration, and that therefore the expenditure could not be regarded as relating to the assessee's business, and that the advances were merely capital advances which even if recover....
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....nal states that it is within the scope of the assessee's business as provided in sub-clause (19) of clause 13 of the memorandum of association to lend moneys and to stand as guarantors to secure third parties' "debts". The inference drawn is that the debts in question were incurred in the course of business. Which business the Tribunal does not say. If it meant the agency business then the reference to the particular clause in the memorandum is misleading. If it had in mind some other business besides the agency business like money-lending business or the business of guaranteeing, then it decided a point not urged by the assessee and not supported by a title of evidence. The Tribunal failed to take a proper perspective of the real question in issue in the case, and has clearly misdirected itself in upholding the assessee's claim disregarding the findings recorded by the department which appear to be amply borne out by the evidence on record. We are not concerned in this case directly with the question whether the payments made by the assessee would be a proper allowance under section 10(2)(xv) of the Act. The question now before us is whether the assessee'....
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....operation. In a recent decision reported in Commissioner of Income-tax v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC), the Supreme Court has laid down the test to discriminate between a capital outlay and a revenue expense. At page 653, Hidayatullah J. observes: "To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses." Applying this test, which we would r....