COMMISSIONER OF INCOME-TAX VS GILLANDERS ARBUTHNOT & CO. LTD., 1992 PTD-CALCUTTA-HIGH-COURT-INDIA 1466 (1991)

Income-tax---

----Business loss---Assessee-company engaged in managing other companies and in financing---Assessee-company financing managed company through its subsidiary---Loss incurred in transaction---Deductible as business loss.

The assessee-company was engaged in managing other companies and also in financing. Monies were advanced by it to a company managed by it through its 100 per cent subsidiary. Subsequently, it took over the loan and sold it to another company for a lesser sum and wrote off the loss. The Tribunal held that it was entitled to deduct the loss. On a reference

Held, that because of certain difficulties, the assessee could not directly advance the loan to the company managed by it. It advanced the sum to its 100 per cent subsidiary, which in turn, loaned the money to such managed company. The financing was really done by the assessee and such financing was-incidental to its business of managing agency. Hence, the loss incurred by the assessee in financing its subsidiary must be allowed as .a business loss.

CIT v. Gillanders Arbuthnot & Co. Ltd. (1982) 138 ITR 763 (Cal.) ref.

S.K. Bagchi and R.C. Prasad for the Commissioner.

Dr. D. Pal and Miss M. Seal for the Assessee.

JUDGMENT

AJIT K. SENGUPTA, J.---In this reference under section ?56(1) of the Income-tax Act, 1961, the following questions of law have been referred to this Court:

"(1) Whether, on the facts and in the circumstances of the case, th:, Tribunal's finding that the loan of Rs.48,52,951 was advanced by the asscsscc company in the ordinary course of its business is based on relevant and adequate evidence and is reasonable?

(2) On the facts and in the circumstances of the case and especially in view of the fact that part of the loan of Rs.48,52,951 was advanced by Burlow & Co. Ltd. and not by the assessee-company itself, was the Tribunal justified in holding that the sum of Rs.21,96,390 out of the aforesaid amount was allowable as a bad debt while computing the assessee's ,total income and that, it, ,was not a capital loss?

Shortly stated, the facts are that the assessee is a limited company an,? derives income from managing agency and from various other sources. Air conditioning Corporation Limited was a company managed by the assessee- company. Another company, Burlow & Co. Ltd., was a 100% subsidiary company of the assessee-company. The assessee-company became the managing agent of Air-conditioning Corporation Ltd., on the basis of an agreement dated February 22, 1949, for 20 years. The assessee advanced loan to the said company from time to time and the loan as on March 31, 1949, stood at Rs.15,67,147. Thereafter the said debt was taken over by the 100% subsidiary company of the assessee, viz. Burlow & Co. Ltd. & Burlow and Company Limited from April, 1, 1949, started financing Air-Conditioning Corporation Limited on the basis of the agreement dated June 28, 1949. Burlow & Company Limited agreed to finance Rs.45.1 lakh to Air- Conditioning Corporation Limited. The advance given by Burlow & Company Limited stood at Rs.48,52,951 as on March 31, 1956. On April 1, 1956, the assessee-company took over the loan granted by its 100% subsidiary Burlow & Company Ltd. and sold the loan to Orient Paper Mills Ltd., a concern belonging to the Birlas in terms of the letter dated April 10, 1956, containing the terms and conditions for a sum of Rs.26,56,561. The unrealised amount of Rs. 21,96,390 was written off by the assessee-company and the same was claimed as a bad debt and/or a trading loss.

The Tribunal, on these facts, found as follows:

(a) The loan has been granted in the course of the managing agency business of the assessee-company. The Department, at no stage, has doubted the genuineness of the letter dated April 10, 1956, on the basis of which the loan has been purchased by Orient Paper Mills Limited for a lesser amount of Rs. 26,56,561.

(b) Under the circumstances, the transaction was in the course of the. business activity of these assessee-company.

(c) As the assessee-company could not realise the loan because the balance of the amount became unrealisable after the debt was purchased by Orient Paper Mills Ltd., it cannot be said that the loan was a capital loss.

(d) The acquisition of the shares and selling out of the loan are two different transactions and they could not be linked together.

(e) The assessee-company was doing the business of financing and, accordingly, it financed Air-Conditioning Corporation Limited. Accordingly, the transaction was in the course of the business activity of the assessee-company and as the assessee-company could not realise the loan for the lesser amount which became unrealisable after the debt was purchased by Orient Paper Mills Limited, the same was rightly written off as a bad debt or as a loss.

At the hearing, Dr. Pal has submitted that the aforesaid findings, and conclusions by the Tribunal are based upon relevant materials and the Re-venue has not pointed out what irrelevant materials have been relied on by the Tribunal in arriving at its findings.

On the other hand, the contention of the Revenue is that the loan was advanced by Burlow & Co. Ltd., and not by the assessee and, accordingly, no deduction can be allowed to the assessee in respect of the loan stated to have become bad or irrecoverable.

We have considered the rival contentions. Burlow & Company was a 100% subsidiary of Gillanders Arbuthnot & Co. Ltd. In the agreement itself which was entered into on June 28, 1949, it was stated that, at the request of Burlow & Co., Gillanders Arbuthnot (being the lender in the said agreement) has agreed to grant financial accommodation to Burlow & Company by way of loan or overdraft on cash credit account up to a limit of Rs. 45 lakh. It was further agreed that all book debts and out standings due or to become due to Burlow & Company in respect of the business including the right, title and interest of Burlow & Company under hypothecation created by, inter alia, Air -Conditioning Corporation Limited in favour of the company and all benefits arising there under would be hypothecated to Gillanders Arbuthnot.

The said agreement dated June 28, 1949, by or between Burlow & Company Limited (referred to as company) and the assessee (referred to as the lender) provides that, at the request of the company, the lender has agreed to grant financial accommodation to the company by way of loan or overdraft or cash credit account up to and not exceeding in the aggregate, at any one time, the maximum limit of rupees forty-five lakh payable with interest thereon at the rate hereinafter mentioned on the security hereof. Clause 1 of the said agreement provided as follows;

1. In pursuance of the said agreement and in consideration of the premises, the company doth hereby hypothecate to the lender first the goodwill of the business and trade carried on by the company, secondly, all book debts and out standings due or to become due to the company in respect of the said business expressly including the right, title and interest of the company under hypothecations created by Mackintosh Burn Ltd., Air -Conditioning Corporation Ltd., D. Waldie & Co. (Lead Oxides) Ltd., Waldie Industries Ltd., and the Bangalore Whitelead Syndicated Ltd., in favour of the company and all benefits arising there under, thirdly, the benefits of all pending contracts and all other property and assets of the company used in connection with the said business (hereinafter collectively referred to as "the said assets and property") by way of first charge as continuing security for the payment to the lender, on demand, of the balance for the time being due and owing by the company to the lender on the said over draft or cash credit account (hereinafter called `the said account') and for the payment and discharge of all present and future indebtedness and liabilities of the company to the lender of any kind in any manner whether solely or jointly primarily or collaterally accrued or contingent with all relative interest charges costs (as between attorney and client) and expenses together with interest thereon in the said account to be kept and made up with interest on the daily debit balance at such rate of interest and with such rests in account as may be agreed between the lender and the company until payment and costs as hereinfater mentioned.

It will, therefore, appear that the Burlow & Company will be financing Air-Conditioning Corporation and, for such financing, Gillanders Arbuthnot will be granting financial accommodation to Burlow & Company up to Rs.45 lakh. The book debts and also the right, title and interest of the company under hypothecation created by Air-Conditioning Corporation will be hypothecated to Gillanders Arbuthnot. In other words, Gillanders Arbuthnot will be entitled to the benefit of hypothecation of the book debts made by Air-Conditioning Corporation in favour of Burlow & Co. The resolution of the company dated June 8, 1949 makes it clear that, in view of the fact that Gillanders Arbuthnot is prohibited from financing, inter alia, Air-Conditioning Corporation, Burlow & Co. is to give such companies the required finance and, therefore, Burlow & Co., will be given advance by Gillanders Arbuthnot to the extent of Rs. 45 lakh. Financing is one of the objects in the memorandum of both Gillanders Arbuthnot and Burlow & Company.

The memorandum of association empowered the assessee to raise finance. Clauses 8 and 9 of the memorandum of association are as follows:

"8. To carry on the business of banking in all its branches and departments, including the borrowing, raising or taking up of money, the lending or advancing of money on securities and property, the discounting, buying, selling and dealing in of bills of exchange, promissory notes, coupons, draft, bills of lading, warrants, debentures, certificates, scripts and other instruments and securities, whether transferable or negotiable or not, the granting and issuing of letters of credit and circular notes, the buying, selling and dealing in bullion and specie, the acquiring, holding, issuing on commission underwriting and dealing with stocks, funds shares, debentures, debenture-stocks, bonds, obligations and other investments and securities and investments of all kinds, the negotiating of loans and advances, the receiving of money and valuables on deposit or for safe custody or otherwise, the collecting and transmitting of money and securities, the managing of property and transacting all kinds of agency business commonly transacted by bankers.

9. To advance or lend any of the moneys of the company whether being capital or loan moneys or otherwise for the time being on the security of lands of any tenure incorporeal rights, rates or bills duly authorised to be made or levied by any Government or local municipal authority or the public body, bills of exchange, promissory notes, bonds, commercial documents, policies of assurance, produce, stock-in-trade, chattels, securities and other property both immovable or movable of whatsoever nature or kind and whether situate in British India or elsewhere and in such form and on such terms as the company shall think fit or if the company shall think fit without security and generally to lend money to such persons or companies whether with or without security and on such terms as may seem expedient and in particular to customers and others having dealings with the company."

Clauses 3(g) and 3(h) of the memorandum of association of Burlow & Company have provided for the following objects:

"(g) To carry on business as capitalists and financiers, and to undertake and carry on, and execute, all kinds of financial, commercial, trading and other operations, except the issuing of policies of assurance on human life; to advance or lend money to such persons and on such terms as may seem expedient, to discount, buy, sell and deal in bills, notes, warrants, coupons and other negotiable or transferable securities or documents.

(h) To lend money to and guarantee the performance of the obligations of and the payment of the capital and principal of and dividends and interest on any stock, shares and securities of any company, firm or person in any case in which such loan or guarantee may be considered likely directly or indirectly to further the objects of this company or the interest of its members and in particular to guarantee the overdraft or cash credit account of any person or persons, company or companies with any financier or bank including the Imperial Bank of India."

The accounts position of Burlow & Company also makes it clear that before June, 1949, the audited accounts do not show any amount of advance received from Gillanders Arbuthnot or that any loan was advanced to the companies referred to in the agreement. After 1949, the accounts will show that Gillanders Arbuthnot has advanced sums to the extent of Rs.11,97,774 on current account for the year ending March 31, 1950, and correspondingly also, advances were made to the different companies to the extent of Rs.18,26,021. The position up to 1956 will appear in the balance-sheet for the year ending March 31, 1956. The secured loan from Gillanders Arbuthnot is Rs.45 lakh and the unsecured loan from Gillanders Arbuthnot is Rs.10,16,512. Against that, the advance made by Burlow & Co. to the different companies referred to in the agreement is Rs.58,43,089. In the balance-sheet for the year ending March 31, 1957, when the entire loan was taken over by Gillanders Arbuthnot, the advance also shown to have been made to the different subsidiary companies did not appear in the balance-sheet of Burlow & Co. for the year ending March 31,1956.

From the aforesaid position, it will be clear that because of certain difficulties; Gillanders Arbuthnot could not directly advance the loan to its managed companies like Air-Conditioning Corporation. It was really to the 100% subsidiary, Burlow & Co., that advances were made and alt the book debts which were hypothecated by Air-C6nditioning Corporation and other subsidiary companies were hypothecated to Gillanders Arbuthnot. Therefore, Burlow & Co. was really a medium or a conduit pipe through which finances were made by Gillanders Arbuthnot and when in 1957, the entire loan advanced by Burlow & Co. was taken over, the balance-sheet of Burlow & Co. also wiped off the advances given by Gillanders Arbuthnot and also the loan I given to the different subsidiary companies by Burlow & Co. Thus, the finance was really made by Gillanders Arbuthnot and such financing to the managed company was incidental to the business of managing agency. Hence, when the entire book debts amounting to Rs.48,52,951 as on March 31, 1956, were assigned and taken over by Orient Paper Mill for a sum of Rs.26,56,561, the unrealised amount of Rs.21,96,390 was written off by the assessee-company as a bad debt and/or a trading loss, when the debt was written off. The directors' report for the year ending March 31, 1957, also may be looked into.

We may add in this connection that the case of the assessee came up for hearing before this Court--see CIT v. Gillanders Arbuthnot & Co. Ltd. (1982) 138 ITR 763. There, a Division Bench.of this Court held that the assessee was engaged in the business of financing its subsidiaries or that, at any rate, financing the subsidiaries was incidental to the assessee's main business activities, which were diverse in nature.

For the foregoing reasons, it must be held that the loss incurred by the, assessee in financing its subsidiary must be allowed as a business loss.

We, therefore, answer both the questions in this reference in the affirmative and in favour of the assessee.

There will be no order as to costs.

SHYAMAL KUMAR SEN, J: --I agree.

M.B.A./1635/TQuestions answered.