COMMISSIONER OF INCOME TAX vs JEYA JOTHI and CO.

V. Ramaswami, J. - Sree Shanmugar Mill Limited, Rajapalayam, a company incorporated under the Companies Act, had incurred heavy losses

and was under liquidation and an Official Liquidator had been appointed by this Court in O.P. No. 279 of 1957. Some of the share-holders

desired that the Mill should continue to work by being leased out to a good financier so that the employment of the workers and the capital of the

investors of the workers and the capital of the investors could be protected. The assessee-firm, who was granted registration by the ITO came into

existence in June 1960, primarily, to work Shanmugar Mill, Rajapalayam. A petition was filed before the High Court in O.P. No. 279 of 1957 for

stay of the sale and a directed to the Official Liquidator to grant lease of the Mill was stayed. A list of creditors of the company was also drawn.

The Mill was leased to the assessee for a period of ten years on a monthly lease rent of Rs. 6,000. The lease rent was subject to modification with

the increase in spindlage capacity of the Mill. The lessee was directed to install additional spindles secured from government grant, to make the

necessary funds available for purchase, installation, etc. of the same and run the Mill. The assessee had agreed and the Court accordingly had

directed him to provide funds for discharging the debts of the company. Initially, a sum of Rs. 1 lakh was to be paid. Within three weeks of the

Courts order dt. 29-4-1960, another sum of Rs. 2 lakhs was to be provided by the assessee. The amounts of debt set out in the list of creditors

were to be partially paid. Subsequent arrangements were also made for discharging the entire debts of the company. Thus, between 1960 and

1964 the assessee had advanced a total sum of Rs. 8,66,000 to the Official Liquidator in order to enable him to discharge the creditors of the

company, as directed by the Court. In February, 1969, the Mill was put up for sale in question. The assessee, being the highest bidder, purchased

the Mill for a sum of Rs. 6,76,000. The assessee was permitted to set off this sum of Rs. 6,76,000 towards the advances made as per the

directions of the Court to the Liquidator and there was still a deficit of Rs. 1,33,493. This amount was claimed as irrecoverable and the assessee

had also written off the same in the books of account as irrecoverable as on 31-3-1970. The assessee claimed it is a bad debt and a loss arising

out of the advances made to the Mill and therefore, deductible as an expenditure. However, the ITO rejected this claim and held that it is a capital

loss and disallowed the claim. On appeal, the AAC, however, held that the assessee is a money-lender, that the loss is attributable to his money-

lending business and that it cannot be held to be capital in nature. Accordingly, the assessee was held to be entitled to the deduction. This order

was confirmed by the Tribunal.

The ld. counsel for the Revenue strenuously contended that though the assessee may be a money-lender and is also carrying on the business of

money-lending, this sum of Rs. 8,66,600 advanced to the Official Liquidator formed part and parcel of the lease agreement and therefore, cannot

be treated as an advance and therefore, cannot be treated as an advance in the course of the carrying on of the business as money-lender and in

reality it is of the nature of investment. He also contended that the fact that he is also having money-lending business, cannot conclude the question.

In this connection, he referred to the decision reported in Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of Income Tax, Bombay, . The assessee in

that case who was a dealer in shares and securities was also carrying on business as managing agents of other companies. In order to acquire the

managing agency of a textile mill, the assessee purchased the shares of another managing agents in a company at a price in excess of the market

price of the shares. Two months later, the assessee sold these shares at a loss and claimed that as a trading loss. It was held by the Supreme Court

that by purchasing the shares for a price far in excess of their market price to facilitate the acquisition of the managing agency, a capital asset was

acquired by the assessee and the subsequent disposal of some out of the shares could not convert what was a capital acquisition into an acquisition

in the nature of trade. As stated in the facts itself, the assessee in that case acquired the shares in order to acquire the managing agency of a textile

mill, and it is also pertinent to note that he was also carrying on business as managing agent of other companies. Having regard to the facts and

other circumstances, the Supreme Court held that the shares could not be treated as part of his business as dealer in shares and it was really

acquiring the managing agency. Questions of this nature cannot be decided in the abstract without reference to facts. In this case, as stated earlier,

the lease was for a period often years primarily on a lease rent of Rs. 6,000 per mensem. The lease rent also is subject to modification with

increase in the spindlage capacity of the Mill. The assessee is also a money-lender and it is in evidence that he was also assessed as a money-

lender with reference to the business carried on by him as money-lender. The assessee was entitled to interrest even as per the order of the Court

at the rate of 7-1/2 per cent on the advances made to the Official Liquidator. The advances also were directed to be given by the Court in order to

enable the Liquidator to discharge the creditors of the company. Though the order of the Court is of the same date, namely 294-1960, the date on

which the lease was granted and as part of the same order, both ar two distinct transactions, one a lease of the Mill by the Liquidator to the

assessee and the other, as per the directions of the Court, advancing money to the Liquidator for the purpose of enabling him to discharge the

creditors. That advance of the money cannot be treated as part of the terms of the lease itself. It is true that though primarily the lease is mentioned

as for a period of ten years, if the advance made to the Official Liquidator is outstanding, the assessee will have to be permitted to continue the

lease, but that is, so as to enable him to secure the payment of the money of the money to him. We do not find anywhere in the orders of the

assessing officers or the order of the Tribunal or the stated case, any material to treat this advance as a premium for grant of the lease. If the

assessee had not been a money-lender, it might have been possible to contend that the advance was in the nature of a premium, as in the decision

reported in Commissioner of Income Tax Vs. Coimbatore Pictures (P.) Ltd., . Though, as held in Ramnarain Sons (Pr.) Ltd. Vs. Commissioner of

Income Tax, Bombay, , the assessee also carrying on business as a money-lender may not conclude the issue, it is certainly a relevant factor to

consider whether the advance was a part of the term of the lease or in the nature of a premium for the grant of the lease or that it was an advance

of money in the normal course of the carrying on of the business of money-lending. The facts, in this case, clearly show that these two transactions

of lease and advancing money to the Liquidator were kept separate from the beginning and not linked one to the other and the assessee was

always keeping separate its dual capacity in regard to these two transactions. We therefore, have to agree with the Tribunal that the loss has to be

regarded as a direct result of the assessees continuing the busness of money-lending and the loss is not of a capital nature.

It was then contended by the ld. counsel that in any case, this is not an allowable deduction in the asst. yr. 1970-71 as the sale itself was in

February 1969. This contention has been raised ignoring the fact that the sale was confirmed only in June 1969 by this Court. The sale is complete

only when it is confirmed by this court and therefore, the claim for deduction made in 1970-71 is in order.

The question referred to is accordingly answered in the affirmative and against the Revenue. The respondent will be entitled to its costs.

Counsels fee Rs. 500.