An advance paid by an assessee company to another company for the purchase of shares cannot be claimed as a bad debt under section 10(2)(xi) of the Income-tax Act, 1922, as it is not a debt which is related to business or results from it.

Headnote:
INCOME TAX - Bad debt - Deduction - Whether amount advanced by assessee company to another company for purchase of shares can be claimed as bad debt under section 10(2)(xi) of the Income-tax Act, 1922 - Held, no.
Fact of the Case:

The assessee company advanced Rs. 6,05,071-8-6 to another company, Southern Agencies Ltd., for the purpose of purchasing shares in Rodier Textile Mills Ltd. The subscription list for the shares remained open from January 5 to January 20, 1949, but no application for shares was made on behalf of the assessee company. The assessee company 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. The claim was disallowed by the Income-tax Officer, Appellate Assistant Commissioner and the Tribunal.
Finding of the Court:

The High Court held that the assessee company was not entitled to claim the deduction under section 10(2)(xi) of the Income-tax Act, 1922, as the amount advanced was not a bad debt but an advance for the purchase of shares, which was a capital expenditure.
Issues: Whether the amount advanced by the assessee company to Southern Agencies Ltd. for the purchase of shares in Rodier Textile Mills Ltd. can be claimed as a bad debt under section 10(2)(xi) of the Income-tax Act, 1922.
Ratio Decidendi: A debt, for the purpose of section 10(2)(xi) of the Income-tax Act, 1922, 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. An advance paid by the assessee company to another to purchase 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.
Final Decision: The appeal was dismissed and the assessee company was directed to pay the costs of the respondent.

JUDGMENT

HIDAYATULLAH J.-The assessee, A. V. Thomas and Co. Ltd., Alleppey, claimed a deduction of Rs. 4,05,072-8-6 in the assessment ear 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 in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 4,05,071-8-6 claimed by the assessee company as a deduction was not admissible 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 respondent.

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 Iyer, and

3. J. Thomas.

There was another private limited company known as the Southern Agencies Ltd., Pondicherry, and its directors were:

1. A. V. Thomas,

2. S. S. Natarajan, and

3. C. S. Ramakrishna Karayalar.

There was a mill in Pondicherry known as Rodier Textile Mills belonging to the Anglo-French Textiles Ltd., Pondicherry. 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 a view to buying and developing the Rodier Textile Mills. 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 failed.

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. (in formation) 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 entire amount. 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 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

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