Income Tax Appellate Tribunal - Delhi
Pragati Construction Co. vs Deputy Commissioner Of Income-Tax on 24 January, 1995
Equivalent citations: [1995]54ITD153(DELHI)
ORDER
B.S. Saluja, Judicial Member
1. The assessee is in appeal against the order of CIT(A), XI, New Delhi on the following grounds :-
1. The Commissioner of Income-tax has erred to disallow Rs. 31,05,000 as bad debts claimed by the appellant which is against the fact of the case and bad in law.
2. Without prejudice, the said loss of Rs. 31,05,000 is a trading loss and CIT(A) has erred to disallow the same.
3. The 1d. CIT(A) has erred to disallow entertainment expenditure of Rs. 20,638.
4. The 1d. CIT(A) has erred in not disposing off the ground of appeal regarding interest paid of Rs. 46,133. The said disallowance was wrong and totally uncalled for.
2. The assessee filed duplicate return of income on 12-1-1990 declaring total income of Rs. 12,87,750. The assessee-firm was having income from business and house property and the business consisted of sale of flats in the building called Devika Tower. The Assessing Officer noted from the partners' account that there was withdrawal of capital and at the same time the firm had paid interest on loan to outsiders. He disallowed an amount of Rs. 46,133.80 in this behalf and added the same in the income of the assessee. He further noted that the assessee had claimed Rs. 31.05 lakhs as bad debts. On enquiry from the Assessing Officer, the assessee submitted that it had made an application on 12-3-1982 for acquiring commercial space in a proposed multi-storey building Ambika Tower House, Asaf Ali Road, New Delhi. The promoter of the project M/s. Pragati Construction Co. (P.) Ltd. happened to be a sister concern of the assessee-firm and the said company was to acquire the proposed plot. The assessee-firm had paid Rs. 44.50 lakhs to M/s. Pragati Construction Co. (P.) Ltd. who had deposited Rs. 48 lakhs at the time of auction with the DDA but later on the DDA vide its letter dated 4-4-1985 forfeited the earnest money of Rs. 48 lakhs. Thereupon M/s. Pragati Construction Co. (P.) Ltd. vide its letter No. 107 dated 14,12-1988 informed the assessee-firm that the company was not in a position to pay back the amount and that the company had no tangible assets which could be encashed in the market to recover the money. Thus the amount of Rs. 31.05 lakhs, which was outstanding, was treated as bad debt by the assessee-firm and the same was written off in the assessee's account. The assessee-firm submitted that its business was as a builder to sell the property and that the firm had thought of buying and selling the said commercial space as a normal trade transaction to earn profit. It claimed that the money given to the said company was purely revenue in nature.
2.1 The Assessing Officer, after examining the facts and circumstances of the case, noted that there was no written agreement between the assessee-firm and the said company and that the assessee-firm had not made any effort to recover the amount from its sister concern, except obtaining a legal opinion that the amount was irrecoverable. The Assessing Officer also observed that in fact the company had applied for the plot and the money was also deposited by that company and if bad debt was to be claimed it was to be claimed by the said company and not by the assessee firm. He held that the money given by the assessee-firm was just an advance and not in the nature of transaction which could be treated as a transaction to swell the profits of the assessee-firm. He further observed that there was a regular transaction between the assessee-firm and its sister concern and that the assessee-firm was getting rent from the sister concern and the said concern had purchased some flats from the assessee-firm in the preceding years also. He further observed that the partners of the firm and Directors of the said company were common and that the money advanced by the assessee-firm is in the nature of advance and by no stretch of imagination it could be said to be a debt which had become bad in the ordinary course of business. He also observed that for claiming deduction under Section 36 the assessee should have fulfilled certain conditions. The debt should have been taken into account in computing the income of the accounting year or of an earlier year and such computation should have been of the income of the assessee. He also observed that it was not enough that the debt should be incidental to the business but it was further necessary that the debt should have been taken into account in computation of the assessee's income of any year, i.e., the debt should have been brought in as a trading receipt to swell the profit or reduce the loss of any year. He further observed that the scope of the claim was restricted to the trade debts only and not to loans and advances given in the ordinary course of business and that in the present case the said amount was merely an advance and that too to a sister concern where directors and partners were common. In the circumstances the case of the assessee was not covered by the provisions of Section 36(1)(vii) of the I.T. Act. He accordingly disallowed the said amount of Rs. 31.05 lakhs and added back the same to the total income of the assessee.
3. On appeal before the CIT(A), the assessee made a request for modifying the grounds of appeal relating to the addition of Rs. 31.05 lakhs on account of disallowance as bad debts. The modified ground of appeal was forwarded by the CIT(A) to the Assessing Officer for his comments. The Assessing Officer stated that the money which was deposited by the assessee-firm with M/s. Pragati Construction Co. (P.) Ltd., sister concern, was in the nature of advance and could not be treated as bad debt. He further stated that various conditions laid down in Section 36(1)(vii) had not been fulfilled by the assessee and that the transaction was not in the ordinary course of business and, therefore, the same was disallowed. He also submitted that the decision of the Hon'ble Supreme Court in the case of A. V. Thomas & Co. Ltd. v. CIT[ 1963] 48 ITR 67 may be considered by the CIT(A) while passing the orders.
3.1 The CIT(A) noted that M/s. Pragati Construction Co. (P.) Ltd., assessee's sister concern, had promoted a project for construction of multi-storeyed building, Ambika Tower House at plot No. 8, Asaf Ali Road, New Delhi. The said plot was auctioned by the Slum Wing, DDA on 12-3-1982. The said company offered the highest bid of Rs. 1,92,00,000 and deposited Rs. 48 lakhs on account of earnest money. After confirmation of the bid the said company was issued demand notice on 30-3-1982 for payment of the balance amount of Rs. 1,44,00,035 up to 29-5-1982. The company did not make the balance payment and filed a suit in the High Court restraining the DDA from forfeiting the earnest money, which was vacated by the High Court on 25-2-1985. The amount of Rs. 48 lakhs was forfeited on 4-4-1985 after obtaining approval of the Lt. Governor of Delhi. However, the suit is pending and its final outcome is awaited. In paras 9 to 11 of the order of CIT(A), the facts as examined by the Assessing Officer have been noted by the CIT(A).
3.2 The learned counsel for the assessee submitted before the CIT(A) that the observation of the Assessing Officer that there was no written agreement between the assessee and M/s. Pragati Construction Co. (P.) Ltd. was not correct. He submitted that there was a duly executed agreement dated 2-6-1982 which was available on record. He also submitted that the share capital of the said company was Rs. 24,000 only and the rest of the amount had been borrowed. The counsel further submitted that the company did not have any asset from which the advances could be realised. He invited the attention of the CIT(A) to the findings in the assessee's case in preceding assessment years in which the amount advanced was treated as interest-free loan and notional interest thereon had been charged in the preceding years which had been deleted in the first appeal. He further submitted that the assessee was engaged in the purchase and sale of flats not only from the sister concern but also from other parties and that the assessee had been showing profit as well in the past. He further submitted that as the said company had no resources to return back the amount of Rs. 31,05,000 to the assessee, the assessee did not want to waste good money for the recovery of bad money and that no adverse inference should be drawn from the fact that no legal action had been taken by the assessee against the said company. The counsel further raised a plea that the amount of Rs. 31,05,000 had been claimed as business loss without prejudice to the claim of bad debt. He elaborated the point that bad debt was there when some sales were effected on which gross profit etc., had been declared. However, if the amount involved in the transaction was not received from sundry debtors in the subsequent years, and it was found that the same was irrecoverable, after satisfying certain conditions, it is claimable as bad debt. The counsel further mentioned that in the assessee's case, during the normal course of business, space had been booked with a particular party depositing the specified amount. Since the said party had bid in the auction for the plot in which the commercial space was to be built and had deposited the earnest money for the same which stood forfeited, in the absence of any asset from which the amount advanced by the assessee could be realised, the assessee's claim for loss incurred during the normal course of business deserved to be accepted. He also placed reliance on the decisions of the Apex Court in the cases of Travancore Titanium Product v. CIT[ 1966] 60 ITR 277 (SC), Nonsuch Tea Estate Ltd. v. CIT[ 1975] 98 ITR 189 (SC) and the decision of the Gujarat High Court in the case of CIT v. Gujarat Mineral Development Corpn.[1981] 132ITR377 and the decision of the Patna High Court in the case of Addl CIT v. Ram Bahadur Thakur & Co. [1979] 116 ITR 698.
3.3 The CIT(A) held that the judgments relied upon by the learned counsel were distinguishable on facts as the facts involved therein were totally different from the facts and circumstances of the assessee's case. He observed that the basic question to be considered was whether the amount of Rs. 31,05,000 was to be treated as bad debt or loss in the assessment year 1989-90 as claimed by the assessee. He observed that the assessee had explained during the course of assessment proceedings that the company with whom the assessee had deposited the amount did not have adequate assets from which the amount advanced by the assessee could be realised. He further observed that the assessee had not denied that the company is sister concern of the assessee-firm. After examining the details in this behalf, CIT(A) observed that three directors of the company to whom Rs. 44.5 lakhs had been advanced were associated with the assessee-firm. He further observed that because of commonness of the persons in the assessee-firm and the company, the firm had advanced Rs. 44.5 lakhs to the company knowing well that the company had no assets and had share capital of only Rs. 24,000. He also observed that normally the assessee would not have advanced such a considerable amount of money to any other party which had its own capital of only Rs. 24,000. He, therefore, held that it was difficult to say that dealing between the assessee-firm and the said company, having 50% common persons directly or indirectly as partners and directors, had been collusive, but the facts and circumstances of the case did provide sufficient basis for the belief that by advancing Rs. 44.5 lakhs to a company when it had a capital of only Rs. 24,000, the assessee did not appear to have acted with business prudence as it did not appear to have taken into consideration security and safety of the amount advanced for booking of space with the said company. He further observed that the assessee had applied for booking of space with the said company on 12-3-1982 and the amount of advance with the said company had been given near about the same date. The earnest money of Rs. 48 lakhs deposited by the said company had been forfeited on 4-4-1985. In this background, the CIT(A) observed that "if bad debt or loss was to be claimed at all, assessee could have done so in the assessment year 1986-87 relevant for accounting year 1985-86 wherein the date of forfeiture of amount fall. However, the assessee has chosen to claim loss/bad debt in the accounting year relevant for the assessment year under appeal on the basis of the so-called letter dated 14-12-1988 from M/s. Pragati Construction Co. (P.) Ltd., wherein it is stated that the company did not have tangible asset which could be engaged in the market for payment of the amount involved". The CIT(A) also referred to the letter dated 24-3-1992 written by the Dy. Director, Slum Wing, DDA and observed that it was evident that the said company was still contesting in the High Court against the forfeiture of the earnest money and that the final decision in the matter was still awaited and the said company has not considered the forfeiture of the amount and the matter involved was pending for decision in the Delhi High Court. He also observed that had the said company not been the assessee's sister concern with 50% of its Directors being directly or indirectly associated with the assessee as partners, the assessee would not have shown affected stoicism in the form of its indifference to seek remedial legal measures for recovery of Rs. 31,05,000. The CIT(A) further examined the provisions of Section 36(2)(i) of the I.T. Act and observed that the following conditions are to be satisfied for allowing deduction of bad debt :
(i) It must be a proper debt, or a part thereof;
(ii) It should be of revenue nature contradistinguished from capital nature;
(iii) It should have been written off as irrecoverable in the accounts of the assessee for the previous year;
(iv) (a) It should have been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year; or
(b) It should represent money lent in the ordinary course of banking or money-lending which is carried on by the assessee.
The CIT(A) held that the condition mentioned at (iv)(a) is not satisfied in the case of the assessee inasmuch as the assessee had not taken into account the claimed amount of bad debt in computing the income of the previous year in which it was claimed to be written off or in one of the earlier previous years. He, therefore, held that the assessee is not entitled to deduction on this account also for the amount of Rs. 31,05,000. Accordingly he confirmed the said addition.
4. The learned counsel for the assessee Shri Vinod Bindal submitted before us at the outset that he is not pressing ground No. (3), which relates to the claim of allowing Rs. 31,05,000 as bad debt. He further submitted that he is also not pressing ground No. (3) which relates to disallowance of Rs. 20,638 on account of entertainment expenditure. In the circumstances ground Nos. (1) and (3) are rejected.
4.1 With reference to ground No. 2 relating to the claim of Rs. 31,05,000 as trading loss, the learned counsel invited our attention to the agreement dated 2-6-1982 which is placed at pages 2 to 6 of the paper book. He submitted that the assessee had made an application dated 12-3-1982 for the allotment of commercial space in the proposed building to be constructed by M/s. Pragati Construction Co. (P.) Ltd. The approximate covered area, for which the application had been made, was 3,800 sq. ft. on ground floor at a rate of Rs. 2,500 per sq. ft. and the approximate cost was Rs. 95 lakhs. He further referred to the first paragraph at page 5 of the agreement, wherein the assessee-firm requested the company to adjust the amount of Rs. 36,55,000 paid to the company as advance for booking of the space as earnest money for the booking of the said space. He further invited our attention to the letter dated 22-12-1987 written by the Dy. Director, DDA, placed at page 7 of the paper book, wherein the company was informed that their request for refund of earnest money cannot be acceded to as the bid of the plot had been cancelled and the amount of earnest money was forfeited by the Chairman, DDA, Lt. Governor, Delhi in accordance with the terms and conditions of the auction. He further invited our attention to the letter dated 4-4-1985 written by the Director, DDA, whereby the company was informed that the stay for forfeiting the amount of earnest money had been vacated by the Hon'ble High Court of Delhi and the earnest money of Rs. 48 lakhs equivalent to 25% of the cost of land had been forfeited in accordance with the terms and conditions of the auction. He also invited our attention to the legal opinion obtained by the assessee-firm from one Shri Satish Chand Kaushik, Advocate. The said opinion is placed at page 9 of the paper book. The learned Advocate had advised the company that the amount was not recoverable and it was not advisable to file a legal suit. He also invited our attention to the legal opinion obtained by the assessee-firm from one Shri A.C. Talwar, Advocate, in respect of suit for the recovery of forfeited amount of Rs. 48 lakhs. A copy of the said opinion is at page 10 of the paper book. In the said opinion the learned Advocate has referred to the decision of the Hon'ble Supreme Court in the case of Express Buildings v. Union of India AIR 1986 SC 872, wherein the Apex Court have decided that 400 FAR was legally permissible with reference to the proposed building. In the light of the said decision, the learned Advocate opined that there was hardly any chance of success in suit No. 993 of 1983 filed by the company and the amount was irrecoverable. He also invited our attention to the letter dated 14-12-1988 written by M/s. Pragati Construction Co. (P.) Ltd. to the assessee-firm, wherein it has been mentioned that the company was unable to pay or refund any amount and the assessee-firm was free to seek any legal remedy. A copy of the said letter is placed at page 11 of the paper book.
4.2 The learned counsel submitted that the main reason for rejecting the claim by the Assessing Officer was that the assessee never showed the amount in question as a receipt. In this connection he referred to the last paragraph of page 2 of the assessment order. He also submitted that the plea of trading loss had been taken before the Assessing Officer and in this connection he referred to the following portion of the assessment order:
That the assessee's business is just a builder and to sell the property. The firm had thought to buy and sell this space as a normal trade transaction to earn profit. It has been claimed that the money given to the company was purely revenue in nature. With reference to the observations of the CIT(A) made in para 11 of his order, the learned counsel submitted that there was an agreement dated 2-6-1982, that the transactions were genuine and that similar transactions were there in the earlier years. He also mentioned that M/s. Pragati Construction Co. (P.) Ltd. was a sister concern and rather it proves that the assessee had reason for giving the money to the said company. The learned counsel relied on the following case laws :
1. Ram Chandar Shivnarayan v. CIT[ 1978] 111 ITR 263 (SC)
2. CIT v. Mysore Sugar Co Ltd [1962] 46 ITR 649 (SC)
3. Standard Batteries Ltd. v. ITO [1985] 11 ITD 309 (Bom.)
4. CIT v. Inden Biselers [1989] 47 Taxman 225 (Mad.)
5. P. Satyanarayana v. CIT[1979] 116 ITR 803 (AP)
6. CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal.)
7. CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC)
8. Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736 (SC)
9. Devi Films (P.) Ltd. v. CIT [1970] 75 ITR 301 (Mad.)
10. ITO v. Gokal Chand Jagan Nath Nahar, ITO [1982] 1 ITD 469 (Delhi) 475
11. CIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545 (SC)
12. CIT v. Gillanders Arbuthnot & Co. Ltd [1992] 195 ITR 331 (Cal.).
The learned counsel submitted that the case of Gillanders Arbuthnot & Co. Ltd. (supra) is the direct case on the point.
4.3 On a direction from the Bench the assessee has also filed photo copies of the balance-sheets for the period from 1982 to 1989. The assessee has claimed that throughout the amount in question has been shown as advance for booking of space in the proposed Ambika House.
5. The learned Departmental Representative Shri S.C. Gupta, while relying on the orders of the lower authorities, submitted that even the modified ground of appeal before the CIT(A) related to claim to bad debt. He also invited our attention to the petition filed by M/s. Pragati Construction Co. (P.) Ltd. in the High Court of Delhi against the DDA, which is placed at pages 19 to 50 of the paper book. He referred to para 4 of the said petition, wherein it has been mentioned that the stipulated date of auction was 12th March, 1982 at 11.30 A.M. In this connection he stated that the assessee-firm had advanced an amount of Rs. 44.5 lakhs to the said company by cheque dated 12-3-1982 and the builder company got a demand draft from the bank against that cheque. The learned D.R. emphasised that the money had thus been passed on before the auction. In this connection he also referred to the terms and conditions of auction of commercial plots by the DDA, a copy of which is placed at pages 13 to 18 of the paper book. He drew our attention in particular to Clauses (ii), (iii), (vi) and (vii) of para 2 of the said terms and conditions. Clause (ii) mentions that the highest bidder shall, at the fall of the hammer, pay to the DDA (Slum Wing) through the Officer conducting the auction 25% of the bid amount as earnest money either in cash or by Bank Demand Draft in favour of Director, Slum, DDA. Clause (iii) further stipulates that the highest bid shall be subject to the acceptance of Chairman, DDA or such other officer as may be authorised by him in this behalf. It further provides that the highest bid may be rejected without assigning any reason. It also provide that the areas announced are only approximate and that persons whose bids are accepted should be prepared to accept a variation up to 15% either way in the said areas subject to the adjustment of cost in proportion to the land of the accepted bid. Clause (vi) provides that when the bid is accepted by DDA, the intending purchaser shall within three months from the date of acceptance of the bid or within 60 days from the date of informing the intending purchaser of the acceptance of the bid by registered letter, whichever is earlier, pay to the Director (Slum), DDA, the balance 75% amount of the bid in cash or by Bank Draft. Clause (vii) stipulates that physical possession of the plot shall be handed over only after the full amount of the bid is paid by the intending purchaser. The learned D.R. emphasised that the assessee-firm was aware of the fact that the bid could be rejected by the DDA under certain circumstances. He further referred to para 5 of the said terms and conditions, which requires the lessee to obtain prior permission of the DDA (Slum Wing) in writing, before selling or transferring the floor space constructed on the plot. It further stipulates that the said written permission will be granted on payment of Rs. 100 for each case of sale/transfer provided such a transaction does not violate the said terms and conditions. It further provides that for sale/transfer subsequent to the first sale of the floor space units, the permission of the DDA shall be required which will be given after charging Rs. 5 per sq. ft. of the floor space to be transferred. The learned D.R. submitted that in view of the said condition no application could have been given by the assessee-firm on 12-3-1982 as claimed by the learned counsel. He further invited our attention to para 11 of the aforesaid petition, wherein it is mentioned that the bid was finally accepted by the DDA on 30-3-1982. He further invited our attention to para 12 of the said petition, wherein it is mentioned that it was imperative for the company to have in their possession the control drawings because without them, it was not possible for the company to negotiate with the members of the public for sale of commercial space in the proposed construction. He further referred to para 13 of the said petition, wherein it is mentioned that the plans were supplied by the DDA to the company on 11th May, 1982. He further referred to para 14, wherein it is mentioned that upon receipt of the control drawings supplied to the company by the DDA, the company got the said drawings examined by their architectural experts and it was found that the control drawings have not been prepared in consonance with the building bye-laws framed by the Municipal Corporation of Delhi. It was further mentioned therein that it was not possible for the company acting as promoters to negotiate with prospective purchasers of flats, shops and godowns at commercial plot No. 8, Asaf Ali Road, New Delhi in the above circumstances. In view of the aforesaid, the learned D.R. submitted that the builder company was not in a position to sell anything before 30-3-1982 whereas the money was given by the assessee-firm on or before 12-3-1982. He further submitted that in view of the dispute with the DDA regarding floor area, there could not have been any application by the assessee-firm on 12-3-1982 for booking the space in the proposed building, as the rate of Rs. 2,500 per sq. ft. as stipulated in the application could not have been determined on that date. He further invited our attention to Annexure-A of the agreement (page 6 of the paper book) which specifies the mode of payment. The earnest money according to the said mode of payment should have been 25% of the booking amount. As per agreement the total value works out to Rs. 95 lakhs and the earnest money could not have exceeded Rs. 23.25 lakhs. He submitted that in the present case the assessee had advanced initially an amount of Rs. 44.5 lakhs on 12-3-1982 and Rs. 3.5 lakhs on 16-3-1982. He submitted that further payment to the builder company could not be before 12-5-1982, which is the date of receipt of control drawings from DDA.
5.1 In view of the foregoing facts, the learned D.R. submitted that the assessee-firm was financing the sister concern's business or fostering the business of the sister concern and that the agreement dated 2-6-1982 had been entered into by the assessee-firm with the sister concern to cover the whole transaction. He further submitted that the payment of the amount of Rs. 31.05 lakhs was, therefore, merely an advance to M/s. Pragati Construction Co. (P.) Ltd. and giving of the said funds by the assessee-firm had nothing to do with the business of the assessee. In this connection, the learned Departmental Representative relied on the following case laws :
1. A.V. Thomas & Co. Ltd 's case (supra),
2. Bengal Enamel Works Ltd v. CIT[1970] 77 ITR 119 (SC),
3. Indian Aluminium Co. Ltd. v. CIT[197l] 79 ITR 514 (SC),
4. CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC),
5. Siddho Mal & Sons v. ITO [1980] 122 ITR 839 (Delhi),
6. Travancore Tea Estates Co. Ltd. v. CIT [1992] 197 ITR 528 (Ker.),
7. Indequip Ltd. v. CIT [1993] 202 ITR 417 (Bom.),
8. CIT v. L.N. Dalmia [1994] 207 ITR 89 (Cal.).
6. We have carefully considered the submissions made by both the parties (including the case laws relied upon by them) and the relevant material on record to which our attention was invited.
6.1-1 We proceed to examine the case laws relied upon by the learned counsel. In the case of Abdullabhai Abdulkadar (supra), the respondent was treated as agent of the non-resident principal under Section 43 of the I.T. Act, 1922, and assessed in respect of the tax payable by the nonresident. The respondent had to pay Rs. 3,78,491, which after adjustment against amounts payable to the non-resident left a debit balance of Rs. 3,20,162. The respondent wrote off the amount, which he was unable to recover and claimed it as a bad debt or a trade loss. It was held that in order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Loss was allowable if it "sprang directly from and was incidental to" the business of the assessee; it was not sufficient that it fell on the trader in some other capacity or was merely connected with his business. It was further held that a debt was only allowable when it was a debt and arose even as an incident to the business. Except in money-lending trade, debts could only be so described if they were due from customers for goods supplied or loans to constituents or transactions of a similar kind.
6.1-2 In the case of Mysore Sugar Co. Ltd (supra), the assessee was the manufacturer of sugar and used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In the year under consideration owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Government Committee recommended that the assessee should ex gratia forego some of its dues. The assessee accordingly waived its rights in respect of Rs. 2,87,422 and claimed the said amount as a deduction under Sections 10(2)(xi) and 10(2)(xv) of the I.T. Act, 1922. The question was whether the said amount which was given up represented a loss of capital or was a revenue expenditure. It was held that there was no element of a capital investment in making the advance and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible.
6.1-3 In the case of Nainilal Bank Ltd. (supra), the respondent, a public company which carried on the business of banking, had a branch situated at Ramnagar. In the usual course of its business large amounts were kept in various safes in the premises of that branch. There was a dacoity on 11-6-1951 and the dacoits carried away cash amounting to Rs. 1,06,000. It was held that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business. It was further observed that "whether loss is incidental to the operation of a business is a question to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out. The degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material".
6.1-4 In the case of Indore Malwa United Milk Ltd (supra), the assessee-company in pursuance to the authority under its memorandum of association to invest its funds in loans to others, resolved to invest its surplus funds with its managing agents at 6% interest. The managing agents borrowed on behalf of the company large sums of money from outsiders, entered them in the company's books of accounts, withdrew the sums and utilised them for their own purposes. The managing agents went into liquidation in 1933. In computing its profits for the purpose of industrial tax under the Indore Industrial Tax Rules, 1927, for the assessment year 1941, the company claimed deduction of the sums which could not be recovered from the managing agents as bad debts and trading loss. It was held that the money borrowed by the managing agents which had become irrecoverable was a trading loss deductible in computing the profits of the managed company in the assessment year and that it was a loss incidental to the company's business.
6.1 -5 In the case of Devi Films (P.) Ltd. (supra), the assessee had advanced considerable sums of money, entered into an arrangement on April 1, 1957, by which he waived a substantial portion thereof. The assessee's claim to deduct this amount as a bad debt in the years 1957-58 and 1958-59 was negatived by the department. For 1959-60 the claim was upheld by the Appellate Assistant Commissioner but disallowed by the Tribunal. On a reference it was held that the claim did not fall within the ambit of bad debt under Section 10(2)(xi) but was a trading loss in the sense that the assessee in the course of the business thought it necessary to waive a portion of the outstanding. It was further held that as the trading loss occurred when the assessee wrote off the amount claimed as deduction on April 1, 1957, the amount was eligible for deduction as a trading loss in 1957-58 and hence the same could not be allowed as a deduction in the year 1959-60.
6.1-6 In the case of Ram Chandar Shivnarayan (supra), the assessee, a registered firm, carried on business in gold, silver and guineas at Rajahmundry. It also derived income from investment in Government securities. The assessee had sold some Government securities and bonds. It borrowed a sum of Rs. 50,000 in cash for the purposes of purchasing Government securities and the amount was handed over to the cashier and when the cashier was busy in taking out certain books, a stranger committed theft of Rs. 30,000 out of the said amount. The amount could not be recovered in spite of lodging a complaint with the police. The Apex Court held, reversing the decision of the High Court, that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit, and in such a situation it was part of the trading loss and deductible as such in arriving at the true profits of the assessee.
6.1 -7 In the case of P. Satyanarayana (supra), the assessee, a film distributor, advanced certain amounts to the producer of a film for the purpose of production of the motion picture under an agreement which provided for realisation of the amount advanced by him after exhibition of films. The said amount could not be realised in full out of the collections through exhibition of such films, and by an agreement the distributor agreed to take a part of the amount from the producer and wrote off the balance. It was held that the loss arising to the distributor was a trading loss incurred in the course of business and incidental thereto and that the distributor was entitled to deduction under Section 28 of the I.T. Act, 1961.
6.1-8 In the case of Rohtas Industries Ltd. (supra), it was held that the advances made by the assessee for the purpose of securing raw material were advanced wholly and exclusively for the purpose of assessee's business. It was further observed that the amounts were in the nature of trade debts to be realised by the assessee from its suppliers and the amount written off was, therefore, allowable as a bad debt in the relevant assessment year.
6.1-9 In the case of Gokal Chand Jagan Nath Nahar (supra), the assessee-firm was a dealer in paper. Its partners were shareholders in a company, which was running a paper mill. The assessee advanced huge sums to the said company for the construction of the company's factory, etc., even prior to the company's incorporation. The company started production in November 1965 but due to heavy losses it was sold on 16-11 -1967. The amounts due from the said company on 1-4-1967 were Rs. 5,65,470. After adjusting the payment of Rs. 3,27,656 received by the assessee during the year ending 31-3-1968, the balance was Rs. 2,44,290. During the assessment year 1971 -72, the aforesaid balance was treated by the assessee as irrecoverable and written off as bad debt. The assessee claimed deduction under Section 28( i) on the ground that the advances were made to the company for earning profit by selling company's product and by selling raw materials to the company and that goods had been purchased from the company and that in earlier years interest earned on said advances was treated as its business income. The ITO rejected the assessee's claim but the AAC upheld the assessee's claim holding, inter alia, that the impugned transactions were integral part of the assessee's business. On further appeal, the Tribunal held that the true nature of the transaction in this case was that by forming a private limited company the partners had advanced money to themselves and it was the loss of a part of that money that they were claiming a trading loss. Such a loss could not be allowed as a trading loss. The Tribunal observed that "when the assessee was found to have advanced a large amount even before the incorporation of the company, it could not be said that the said advances were for the purpose of the assessee's business. In fact, the impugned advances were made not only before the company's incorporation, but thereafter too the advances were made for setting up of the company's factory. Thus, the advances were made by the assessee to the company for creating a source from where goods could be purchased. The creating as source for making purchases would be an enduring benefit and that the loss would be of a capital nature". It further observed that the loss could not be also have pertained to the assessment year 1971 -72 since it had accrued when the accounts were finally settled on 31 -3-1968. No effective action, legal or otherwise, was initiated by the assessee-firm for recovering dues from the company apparently for the reason that the shareholders and the directors of the company were the same persons as the partners.
6.1 -10 In the case of Standard Batteries Ltd. (supra), the assessee entered into a collaboration agreement with another company, under which the assessee was to receive 50% of production of the other company. The product was in assessee's line of business. The assessee placed an order with the other company for supply of product and paid advance of Rs. 1 lakh. The assessee had no right to the profits of the other company nor any interest in factory or infrastructure of the other company. The said advance of Rs. 1 lakh became irrecoverable and the same was held as of revenue nature.
6.1 -11 In the case of Indian Biselers (supra), the assessee, a firm exporting minerals and ores to foreign countries through STC, entered into an agreement with a transport company for transport of ore. On account of transporter having defaulted in its payments to financing company, lorries were seized. Assessee-firm, therefore, entered into a tripartite agreement with said transporter and financing company to pay instalments due to latter by making adjustments against freight charges payable to transporter. After such adjustment certain sum remained outstanding against transporter being irrecoverable. The said sum was allowed as deduction for purpose of determining assessee's total income.
6.1 -12 In the case of Gillanders Arbuthnot & Co. Ltd. (supra), the assessee-company was engaged in managing other companies and also in financing. It advanced monies to a company managed by it through its 100% 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 it was held that the financing was really done by the assessee and such financing was incidental to its business of managing agency and that the loss incurred by the assessee in financing its subsidiary must be allowed as a business loss.
6.2-1 Now we proceed to examine the case laws relied upon by the learned Departmental Representative. In the case of A.V. Thomas & Co. Ltd. (supra), the assessee-company was permitted by its memorandum of association to promote and undertake the formation and establishment of other companies to make investments and to assist any company financially or otherwise. One of the directors of the assessee-company, Shri A.V. Thomas was a common Director of the assessee-company and another private company. The private company took up in 1948 the promotion of a textile mill and the said Director financed that private company to the extent of Rs. 6,05,072. The Board of Directors of the assessee-company approved of the action taken by the Director and passed a resolution that the amount of Rs. 6 lakhs should be shown in its accounts as an advance for the purchase of shares in the textile mill and the sum of Rs. 5,072 as sundry advances due from the promoters of the textile mill. The project of promoting the textile mill failed. The private company paid back to the assessee a sum of Rs. 2,00,000. The assessee wrote off the balance on December 31,1951, which was the date on which its accounting year ended and claimed the balance as a bad debt or alternatively as a business expenditure for the assessment year 1952-53. There was evidence to show that the assessee expected to obtain the selling agency of the goods to be produced by the textile mill. It was held that the assessee-company, in making the large payments, intended to acquire a capital asset for itself and that in any event the amounts were spent in 1948 and not in the year of account ending December 31, 1951. Therefore, they could not be allowed as business expenditure under Section 10(2)(xv) of the I.T. Act, 1922. It was further held that the assessee-company was neither a banker nor a money-lender, the advances paid by the assessee-company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purposes of Section 10(2)(xi), was something more than a mere advance and meant something which was related to the business or resulted from it. It was an understanding which, if recovered, would have swelled the profits, and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchase was made.
6.2-2 In the case of Bengal Enamel Works Ltd. (supra), the assessee-company claimed under Section 10(2)(xv) of the I.T. Act, 1922, deduction of certain sums paid as remuneration to Dr. Ganguly as technical adviser under the terms of a resolution of the Board of Directors. A sum of Rs. 42,000 per year alone was allowed and the balance was disallowed on the ground that the payment was influenced by "extra-commercial considerations". Dr. Ganguly and his father-in-law were able to control the voting before the Board of Directors. Dr. Ganguly was not trained in the technique of "enamelled-ware" and had no special qualifications for the post. It was held that "where an amount paid to an employee pursuant to an agreement is excessive because of 'extra-commercial considerations', the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business".
6.2-3 In the case of Indian Aluminium Co. Ltd. (supra), the principal business of the assessee-company consisted of manufacturing aluminium ingots, sheets and other aluminium products. It had an agreement with a company in Canada, which provided the assessee with technical know-how, engineering services, etc. The agreement provided for an annual retainer fee. The assessee-company had credited a total fee of Rs. 2,50,808 in favour of the Canada company for a period of 7 years. The ITO treated the assessee-company as being in default under Section 18(7) of the Act in respect of the amount of tax liable to be deducted from the payments made to the Canada company. The assessee-company paid an amount of Rs. 1,24,199 towards such tax and asked the Canada company for reimbursement. The Canada company refused to reimburse the amount on the ground that it was bound neither morally nor contractually to meet the obligations of the Indian tax liability. It was held that the amount which the assessee was bound to deduct from the payment made to the Canada company under Section 18(3B) and which it failed to recover from that company could not be regarded as a bad debt under Section 10(2)(xi) of the Act and that the payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of the assessee's business within the meaning of Section 10(2)(xv).
6.2-4 In the case of Panipat Woollen & General Mills Co. Ltd. (supra), the respondent-company entered into an agreement with M/s. Saligram Premnath on 20-10-1955 by which the latter were appointed sole selling agents. The agents were to invest full amount for the working of the worsted plant of the respondent-company, from the purchase of wool tops to the completion of the sale of yarn including wages, power, repairs, etc. Programme for the manufacture of goods was to be made by the respondent-company in consultation with and with the consent of the agents. The accounts of the worsted plant were to be maintained separately. The agents were entitled to interest of 6% on all advances made and in addition a commission of 1 1/4%, on net sales and 50% of the profits of the worsted plant to be ascertained after deducting all manufacturing expenses, interest, insurance, depreciation, selling commission etc. In the case of net loss the agents were also liable to bear 50% of such loss. The Tribunal held that the sums of Rs. 37,157 and Rs. 73,787 paid by the respondent-company to the agents for the assessment years 1956-57 and 1957-58 towards 50% of the net profits of the worsted plant were not admissible deductions under Section 10(2)(xv) of the Indian I.T. Act, 1922, because the agreement amounted to a joint venture for the distribution of profits between the respondent-company and the agents after the profits were ascertained. On a reference the High Court held that the amounts were deductible under Section 10(2)(xv). On appeal to the Supreme Court, it was held (reversing the decision of the High Court), that on the facts, that the agreement amounted to a joint venture to divide the profits after they were ascertained and the payments made by the respondent-company were not deductible under Section 10(2)(xv).
6.2-5 In the case of Siddho Mal & Sons (supra), the assessee, a firm dealing in paper and stationery, entered into an agreement with two minors through their guardians for payment of commission on loans of Rs. 93,181 and Rs. 1,09,022 respectively to be utilised for the import. Those amounts were already lying with the firm and interest of 7 1/2%, was being paid. The ITO also found that the minors were the sons of two of the partners of the firm and that on the date of the agreement the firm had Rs. 4,95,000 in fixed deposit and cash of Rs. 43,559 and that the import was completed during the accounting period ending July 7,1959 and the position on the last day of the ready funds of the firm was : China tissue paper account, Rs. 2,53,253; fixed deposit with bank, Rs. 3,00,000; and cash in the bank Rs. 5,074 making a total of Rs. 5,58,327 and that the wife of one of the partners had a deposit of Rs. 2,65,000 with the firm, but she was not given any extra interest or commission for continuing to keep the money in the firm. The ITO further held that in addition to the interest of 7 1/2% per annum, the commission paid to the minors worked out to a return of 40% on the amount deposited by them with the firm. On these facts, the ITO disallowed the amount of commission holding that the transaction was a collusive device to reduce the incidence of taxation. The Tribunal affirmed the disallowance holding that the payment of commission was not made for reasons of commercial expediency or legitimate business interest. On a reference, the High Court confirmed the disallowance.
6.2-6 In the case of Travancore Tea Estates Co. Ltd. (supra), the assessee was a non-resident company engaged in the business of growing, manufacturing and selling tea. A sum of Rs. 40,81,140 was due to the assessee on account of tea supplied to another company. The Indian undertaking of the assessee was transferred to R with effect from September 1,1976. A day before the transfer of the undertaking, i.e., on August 31,1976, the assessee wrote off the amount of Rs. 40,81,140 due to the other company for the sale of tea to them and the assessee claimed the said amount as a deduction on account of bad debt. The amount, admittedly, represented the price of tea supplied up to December 31,1974. On October 31, 1975, the assessee moved the civil court under the Arbitration Act according to the provisions contained in the agreement. It was during the pendency of those proceedings that the assessee transferred the assets and liabilities of the company in India to R on September 1,1976. The ITO and the Tribunal rejected the claim. On a reference it was held that there was no material to show that the debt had become bad and that the loss was a capital loss and had not been challenged by raising specific questions. The amount of Rs. 40,81,140 was not allowable as a bad debt or as a business loss. It was further observed that in order to claim a deduction under Section 36(1)(vii) of the I.T. Act, 1961, the debt should be proved to be bad in the previous year and it should have been written off by the assessee in the relevant previous year. The debt may become bad when it is proved to be irrecoverable on account of the fact that the debtor is in a bad financial position or that it had become irrecoverable. So long as there is a ray of hope to recover the debt, however dim it may be, and so long as the debt is in the process of realisation, it cannot be said that it has become irrecoverable. The burden of proof that there is a debt owing to the assessee, that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and, finally, it has become bad in the year of account, are all on the assessee.
6.2-7 In the case of Indequip Ltd. (supra), the assessee, a private company, used to supply various products to various textile mills including M, a textile mill company. M was one of the biggest purchasers of the products supplied by the assessee. From the year 1962 onwards, M was in financial difficulties and the assessee started advancing monies to it from time to time. The advances were recorded by the assessee in its books of account in a separate loan account opened for that purpose in the name of M. At the end of the previous year relevant to the assessment year 1968-69, the net debit balance in the loan account was Rs. 16,46,593 and that balance swelled up to Rs. 18,38,837 at the end of the previous year relevant to the assessment year 1970-71. In view of the unsatisfactory financial condition of M, the assessee-company, on its own, by a resolution, decided to write off 50% of the amount due from it on the goods account and 50% on the loan account. This entry, however, was later reversed by the assessee. Fresh entries were made whereby the entire amount due on the goods account was first written off as a bad debt and the balance left thereafter amounting to Rs. 1,38,146 was written off from the loan account. Both these amounts were claimed as deductions by the assessee in computing its taxable income for the relevant assessment year. The ITO did not accept the reversal of the entries by the assessee. He, therefore, allowed as deduction only the amount written off in the goods account and disallowed the amount which was written off in the loan account. The AAC, however, allowed full deduction of the amount to the extent of debts which were due from M, on account of goods supplied to it, as a bad debt. He, however, did not allow deduction of the balance of Rs. 1,38,146 which was written off from the loan account as, according to him, it was a capital loss which was not deductible in computing income under Section 28 of the I.T. Act, 1961. The decision of the AAC was approved by the Tribunal. On a reference it was held that M's financial condition was bad not only in the year of consideration but as far back as in 1962. The assessee was simply a supplier of goods to it and M was one of its buyers. M was not the sole buyer of the goods sold by the assessee. When the financial condition of M, the buyer company, was deteriorating, which ultimately resulted in its winding up, lending money to M, in addition to supplying the goods to it on credit, could not be said to be the conduct of a prudent businessman. The loan was not incidental to the carrying on of the business of supply of goods by the assessee. The amount of Rs. 1,38,148 was not deductible under Section 28 or Section 36.
6.2-8 In the case of L.N. Dalmia (supra), the assessee entered into an agreement in October 1967 with A and F Harvey and its associates to purchase the shares at Rs. 32 per share. PPM which had a paper mill was under the control and management of A and F Harvey and its other associate concerns which held the majority shares of PPM. The issued, subscribed and paid-up capital of PPM was Rs. 25,09,000 divided into 1,00,360 shares of Rs. 25 each. The assessee, his nephew M and assessee's wife along with others were appointed directors of PPM. The assessee thus obtained complete control of PPM by the end of March 1969. The break-up value of the said shares was Rs. 56.45 at the time when the assessee had purchased the said controlling interest shares of PPM at Rs. 32 per share. The assessee had borrowed monies for acquiring the said shares. In respect of such borrowing during the relevant previous year, the assessee had paid interest of Rs. 1,46,501. The assessee floated a private company LNE. The certificate of incorporation of LNE was issued by the Registrar of Companies on June 6, 1969. The assessee sold 27,162 shares of PPM to LNE (a company till then not incorporated) at Rs. 25 per share in May 1969. LNE, on June 7, 1969 after its incorporation, duly ratified the purchase of the said shares. Thereafter, a further lot of 12,000 shares of PPM was sold by the assessee to LNE at Rs. 25 per share. The assessee suffered a loss at Rs. 7 per share on the sale of the said 39,162 shares to the LNE. The loss claimed on the sale of the said shares was disallowed by the ITO who held that the LNE was a dummy of the assessee and that the transactions of the sale of shares to LNE was unreal and sham. The AAC came to the conclusion that the loss could not be allowed as a business loss and that the acquisition of the shares by the assessee was on capital account and as such the loss suffered by it could only be allowed as a short-term capital loss. As regards the interest paid, the AAC held that the interest could not be allowed as a deduction under the head "Other sources" since no income from the shares had accrued although the assessee was having income from director's fee, etc., under the head "Other sources". The AAC, however, held that the interest paid by the assessee could be added to the cost of the said shares and the short-term capital loss was to be computed accordingly. The Tribunal upheld the finding of the AAC. The Tribunal further found that the market price of the shares of PPM was Rs. 25 only as recorded in the order of the AAC and that no material had been adduced on behalf of the Department to show that the market rate was higher. On a reference to the High Court it was held that pre-incorporation contracts, as a general rule, cannot bind a company. Even assuming that the contract was valid, the facts and surrounding circumstances deserved a closer look. The assessee had acquired the controlling interest in PPM along with his wife, nephew and other family members. Out of the t6tal number of shares of 1,00,360, the Kerala Government had been holding 12,000 shares and the rest were held by the assessee along with his relations and family members. Two companies were formed by the assessee; one was LNE, where he and his nephew, M were the shareholders and directors. The other company was K, where the shareholders and directors were the assessee and his wife. The assessee, his wife and his nephew were also directors of PPM. By the transfer of the shares by the assessee to LNE and K, the transferor did not lose his control either over the transferred shares or the controlled company, viz., PPM. The assessee had got the major shares in these two companies where the other shareholders were respectively his nephew and wife. The transfer of the shares did not appear to be a sale in distress. It was not made either to meet any other financial exigencies faced by the transferor. The transaction took place without any ready cash and the entire sale was made on credit. There was no positive proof that the purchasing company had sufficient funds to acquire 39,162 shares for a total consideration of Rs. 9,79,000. There was no indication as to how the consideration would be met by the purchasing company, i.e., LNE. The appellate authorities considered this to be a normal transaction without going through this vital aspect of the issue. The assessee was incurring huge interest on borrowed moneys allegedly utilised for the acquisition of the very shares and in the relevant year such interest amounted to Rs. 1,46,501. This was not normal business-like behaviour. By the sale, the assessee did not lose any rights or interest in the shares or in the controlled company, PPM. It was possible because the transfer was a mere paper transfer having no impact on the real ownership of the asset being the shares and on the power of exercising control over PPM. A paper loss was created by a make-believe sale at Rs. 7 per share, the total loss being Rs. 3,00,311 in the deals. The timing of the transaction was also significant. The assessment year was 1970-71 and the accounts of the assessee ended in July 1969. The papers for the formation of the company, LNE were submitted some time in March 1969, and there could be no certainty as to when the certificate of registration would be granted by the Registrar of Companies. To complete the transaction before the close of the financial year, it was necessary to have the contemplated paper loss of Rs. 3,00,311 and the shares were, therefore, purchased in the name of the company on May 20, so that it could not be too close to the year of closing. The certificate of registration of LNE had, however, been issued on June 6, 1969. The assessee was holding the shares as his investment portfolio, more particularly for controlling interest, and the loss from the transfer of such shares could not but be a capital loss. This loss had formed a cushion against the future gain, capable of being carried forward and set off against the future capital gain. Though a paper loss, it had got a far-reaching effect on the tax liability in future years of the transferor. The facts obtaining in the present circumstances were not rightly appraised and the proper inferences drawn. The transaction of sale of snares were not genuine. The loss of Rs. 3,00,311 could not be allowed. It was further held that it is well-settled that an allowance for deduction can be upheld on a ground other than that on which it was allowed by the Tribunal. The sum on account of interest was allowable as deduction under the head "Other sources".
6.3 A close study of the case laws relied upon by the learned counsel as also by the learned Departmental Representative would show that the question as to whether the loss is incidental to the operation of business is a question to be decided on the facts of each case. The undisputed facts in the present case are that the auction of the plot by DDA took place on 12-3-1982, that the assessee-firm made payment of the amount, claimed as loss, on the same date and is also alleged to have applied for the booking of space in the proposed building on the same date - as is mentioned in the agreement placed at page 2 of the paper book. It is also clear from the copy of the petition filed by M/s. Pragati Construction Co. (P.) Ltd. before the High Court of Delhi that the bid was accepted by the DDA on 30-3-1982. It is also clear from the said petition that the control drawings were given to the said company on 11-5-1982, where after the company discovered error in the control drawings which led to the dispute with the DDA and the filing of the said petition. The assessee-firm entered into an agreement with the said company on 2-6-1982, as is evident from the copy of the agreement placed at pages 2 to 6 of the paper book. In view of the foregoing facts, we find force in the arguments of the learned Departmental Representative that no application for booking of space in the proposed building could have been made on the date of auction of the plot itself, more so before the receipt of control drawings from the DDA by the said company and in view of the subsequent dispute relating to the said control drawings. We also agree with the submissions of the learned Departmental Representative that it is highly improbable to determine the rate of Rs. 2,500 per sq. ft., as mentioned in the agreement, for the booking of the space before the acceptance of the bid by the DDA and the receipt of the control drawings from the DDA by the company. Further the agreement had been entered into on 2-6-1982, much after the date on which the said company wrote a letter to the Lt. Governor of Delhi on 17-5-1982 listing out in detail the flaws in the control drawings, which, according to the company, would hamper it in negotiating with prospective purchasers (reference para 16 of the petition, page 39 of the paper book). It is further observed that the amount paid by the assessee-firm to the said company for booking of the space exceeded the earnest money of 25% (Rs. 23.25 lakhs) of the total amount of Rs. 95 lakhs and the same was not in accordance with the mode of payment mentioned in the agreement. The case law relied upon by the learned counsel for the assessee is therefore, clearly distinguishable when applied to the aforesaid facts of the present case, and the same is of no help to the assessee, rather the cases mentioned in paras 6.1-1 and 6.1-9 go against the assessee. We have also carefully considered the case law relied upon by the learned Departmental Representative and we find that the ratio laid down in the cases of Indequip Ltd. (supra) and L.N. Dalmia (supra) supports the case of the Department. In the background of these cases, we agree with the analysis of the facts of the case made by CIT(A) in paragraphs 15 and 16 of his order that the three Directors of M/s. Pragati Construction Co. (P.) Ltd. to whom the advances in question were made are associated with the assessee-firm; that normally the assessee-firm would not have advanced such a considerable amount of money to any other party which had its own capital of only Rs. 24,000 and that the assessee-firm do not appear to have acted with business prudence as it did not take into consideration security and safety of the amount advanced for booking of space with the said company. In view of the foregoing facts and circumstances of the case, we hold that the amount advanced by the assessee to the sister-concern for booking of space in the proposed building was not in the nature of trading advance in the ordinary course of business. Hence, the loss of Rs. 31,05,000 as claimed by the assessee-firm is not allowable as a trading loss and ground No. 2 is rejected accordingly.
7. In ground No. 4, the assessee has alleged that the learned CIT(A) has not disposed of the ground of appeal regarding interest paid of Rs. 46,133. It is observed from ground No. 2 of the grounds of appeal filed before the CIT(A) that the assessee had claimed relief on account of disallowance of interest of Rs. 46,133 as made by the Assessing Officer. In the circumstances this matter is restored to the file of the CIT(A) who may deal with this matter after giving a reasonable opportunity to the assessee of being heard.
8. In the result, the appeal is allowed in part for statistical purposes.