M. S. H. QURSSHI, J.-This is a certificated appeal from the judgment of High Court dated 10-9-1969, whereby the question referred to it by the Income-tax Tribunal, Lahore, under section 66 (1) of the Income-tax Act, 1922, was answered against the appellant. Civil Petition No. 387 of 1969 earlier filed stands merged in this appeal and is disposed of as such.
2. The appellant, Messrs Roberts Cotton Association Ltd., is a Private Limited Company consisting of the following seven shareholders: -
(1) Sir William Roberts,
(2) Mr. T. J. Roberts,
(3) Lady Roberts,
(4) Mrs. M. M. Leoh
(5) Mr. M. E. Roberts,
(6) Mrs. T. J. Roberts, and
(7) Roberts Agricultural Research Trust.
The appellant itself was a member of a group called the Roberts Group which comprised
(1) Sir William Roberts,
(2) Mr. T. J. Roberts,
(3) Lady Roberts,
(4) Mrs. M. M. Lech,
(5) Mrs. M. E. Roberts,
(6) Roberts Cotton Association Ltd. (appellant),
(7) Sir William Roberts (M.A.) Ltd.,
(8) Mrs. T. J. Roberts.
This Group and the Ali Group comprising Syed Maratab Ali and certain members of his family held the major and controlling shares in the Abbasi Textile Mills Ltd.
3. The appellant used to supply cotton to Messrs Abbasi Textile Mills under a running account which showed a balance due from the said Mill at Rs. 14,80,943 on 15-1-1957. On that date the Roberts Group entered into an agreement with the Ali Group, whereby the former severed their connec-- tions with the Mill and transferred all their shares of and interest in the Mill in favour of the latter Group and agreed to sell their shares of the Mill at 70 % of the face value. Although the Mill itself was not a party to this agreement but it was also agreed by clause (13) of the agreement that the appellant's claim of Rs. 14,80,943, would be purchased by the Ali Group for Rs. 10,35,061 and the amount would be paid by Ali Group for full settlement. By this sale, therefore, the appellant suffered a loss of Rs. 4,45,882 In its tax return of income for the assessment year 1958-59, the appellant claimed benefit of this amount as a bad debt having been written off. The claim was disallowed by the Income-tax Officer who was not satisfied that it was a bad debt within the meaning of section 10 (2) (xi) of the Income-tax Act. In appeal, which was dismissed, the Appellate Assistant Commissioner observed that "This is a device for claiming a set-off from the taxable income of the appellant an amount which would otherwise not be available to the appellant because as a matter of fact the appellant had short received this amount in respect of the capital invested in the said Company in the shape of shares. The form of transaction was twisted in order to enable the appellant to claim a set-off as if the amount in question was received from Abbasi Textile Mills". In further appeal, the Income-tax Appellate Tribunal expressed the view that the loss was not on account of the Mill's inability to pay because the Mill was "still carrying on as flourishing a business as ever", that there was no material of any kind on record to show that the assessee at any stage pressed for payment of the outstanding dues or taken legal steps for recovery of the full amount from the Mill, and that no remission had been allowed to the Mill which as a result of the compromise had accepted the liability of payment of the full amount to Ali Group. The Tribunal also considered the contention that the short receipt constituted trading loss. It held that the loss was neither a bad debt nor a trading loss but that it was "a loss which has occurred in the liquidation of holdings and is of a capital nature". The Tribunal, therefore, dismissed the appeal.
However, at the instance of the appellant, it referred the following question to the High Court : "Whether on the facts and circumstances of the case, the Tribunal was right in holding that the disputed loss of Rs. 4,45,882 was neither a bad debt nor a trading loss."
4. Counsel appearing for the appellant before the High Court conceded that the claim as expressed by the assessee in its income-tax returned before the Income-tax Officer was a bad debt under section 10 (2) (xi). The High Court, accordingly, examined the matter in the light of that provision but rejected the contention. Nevertheless; the High Court proceeded to examine the further contention that the amount constituted trading or business loss but rejected the same, too, for the reason that the appellant had not claimed it as such as per its income-tax return, that 'the loss had not been sustained by the appellant on account of any deal with the debtor, that the loss had been voluntarily incurred in order to grant certain accommodations to Ali Group and that the short receipt was not incidental to business of the assessee with the Mill which must necessarily be something which came upon the assessee involuntarily in the incidence of its business. The High Court also examined the contention that the loss was covered by the provision of clause (xv) of subsection (2) of section 10, but finding no circumstance to show how the appellant had benefited by the transaction, held that the transaction, if at all, only benefited Ali Group and as such was not an act of good management of business. The High Court further observed that as sale of actionable claims had not been a business of the assessee carried out during the year of the assessm ent, the appellant had made this "colourable entry" in order to claim an allowance which was not otherwise admissible under the law. The High Court thus returned the answer to the question in the affirmative.
5. Three alternative submissions have been made before us, that is-
(1) the amount constituted bad and doubtful debt under sec--tion l0 (2) (xv)
(2) the amount was expenditure laid out wholly and exclusively for the purpose of the business of the appellant under section 10 (2) (xv), and
(3) in any case, the amount constituted trading loss under section 10 (1).
On the first point, it is submitted that it was obvious from the agree--ment that the Mill was running at a loss, for which reason Roberts Group had decided to sever their connections with the Mill and as the extent of irrecoverability had been put at the same rate as the fall in the value of the shares, i.e., 30 %., the loss did reflect a bad debt and at least a doubtful debt which ought to have been allowed. On the second point, it is urged that an expenditure incurred or relinquishment of a claim made for the purpose of getting rid of inconvenient business association is an expense allowable under section 10 (2) (xv), that the appellant was running at a loss and was in need of ready cash and as such had to make the deal in order to secure early collec--tion and effect a severance of inconvenient business relationship and for avoiding future losses in its dealing with the Mill and that, therefore, the short receipt was allowable. For the third point, it is urged that the loss related to trading debt and reflected a shortfall in the collection of that debt and that the transaction being forced by the necessity of collecting a trading debt either by direct collection or by sale of the debt is to all intents and purposes a transaction incidental to the business and as such the short receipt was a trading loss.
6. We have considered these submissions but are not persuaded to agree. The trading was between the appellant-Company, i.e., Robert Cotton Association Ltd. And the Mill but neither of them was directly party to the agreement which had been contracted by two different legal entities, namely, the Roberts Group and the Ali Group. The agreement had been actuated primarily by a desire on the part of the Roberts Group to sever its connec--tions with the Mill. The Mill, of course, could not be concerned with the sale of its shares by one shareholder to another. But it was concerned as far as its liability to the appellant on account of supply of cotton was involved. Even for this, the Mill was not made a party to the agreement. The actionable claim of the appellant against the Mill was thus sold to the Ali Group at a discount. There is no evidence, as pointed out by the Assessing Authority, to show that the Mill had refused or expressed its inability to pay the debt.
Merely because the Mill was running at a loss would not justify the assumption that it was unable to discharge its liability. To all appear--ance, the amount had been voluntarily foregone not in favour of the Mill but of the Ali Group. Even at our asking, learned counsel has been unable to point out any material to show that the Mill had not discharged its aforesaid liability in full to the Ali Group after the agreement. If Ali Group could realize the amount of the debt in full from the Mill, then it was they who were to benefit from the deal.
7. All we have to see is whether on the basis of the material before it, one High Court was justified in reaching the conclusions as it did. We are satisfied that the High Court was.
8. The appeal, therefore, fails and is dismissed with costs. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.