1. SAEEDUZZAMAN SIDDIQUI, J.--The following questions have been referred to us for decision under section 136(2) of the Income-tax Ordinance, 1979:-- "(1) Whether, on the facts and in the circumstances of the case, the Income tax Appellate Tribunal was justified in directing the Income-tax Office to allow a sum of Rs. 13,90,230 as bad debts under section 10(2) (xi) of the Income-tax Act?
(2) Whether, on the facts and in the circumstances of the case, the assessee-- company is an investment company?
(3) Whether, on the facts and in the circumstances of the case, the advances to M/s. National Steel Mills and M/s. Motor Corporation of Pakistan were made during the course of carrying out the assessee's business within the meaning of section 10 of the Income-tax Act?
(4) Whether, on the facts and in the circumstances of the case, the advances made to M/s. National Steel Mills and M/s. Motor Corporation of Pakistan were a revenue expenditure?"
2. The facts as stated in the reference are as follows:-- The respondent/assessee a primate limited company, during the year 1973-74 claimed a sum of Rs. 20,17,543 under the head "bad debts". On scrutiny of the accounts the Assessing Officer found that out of the above stated amount a sum of Rs. 5;07,000 was advanced to M/s. National Steel Mills of Pakistan, while another sum of Rs. 8,20,230 was advanced to M/s. Motor Corporation of Pakistan Ltd. The Government, however, did not grant permission to the aforementioned two firms to commence business and as such the assessee was not able to recover the advances made to them. The Assessing Officer disallowed the claim for bad debts in respect of both the amounts on the ground that these advances were made in the nature of capital expenditure. On appeal before the Income-tax Appellate Tribunal, the case was remanded back to the Assessing Officer with the direction to enquire into as to whether the advances were made to the extent claimed by the assessee and whether there was any hope of recovery of these amounts. The Income-tax Officer again disallowed claim for the bad debts relating to the amounts mentioned above. However, in appeal the Appellate Assistant Commissioner held that on the basis of the observation of the Tribunal in the remand order the abovementioned two amounts were advanced in connection with the business of the assessee and as the Assessing Officer had found that there was no hope of recovery of these amounts, he allowed the claim of bad debts made by the assessee. The department feeling aggrieved by the order of the Assistant Appellate Commissioner filed an appeal before the Income-tax Appellate Tribunal, which was rejected. The department thereafter applied to the Appellate Tribunal for referring the above question to this Court under section 136(2) of Income-tax Ordinance, 1979 but it refused to refer the same as in the opinion of the Tribunal no question of law arose on the facts of the case. The department accordingly filed the above reference directly in this Court.
3. Mr. Shaikh Haider, learned counsel for the department contended before us that the investments made by the assessee/respondent were in the nature of capital expenditure and as such these amounts could not be adjusted as bad debts. It is also contended by the learned counsel that the respondent /assessee was not an investment company and as such the advances made by it to M/s. National Steel Mills of Pakistan and M/s. Motor Corporation of Pakistan could not be treated as advances made in connection with the business of the company.
4. The learned counsel for the assessee/respondent on the other hand contended that the claim of the assessee/respondent was disallowed solely on the ground that these expenditures were made in the nature of `capital expenditure; It is urged by the learned counsel for the assessee/respondent that this controversy stood concluded by the order of remand dated 11-5- 1978 passed by the Income-tax Appellate Tribunal, wherein, the above advances were held to have been made by the assessee/respondent in connection with its business and as such the assessee could legally claim their adjustment under section 10(2)(xi) of Act of 1922 as bad debts. It is accordingly contended by the learned counsel for the assessee/respondent that as the above finding by the Tribunal was not challenged by the department, it attained finality and as such the Assessing Officer could not again disallow the claim for the `bad debts' on the ground that these expenses were made by the assessee in the nature of `capital expenditure'.
5. After hearing the learned counsel for the parties we are of the view that the contention of the learned counsel for the assessee/respondent is not without force. The order of remand dated 11-5- 1978 clearly indicates that it was agitated before the Appellate Tribunal on behalf of the department that the above referred two amounts which the assessee claimed as `bad debts' were not in the nature of `revenue expenditure' but were `capital investment'.
6. This contention of the department was disposed of by the Income-tax Appellate Tribunal as follows:-- "Before us, it was, inter alia, urged that, the assessee-company intended to promote two concerns, named M/s. National Steel Mills of Pakistan and M/s. Motor Corporation of Pakistan Limited, and incurred a lot of expenses of preliminary nature, on the feasibility plans, lay-out, purchases of plot etc. For reasons, which it is not necessary for us, to examine in this case, the Government did not sanction the installation of these two industries and all the expenses incurred in that behalf, became a total loss. Admittedly, these advances were made from time to time, in the past, and it was in this year, when the assessee lost all hope of starting those two concerns, and claimed the amounts as bad debts; in the past, they had been making efforts to start the business, and to obtain the necessary sanction from the Government. One of the objects of the assessee-company being promotion of new industrial concerns, there was nothing wrong or surprising, if the assessee- company invested its monies in promoting two new industrial concerns. The claims of bad debts required consideration both on questions of fact as well as law. The assessee, who made a claim of bad debts, were under an obligation to establish firstly that, debts had been advanced for the purpose of their business, and that, they had become doubtful, or bad. There was no doubt that, the assessee-company had a right to promote and manage new business or industrial concerns, but the Assessing Officer had also a right and responsibility to examine the facts, including the accounts to find out if the amounts claimed were, in fact, advanced to those concerns. If they were advanced, there was no doubt that they were advanced for the purpose of the assessee's business it was one of the objects of this assessee to promote new ventures. Nor, was the Assessing Officer right when he observed that, the expenses were of capital nature The expenses, incurred, were of course, initial expenses, in the nature of capital investment, but so far as those two concerns were concerned, they were not of capital nature in the case of this as assessee-company, who advanced loans to those two concerns, so that they may start production. That objection would not apply to the assessee-company. Since the Assessing Officer failed to examine the claim, as it ought to have been examined, the claim to the extent it was disallowed required re-examination. It will serve no useful purpose to send back the case to the learned Appellate Assistant Commissioner, who omitted to consider it, in the first appeal. It was essentially a question of fact as to whether advances were made to the extent claimed by the assessee and whether there was any hope of recovery. This question can be better examined by the Assessing officer. We, therefore, remand the case to the Assessing Officer concerned with a direction to re-examine the claim of bad debts, in accordance with law and in the light of observations made above, and then dispose of it, in accordance with law."
7. From the above findings of the Tribunal, it is quite clear that the contention of the department that the bad debts claimed by the assessee were incurred in the nature of capital expenditure, and as such the same could not be adjusted under section 10(2) (xi) of Act of 1922, was rejected and these advances were held to have been made by the assessee/respondent in connection with its business. However, the case was remanded back by the Appellate Tribunal to the Assessing Officer as the limited question, namely, whether the advances were in fact made by the assessee to the extent of the `bad debts' claimed by it and further whether there was any possibility of recovery of these amounts. It is not disputed before us that the department did not challenge the above finding of the Appellate Tribunal, recorded in its order dated 11-5-1978, and as such the same attained finality. The department, therefore could not agitate again that the `bad debts' claimed by the assessee was in the nature of `capital expenditure' in the appeal filed by it against the order of Assistant Appellate Commissioner. The question, whether the above amount claimed by the assessee as `bad debts' was incurred by it as an expenditure of capital nature or it was the advances made ill connection with the business of the assessee was no more a controversy in the case in view of the order of Appellate Tribunal dated 11-5-1978. It is quite clear from the subsequent orders of the I.T.O. And of the Assistant Appellate Commissioner that the advances which were claimed as `bad debts' by they assessee were in fact made to M/s. National Steel Mills of Pakistan and M/s. Motor Corporation of Pakistan Limited to the extent claimed by the assessee and that there was no possibility for recovery of these amounts in the circumstances of the case. In these circumstances, the Income-tax Appellate Tribunal was justified in directing the Income-tax Officer to allow a sum of Rs. 13,19,230 as bad debts under section 10(2)(xi) of the Income-tax Act, 1922. We accordingly answer the questions Nos. 1 and 3 in affirmative while questions Nos. 2 and 4 do not arise on the facts discussed above. There will be no order as to the costs.