INDORE MALWA UNITED MILLS LTD., INDORE versus STATE OF MADHYA BHARAT AND OTHERS

Citation: [1965] 1 S.C.R. 559 · Decided: 01-10-1964 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
c 
D 
E 
F 
G 
H 
INDORE MALWA UNITED MILLS LTD., INDORE 
v. 
STATE OF MADHYA BHARAT AND OTHERS 
October 1, 1964 
(K. SUBBA RAo, 1. C. SHAH AND S. M. SIKRI, 11.) 
55~ 
·Indore Industrial Tax Rules, 1927, s. 3-Large amounts borrowed by 
Managing Agents from outsiders on behalf of the company and invested 
with themselves-Managing Agents authorised by c</mpany resolution to 
do so--Debt not paid back by Managing Agems claimed as bad debt by 
company-Whether allowable as trade loss-Indian Income-tax Act, 1922, 
s. 10(2). 
The appellant company which carried on the business of manufacturing 
textiles was allowed by its Memorandum of Association to borrow money 
for the purpose of its business and to invest it inter alia in loans to others .. 
Its Board of Directors passed a resolution to the effect that the company 
would invest its surplus funds in current account with the Managing Agents 
on interest. The Managing Agents borrowed large sums from outsiders, 
entered thl' borrowings in the books of the company and invested large 
sum with themselves in current account. 
Before the Annual General 
Meeting they would bring back the money into the company's accounts to 
satisfy the General Body that they had paid off their debts, and afterwards 
would again withdraw large sums for their own purposes. In 1933 the 
Managing Agents' company went into liquidation and a large debt was 
due from them to the company. In 1941 the debt having been found to 
be irrecoverable, the appellant company claimed it as a bad debt and 
trading loss for the purpose of computing its income under the Indore 
Industrial Tax Rules, 1927, the provisions of which, in 'this regard, were 
similar to those of the Indian Income-tax Act, 1922. The assessing authority 
did not allow the claim, nor did the Appellate Authority. The High Court 
also held that the losses incurred by the company were really dehors the 
business of the company. The company thereupon appealed to the Supreme 
Court. 
It was contended on behalf of the appellant that the employment of the 
Managing Agents was incidental to the carrying on of the appellant's busi-
ness,· that, as the Managing Agents had the power to borrow funds for the 
appellant company and invest the surplus in loans to themselves, the loss 
caused by such investment was also incidental to the carrying on the appel· 
!ant's business, and therefore the said loss was deductible in arri\ing at the 
trading profits of the company. 
HELD : The appeal must be allowed. 
The Man~ging Agents had borrowed the money from outsiders and 
invested it with themselves in accordance with the company's resolution. 
The money borrowed from outsiders became part of the funds of the 
company, and the creditors could have sued the company for it. Similarly 
the company could have sued the Managing Agents for the sums invested 
with them. Both the borrowing by the company and the investment with 
the Managing Agents created legal obligations. Appropriate entries were 
made in the company's accounts in accordance with commercial pracfice. 
The amounts invested with the Mana(ling A:gents were entered as debts 
which became bad debts on becoming irrecoverable. In the circumstances 
the loss arising from the bad debts was incidental to the appellant's business 
560 
SUPREME 
COCRT 
REPORTS 
[ 1965] I S.C.R. 
and deductible in computing the profits of the appellant company for the 
A 
assessment year in question. (563 F-H; 564 B-EJ. 
Badridas Daga v. Commissioner of Income-tax, [1959] S.C.R. 690 and 
Commissioner of Income-tax, U.P. v. Mis. Nainllal Bank Ltd., [1965] 
I S.C.R. 340. 
CIVIL APPELLATE JURISDICTION: 
Civil Appeal No. 1013 
of 1963. 
B 
Appeal from the judgment dated November 9, 1960, of the 
Madhya Pradesh High Court in Civil Miscellaneous Appeal No. 
40 of 1955. 
A. V. Viswanatha Sastri and Rameshwar Nath, for the appel-
1~. 
c 
B. Sen, Balwan Singh Johar and /. N. Shroff, for the respon-
dents. 
The J udgmcnt of the Court was delivered by 
Subba Rao J. 
This appeal by certificate preferred against 
D 
the order of the High Court of Madhya Pradesh. Indore Bench, 
raises the question whether an item of Rs. 42,63,090-14-7 should 
have been allowed as a trading loss in computing the profits of 
the appellant-company under s. 3 of the Indore Industrial Tax 
Rules, 1927. 
E 
The facts may be briefly stated. The appellant, Indore Malwa 
United Mills Ltd., is a public limited company incorporated and 
registered under the Indor

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