Aspinwall and Co. Ltd. Vs. Inspecting Assistant - Court Judgment

Excerpt:
of these three appeals, the first two are by m/s. aspinwall & co. ltd., and the last one is by m/s. aspinwall & co. (travancore) ltd. as common issues are involved a consolidated order is passed for the sake of convenience.2. m/s. mambad rubber mfg. co. ltd., was one of the companies promoted by the appellants. it was in incorporated on 21st dec., 1973 with a subscribed capital of rs. 4,50,770, made up of 45,297 equity shares of rs. 10 each. m/s. aspinwall & co. (travancore) also held 10,000 equity shares of rs. 10 each.3. m/s. aspinwall & co. ltd. had to receive rs. 9,86,600 from m/s.mambad rubber mfg. co. ltd., as follows : 2. amounts paid to various parties in settlement of bills raised by them for goods and services on account of mambad mambad rubber mfg. co. ltd., was undergoing losses. the accumulated losses as on 31st march, 1979 stood at rs. 17,06,156. canara bank which had granted loans to mambad rubber mfg. co. ltd., was insisting that its principal debtor should not discharge the liabilities to others before the discharge of liabilities to it. as a result, there was a subordination agreement with canara bank that the appellants will not get the repayment of the amounts due to them from mambad rubber mfg.co. ltd. until the loans to canara bank are cleared. in the circumstances, m/s. aspinwall & co. ltd., converted the outstanding amount of rs. 9,86,000 into equity shares of the face value of rs. 10 each on 26th nov., 1979. thus m/s. aspinwall & co. ltd., came to possess 1,08,660 shares of rs. 10 each as follows : all the shares were sold in the market to another group of persons on 27th dec., 1979 including the shares that, were allotted on 26th nov., 1979 on the conversion of the outstanding balances into shares.similarly, m/s. aspinwall & co. (trav.) ltd., had to recover the sum of rs. 2,00,900 as follows : mambad rubber mfg. co. ltd. allotted 2090 shares of rs. 10 each to m/s.aspinwall & co. ltd. in settlement of the amount due to it on 10th march, 1980. the allotments are supported by the resolution of the board of directors and entires in the register of members. on these points there is no dispute. m/s. aspinwall & co. (trav.) ltd., sold the shares on 16th feb., 1983 to patrakila tea industries ltd., calcutta-1.thus, the appellants had certain amounts to be recovered from mambad rubber mfg. co. ltd. both the appellants converted their outstandings into equity shares of rs. 10 each of the debtor company. m/s. aspinwall & co. ltd., sold the shares on 27th dec., 1979 which shares were acquired on 26th nov., 1979 and m/s. aspinwall & co. (trav.) ltd., sold the shares on 16th feb., 1982 which shares were acquired on 10th march, 1980.the appellants had sold the shares at 26 paise per share. m/s.aspinwall & co. ltd., computed the loss on the sale of shares as follows : m/s. aspinwall & co. (trav.) ltd., computed the loss on sale of shares as follows : the iac (asst.) rejected the claim for deduction of the capital loss for the following reasons : (b) the assessee had intimate knowledge of the state of affairs of mambad rubber manufacturing co. over a long period of time and had in fact intimate connections with the same so much so that the assessee was in the habit of setting bills raised by others for goods and services on mambad. the assessee was also the promoter and one of its directors and several of its employees were shareholders of mambad.besides, the aspinwall group of companies had sizable shareholdings in mambad, as will be evident from the annexure to this order.(c) further by their own admission the break-up value of the shares of mambad as on the date of allotment was nil.(d) there was no compulsion, legal or otherwise for the assessee to accept the offer of allotment of shares by mambad at face value which was far above the real worth of the shares.(e) the shares were held barely for a month viz., from 26th nov., 1979 to 27th dec., 1979. as conceded by the assessee in their letter dt.18th feb., 1981 nothing transpired, in the interregnum which could have a bearing on the value of shares as was indicated by the subsequent sale at a throw away price.(f) the sales of the shares was through established share brokers.therefore, it would appear that the sale price of rs. 25,652 which the assessee realised is the real worth of the shares as on the date of the sale. it is noteworthy that even for realising the sale price of rs. 25,652 the assessee had to incur by way of brokerage a sum of rs. 1,973. the circumstances leading to the acceptance of the allotment of shares, and the subsequent disposal within, a month do not appear to have been motivated by normal business considerations. going by the assessees explanation it would appear that the company was prepared to pay rs. 10 for a share whose break-up value by their own admission was nil and which was able to fetch on 26 paise per share within a month of its allotment, without any significant factors contributing to or adversely affecting the price of the shares. this was certainly not promoted by any business consideration." on appeal, the cit(a) held that the conversion of the outstandings into equity shares and their subsequent sales would attract the ratio of the decision of the supreme court in the case of mcdowell & co. ltd. vs.cto (1985) 154 itr 148 (sc). he affirmed the view of the learned iac (asst.) that no prudent business man would enter into transactions of the nature entered into by the appellants. thus, he sustained the disallowance. the appellant are aggrieved.5. we have heard rival submissions at great length and perused the records. in our considered opinion it cannot be said that the transaction was not done at arms length. in the case of m/s. aspinwall & co. ltd., 98,660 shares were sold through m/s. chitra & co. and the brokers notes (copy of which is at page 10 of the paper book) were already on the records of the assessing officer. in the case of m/s.aspinwall & co. (trav.) ltd., the shares were sold directly to patrika tea industries ltd., calcutta. while the former appellant sold the shares within a month of their acquisition, the latter appellant sold the shares after an interval of nearly two years. the sale was for consideration and was evidenced by duly executed transfer deeds. mambad rubber co. had also acknowledged the transfer of shares to the other parties by these two appellants and the names of the new shareholders have been entered in its register of members. in the facts of the case, it cannot be said that the sale of shares was a share transaction. the learned iac (asst.) does not dispute the fact that mambad rubber mfg.co. ltd., was sustaining losses year after year. at page 17 of her order, it has been observed that admittedly the company (mambad) had not been fairing well and had been incurring substantial losses for a considerable period of time. it would appear that efforts to left mambad from this plight did not seem to bear fruit". this is the position in which the principal debtor company was placed. it is against this background that the action of the appellant companies should be appreciated. substantial amounts were due to the appellant companies from mambad rubber mfg. co. ltd., which in turn had large liabilities to bank of rs. 16,64,730. it had accumulated loss of about rs. 17,06,156. the share capital including reserves and surplus amounted to only rs. 12,88,205. therefore, the value of its share was practically nil if ascertained on breakup value method. since the company did not have surplus and had not declared any dividend, the value of shares on yield basis also will be nil. thus, the value of the shares has been practically eroded by accumulated losses. the bank which had advanced loans to mambad rubber mfg. co. ltd., was insisting for repayment of the loans end stipulating conditions that unless its debts are cleared the company should not pay off any other liabilities to the shareholders. no doubt, the appellants had to recover substantial sums from mambad rubber mfg. co. ltd. in view of the subordination agreement with canara bank and in the light of the serious erosion of capital on account of accumulated loss the appellants had every reason to believe that the amounts due to them from mambad rubber mfg. co. ltd., were incapable of being recovered.some of the shareholders of the appellant companies were also shareholders in the principal debtor company and were associated with its management and, therefore, the appellants had access to insider information about the principal debtor company and, therefore, they had every reason to salvage their position in the best possible manner.further, it is stated before us that there were no takers in the market for the outright purchase of the assets and liabilities of mambad rubber mfg. co. ltd. thus, the appellants were placed between scylla and charybdis. none was prepared to purchase the company lock stock and barrel with all its assets and liabilities. as the value of the shares was practically nil and as the substantial amount of outstanding was difficult to realise the appellants hit upon a strategy of salvaging their position by converting the outstandings into share capital for eventual sale to outsiders. while there may not be any purchase for all the assets and liabilities of a sick unit, it may be what some people take over the sick unit by purchasing shares at below par value. this is that has happened. another group of persons have purchased the shares of appellants at below the par value and thus entered into the management as would be evident from the list of shareholders furnished before the authorities after the transfer of shares. this method of take over of sick units is becoming popular in the commercial world and we take judicial notice of the same. the ultimate take over of sick mambad rubber mfg. co. ltd., by another group has taken place not immediately; but only after the transfer of shares not only by the appellants but also by other shareholders and that too over the years.therefore, it cannot be said that there was a design or motive for tax evasion on the part of the appellants. the motive was to minimise the loss and salvage the investment as far as practicable. hence, the ratio laid down by the supreme court in the case of mcdowell & co. ltd. vs.cto (supra) is not attracted to the facts of the case. the issue can be looked at from a different angle. it is on record that mambad rubber mfg. co. ltd., is a sick unit sustaining huge losses and efforts to lift it from the mess in which it found itself did not bear fruit.therefore, the appellants could have claimed the substantial amounts lying with the debtor company as bad debts since the same was incapable of being recovered. if such a claim had been made, the tax authorities should have considered the claim and in the wake of their findings it is reasonable to presume that the amount may have to be allowed as bad debt. on the other hand, the appellants have chosen to adopt a different method whereby they were able to salvage atleast a part of their investments in the form of share capital and other advances.because of the latter strategy it is the revenue that has gained in that it was not called upon to allow the entire amount of outstandings as bad debt. the appellants claim in the realm of capital loss cannot, therefore be, considered as a ruse or device to hoodwink the tax gatherer. in this context it may not be out of place to refer to the appellate order of the cgt(a) in respect of the very same transaction in the case of m/s. aspinwall & co. ltd. the revenue had attempted to bring to gift tax the difference in the face value of rs. 9,86,600 which represented the amount due to the appellant from mambad rubber mfg. co. ltd. and the amount of rs. 25,000 realised on the sale of shares. the difference was construed by gto as a gift made by the appellant company on favour of mambad rubber mfg. co. ltd. on appeal, the learned cgt(a) in gt-1/oce/cit/82-83 dt. 19th march, 1983 has held as follows : "the appellant found that the prospect of recovering that amount was not at all bright. it was therefore decided to accept shares of the face value of an equal amount knowing fully well that those shares did not command even a fraction of its face value as market value. the idea in accepting the shares was obviously to sell them immediately thereafter, realise whatever amount from such sale and then write off the balance as a loss. there can be some difference of opinion about the manner in which the amounts have been squared up by the appellant.but that has not made the transaction less genuine. when the appellant accepted the shares of mambad rubber mfg. company in full satisfaction of the amount due from that company in oct., 1979 it was common knowledge that the appellant was settling the affairs for a smaller amount and waiving the balance as that was the only way open to the appellant for bringing the transactions between them to an early end.such a settlement would have been considered to be a gift if the appellant were in a position to get the entire amount or a larger amount from mambad rubber mfg. co. and had settled the deal for a lesser amount. however, that was not the case here. thus, having regard to the facts and circumstances of the case, i have no hesitation to hold that the settlement of the dues between the appellant company and the mambad rubber mfg. co. ltd., by allotment of shares and the subsequent sale of those shares by the appellant company at a fraction of the face value does not result in any gift by the appellant company to the mambad rubber mfg. co.even under s. 4(1)(c) it would be a gift only if the settlement is not a bona fide settlement. in this case, i have already held that the settlement of the dues by accepting a lower amount in the form of shares was a bona fide settlement. if there is a transaction by which a lesser amount is accepted in place of a higher amount without any consideration, such a transaction would still be a gift under s.4(1)(a) if not 4(1)(c). this ia also not applicable in this case as the acceptance of a smaller amount was for valid consideration. in the circumstances, there is no question of bringing the transaction within the purview of gift either under s. 4(1)(a) or under s. 4(1)(c)." the decision of the cgt(a) has become final as the revenue did not appeal against the same. thus, it is that the transaction is a bona fide one and was for valid consideration. it cannot be viewed as a sham transaction. nor can it be viewed as a ruse or a device. when the outstandings were converted into shares what was a current asset was converted into a capital investment and when such investment was sold at below the cost of acquisition, capital loss resulted. as the assets were held for less than three years the same has to be considered as short-term capital loss. in this view of the matter, we set aside the order of the cit(a) and hold that the appellants would be entitled to deduction of capital loss.6. grounds nos. 2 and 3 in the grounds of appeal in ita no. 215 (coch)/87 are not pressed and as such they are dismissed.7. in ita no. 217(coch)/87 the first dispute is about the disallowance of bad debts in a sum of rs. 23,246. the debts were disallowed for the reason that they have become barred by limitation. the amount was by way of payments to customs and incidental services rendered by m/s.aspinwall & co. ltd., for and on behalf of gladstone lyall and company limited. it is not in dispute that charges for the services rendered were taken as income in the preceding year. gladstone lyall and co.ltd., did not pay the amount to the appellant. therefore, a suit was filed and the matter went to the high court of kerala at ernakulam.their lordships held that in the absence of any specific pleading that the payment was to be made after the performance of the contractual obligations, limitation would run as from the date on which the obligation was performed; therefore the suit was barred by limitation and hence the amount cannot be recovered. the decision was given on 23rd oct., 1982. the learned iac (asst.) and the cit(a) were of the view that as the suit was barred by limitation, the appellant cannot claim the same as bad debt. we fail to understand this approach. the appellants right to recover the amount was negatived by the high court when it held that the period of limitation must start running from the date of performance of the obligation and not from the date on which the bills and other documents were sent to the defendant. such a declaration was made by the high court by its judgment only on 23rd oct., 1982 which fell within the previous year ending on 31st dec., 1982. till then the appellant had hopes of recovering the amount. those hopes were dashed to ground only when the judgment was declared by the high court. that happened in the relevant previous year. therefore, debt has become really bad in the year of account. the appellant is entitled to the deduction of the same. thus, we modify the order of the cit(a).8. the next point of dispute in ita no. 217(coch)/87 is whether the disallowance of foreign travel expenses to the extent of rs. 15,000 was justified.9. having heard rival submissions, we do not find any infirmity in the order of the cit(a). the total period of travel had extended to 38 days and the cit(a) has made only a nominal disallowance, we decline to interference.10. the last point in ita no. 217(coch)/87 is whether the assessee would be entitled to weighted deduction on a sum of rs. 15,000 disallowed as of personal use. as the expenditure itself was disallowed as relating to personal use there can be no question of allowing weighted deduction on the same. therefore, we sustain the order of the cit(a) on this point. we may add that there is no provision for making weighted disallowance.11. in ita no. 216(coch)/87, the grievance of the appellant is against the disallowance of the provision for leave with wages. the iac (asst.) disallowed a sum of rs. 35,666 being the provision made for leave with wages. the cit(a) sustained the disallowance for the reason that the issue had been decided against the assessee in the preceding year.however, he noticed that the iac (asst.) has rectified the assessment wherein the amount of rs. 29,078 was allowed on payment basis and this was upheld by the cit(a).12. we have heard rival submissions. since the revenue is allowing the expenditure on payment basis, we decline to interfere.13. the next point at dispute in ita no. 216(coch)/87 is about the disallowance of foreign travel expenses in a sum of rs. 41,091 as capital expenditure. the iac (asst.) made the disallowance of rs. 61.091 as being capital in nature. on appeal, the cit(a) at para 8 of his order held that the expenditure was a revenue expenditure, but then details were not available for a sum of rs. 20,000 and at the most only a sum of rs. 20,000 could be disallowed. having held thus, he directed the iac (asst.) to reduce the disallowance to rs. 41,091. obviously, this is a mistake apparent from record. the disallowance sustained by the cit(a) is only in a sum of rs. 20,000 for want of details and that alone will stand. to this extent, the order of the cit(a) is modified.14. another related issue in ita no. 216 (coch)/87 is whether the assessee would be entitled to weighted deduction under s. 35b of the it act, 1961, on the above sum of rs. 20,000. when the expenditure itself is disallowed and is not admitted for consideration, there can be no question of granting weighted deduction on a disallowed expenditure.this ground should fail.

Judgment:
Of these three appeals, the first two are by M/s. Aspinwall & Co. Ltd., and the last one is by M/s. Aspinwall & Co. (Travancore) Ltd. As common issues are involved a consolidated order is passed for the sake of convenience.

2. M/s. Mambad Rubber Mfg. Co. Ltd., was one of the companies promoted by the appellants. It was in incorporated on 21st Dec., 1973 with a subscribed capital of Rs. 4,50,770, made up of 45,297 equity shares of Rs. 10 each. M/s. Aspinwall & Co. (Travancore) also held 10,000 equity shares of Rs. 10 each.

3. M/s. Aspinwall & Co. Ltd. had to receive Rs. 9,86,600 from M/s.

Mambad Rubber Mfg. Co. Ltd., as follows : 2. Amounts paid to various parties in settlement of bills raised by them for goods and services on account of Mambad Mambad Rubber Mfg. Co. Ltd., was undergoing losses. The accumulated losses as on 31st March, 1979 stood at Rs. 17,06,156. Canara Bank which had granted loans to Mambad Rubber Mfg. Co. Ltd., was insisting that its principal debtor should not discharge the liabilities to others before the discharge of liabilities to it. As a result, there was a subordination agreement with Canara Bank that the appellants will not get the repayment of the amounts due to them from Mambad Rubber Mfg.

Co. Ltd. until the loans to Canara Bank are cleared. In the circumstances, M/s. Aspinwall & Co. Ltd., converted the outstanding amount of Rs. 9,86,000 into equity shares of the face value of Rs. 10 each on 26th Nov., 1979. Thus M/s. Aspinwall & Co. Ltd., came to possess 1,08,660 shares of Rs. 10 each as follows : All the shares were sold in the market to another group of persons on 27th Dec., 1979 including the shares that, were allotted on 26th Nov., 1979 on the conversion of the outstanding balances into shares.

Similarly, M/s. Aspinwall & Co. (Trav.) Ltd., had to recover the sum of Rs. 2,00,900 as follows : Mambad Rubber Mfg. Co. Ltd. allotted 2090 shares of Rs. 10 each to M/s.

Aspinwall & Co. Ltd. in settlement of the amount due to it on 10th March, 1980. The allotments are supported by the resolution of the Board of Directors and entires in the register of members. On these points there is no dispute. M/s. Aspinwall & Co. (Trav.) Ltd., sold the shares on 16th Feb., 1983 to Patrakila Tea Industries Ltd., Calcutta-1.

Thus, the appellants had certain amounts to be recovered from Mambad Rubber Mfg. Co. Ltd. Both the appellants converted their outstandings into equity shares of Rs. 10 each of the debtor company. M/s. Aspinwall & Co. Ltd., sold the shares on 27th Dec., 1979 which shares were acquired on 26th Nov., 1979 and M/s. Aspinwall & Co. (Trav.) Ltd., sold the shares on 16th Feb., 1982 which shares were acquired on 10th March, 1980.

The appellants had sold the shares at 26 paise per share. M/s.

Aspinwall & Co. Ltd., computed the loss on the sale of shares as follows : M/s. Aspinwall & Co. (Trav.) Ltd., computed the loss on sale of shares as follows : The IAC (Asst.) rejected the claim for deduction of the capital loss for the following reasons : (b) The assessee had intimate knowledge of the state of affairs of Mambad Rubber Manufacturing Co. over a long period of time and had in fact intimate connections with the same so much so that the assessee was in the habit of setting bills raised by others for goods and services on Mambad. The assessee was also the promoter and one of its directors and several of its employees were shareholders of Mambad.

Besides, the Aspinwall Group of Companies had sizable shareholdings in Mambad, as will be evident from the Annexure to this order.

(c) Further by their own admission the break-up value of the shares of Mambad as on the date of allotment was nil.

(d) There was no compulsion, legal or otherwise for the assessee to accept the offer of allotment of shares by Mambad at face value which was far above the real worth of the shares.

(e) The shares were held barely for a month viz., from 26th Nov., 1979 to 27th Dec., 1979. As conceded by the assessee in their letter dt.

18th Feb., 1981 nothing transpired, in the interregnum which could have a bearing on the value of shares as was indicated by the subsequent sale at a throw away price.

(f) The sales of the shares was through established share brokers.

Therefore, it would appear that the sale price of Rs. 25,652 which the assessee realised is the real worth of the shares as on the date of the sale. It is noteworthy that even for realising the sale price of Rs. 25,652 the assessee had to incur by way of brokerage a sum of Rs. 1,973. The circumstances leading to the acceptance of the allotment of shares, and the subsequent disposal within, a month do not appear to have been motivated by normal business considerations. Going by the assessees explanation it would appear that the company was prepared to pay Rs. 10 for a share whose break-up value by their own admission was Nil and which was able to fetch on 26 paise per share within a month of its allotment, without any significant factors contributing to or adversely affecting the price of the shares. This was certainly not promoted by any business consideration." On appeal, the CIT(A) held that the conversion of the outstandings into equity shares and their subsequent sales would attract the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs.

CTO (1985) 154 ITR 148 (SC). He affirmed the view of the learned IAC (Asst.) that no prudent business man would enter into transactions of the nature entered into by the appellants. Thus, he sustained the disallowance. The appellant are aggrieved.

5. We have heard rival submissions at great length and perused the records. In our considered opinion it cannot be said that the transaction was not done at arms length. In the case of M/s. Aspinwall & Co. Ltd., 98,660 shares were sold through M/s. Chitra & Co. and the brokers notes (copy of which is at page 10 of the paper book) were already on the records of the Assessing Officer. In the case of M/s.

Aspinwall & Co. (Trav.) Ltd., the shares were sold directly to Patrika Tea Industries Ltd., Calcutta. While the former appellant sold the shares within a month of their acquisition, the latter appellant sold the shares after an interval of nearly two years. The sale was for consideration and was evidenced by duly executed transfer deeds. Mambad Rubber Co. had also acknowledged the transfer of shares to the other parties by these two appellants and the names of the new shareholders have been entered in its register of members. In the facts of the case, it cannot be said that the sale of shares was a share transaction. The learned IAC (Asst.) does not dispute the fact that Mambad Rubber Mfg.

Co. Ltd., was sustaining losses year after year. At page 17 of her order, it has been observed that admittedly the company (Mambad) had not been fairing well and had been incurring substantial losses for a considerable period of time. It would appear that efforts to left Mambad from this plight did not seem to bear fruit". This is the position in which the principal debtor company was placed. It is against this background that the action of the appellant companies should be appreciated. Substantial amounts were due to the appellant companies from Mambad Rubber Mfg. Co. Ltd., which in turn had large liabilities to bank of Rs. 16,64,730. It had accumulated loss of about Rs. 17,06,156. The share capital including reserves and surplus amounted to only Rs. 12,88,205. Therefore, the value of its share was practically nil if ascertained on breakup value method. Since the company did not have surplus and had not declared any dividend, the value of shares on yield basis also will be nil. Thus, the value of the shares has been practically eroded by accumulated losses. The bank which had advanced loans to Mambad Rubber Mfg. Co. Ltd., was insisting for repayment of the loans end stipulating conditions that unless its debts are cleared the company should not pay off any other liabilities to the shareholders. No doubt, the appellants had to recover substantial sums from Mambad Rubber Mfg. Co. Ltd. In view of the subordination agreement with Canara Bank and in the light of the serious erosion of capital on account of accumulated loss the appellants had every reason to believe that the amounts due to them from Mambad Rubber Mfg. Co. Ltd., were incapable of being recovered.

Some of the shareholders of the appellant companies were also shareholders in the principal debtor company and were associated with its management and, therefore, the appellants had access to insider information about the principal debtor company and, therefore, they had every reason to salvage their position in the best possible manner.

Further, it is stated before us that there were no takers in the market for the outright purchase of the assets and liabilities of Mambad Rubber Mfg. Co. Ltd. Thus, the appellants were placed between Scylla and Charybdis. None was prepared to purchase the company lock stock and barrel with all its assets and liabilities. As the value of the shares was practically nil and as the substantial amount of outstanding was difficult to realise the appellants hit upon a strategy of salvaging their position by converting the outstandings into share capital for eventual sale to outsiders. While there may not be any purchase for all the assets and liabilities of a sick unit, it may be what some people take over the sick unit by purchasing shares at below par value. This is that has happened. Another group of persons have purchased the shares of appellants at below the par value and thus entered into the management as would be evident from the list of shareholders furnished before the authorities after the transfer of shares. This method of take over of sick units is becoming popular in the commercial world and we take judicial notice of the same. The ultimate take over of sick Mambad Rubber Mfg. Co. Ltd., by another group has taken place not immediately; but only after the transfer of shares not only by the appellants but also by other shareholders and that too over the years.

Therefore, it cannot be said that there was a design or motive for tax evasion on the part of the appellants. The motive was to minimise the loss and salvage the investment as far as practicable. Hence, the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. vs.

CTO (supra) is not attracted to the facts of the case. The issue can be looked at from a different angle. It is on record that Mambad Rubber Mfg. Co. Ltd., is a sick unit sustaining huge losses and efforts to lift it from the mess in which it found itself did not bear fruit.

Therefore, the appellants could have claimed the substantial amounts lying with the debtor company as bad debts since the same was incapable of being recovered. If such a claim had been made, the tax authorities should have considered the claim and in the wake of their findings it is reasonable to presume that the amount may have to be allowed as bad debt. On the other hand, the appellants have chosen to adopt a different method whereby they were able to salvage atleast a part of their investments in the form of share capital and other advances.

Because of the latter strategy it is the Revenue that has gained in that it was not called upon to allow the entire amount of outstandings as bad debt. The appellants claim in the realm of capital loss cannot, therefore be, considered as a ruse or device to hoodwink the tax gatherer. In this context it may not be out of place to refer to the appellate order of the CGT(A) in respect of the very same transaction in the case of M/s. Aspinwall & Co. Ltd. The Revenue had attempted to bring to gift tax the difference in the face value of Rs. 9,86,600 which represented the amount due to the appellant from Mambad Rubber Mfg. Co. Ltd. and the amount of Rs. 25,000 realised on the sale of shares. The difference was construed by GTO as a gift made by the appellant company on favour of Mambad Rubber Mfg. Co. Ltd. On appeal, the learned CGT(A) in GT-1/OCE/CIT/82-83 dt. 19th March, 1983 has held as follows : "The appellant found that the prospect of recovering that amount was not at all bright. It was therefore decided to accept shares of the face value of an equal amount knowing fully well that those shares did not command even a fraction of its face value as market value. The idea in accepting the shares was obviously to sell them immediately thereafter, realise whatever amount from such sale and then write off the balance as a loss. There can be some difference of opinion about the manner in which the amounts have been squared up by the appellant.

But that has not made the transaction less genuine. When the appellant accepted the shares of Mambad Rubber Mfg. Company in full satisfaction of the amount due from that company in Oct., 1979 it was common knowledge that the appellant was settling the affairs for a smaller amount and waiving the balance as that was the only way open to the appellant for bringing the transactions between them to an early end.

Such a settlement would have been considered to be a gift if the appellant were in a position to get the entire amount or a larger amount from Mambad Rubber Mfg. Co. and had settled the deal for a lesser amount. However, that was not the case here. Thus, having regard to the facts and circumstances of the case, I have no hesitation to hold that the settlement of the dues between the appellant company and the Mambad Rubber Mfg. Co. Ltd., by allotment of shares and the subsequent sale of those shares by the appellant company at a fraction of the face value does not result in any gift by the appellant company to the Mambad Rubber Mfg. Co.

Even under S. 4(1)(c) it would be a gift only if the settlement is not a bona fide settlement. In this case, I have already held that the settlement of the dues by accepting a lower amount in the form of shares was a bona fide settlement. If there is a transaction by which a lesser amount is accepted in place of a higher amount without any consideration, such a transaction would still be a gift under S.4(1)(a) if not 4(1)(c). This ia also not applicable in this case as the acceptance of a smaller amount was for valid consideration. In the circumstances, there is no question of bringing the transaction within the purview of gift either under S. 4(1)(a) or under S. 4(1)(c)." The decision of the CGT(A) has become final as the Revenue did not appeal against the same. Thus, it is that the transaction is a bona fide one and was for valid consideration. It cannot be viewed as a sham transaction. Nor can it be viewed as a ruse or a device. When the outstandings were converted into shares what was a current asset was converted into a capital investment and when such investment was sold at below the cost of acquisition, capital loss resulted. As the assets were held for less than three years the same has to be considered as short-term capital loss. In this view of the matter, we set aside the order of the CIT(A) and hold that the appellants would be entitled to deduction of capital loss.

6. Grounds Nos. 2 and 3 in the grounds of appeal in ITA No. 215 (Coch)/87 are not pressed and as such they are dismissed.

7. In ITA No. 217(Coch)/87 the first dispute is about the disallowance of bad debts in a sum of Rs. 23,246. The debts were disallowed for the reason that they have become barred by limitation. The amount was by way of payments to customs and incidental services rendered by M/s.

Aspinwall & Co. Ltd., for and on behalf of Gladstone Lyall and Company Limited. It is not in dispute that charges for the services rendered were taken as income in the preceding year. Gladstone Lyall and Co.

Ltd., did not pay the amount to the appellant. Therefore, a suit was filed and the matter went to the High Court of Kerala at Ernakulam.

Their Lordships held that in the absence of any specific pleading that the payment was to be made after the performance of the contractual obligations, limitation would run as from the date on which the obligation was performed; therefore the suit was barred by limitation and hence the amount cannot be recovered. The decision was given on 23rd Oct., 1982. The learned IAC (Asst.) and the CIT(A) were of the view that as the suit was barred by limitation, the appellant cannot claim the same as bad debt. We fail to understand this approach. The appellants right to recover the amount was negatived by the High Court when it held that the period of limitation must start running from the date of performance of the obligation and not from the date on which the bills and other documents were sent to the defendant. Such a declaration was made by the High Court by its judgment only on 23rd Oct., 1982 which fell within the previous year ending on 31st Dec., 1982. Till then the appellant had hopes of recovering the amount. Those hopes were dashed to ground only when the judgment was declared by the High Court. That happened in the relevant previous year. Therefore, debt has become really bad in the year of account. The appellant is entitled to the deduction of the same. Thus, we modify the order of the CIT(A).

8. The next point of dispute in ITA No. 217(Coch)/87 is whether the disallowance of foreign travel expenses to the extent of Rs. 15,000 was justified.

9. Having heard rival submissions, we do not find any infirmity in the order of the CIT(A). The total period of travel had extended to 38 days and the CIT(A) has made only a nominal disallowance, we decline to interference.

10. The last point in ITA No. 217(Coch)/87 is whether the assessee would be entitled to weighted deduction on a sum of Rs. 15,000 disallowed as of personal use. As the expenditure itself was disallowed as relating to personal use there can be no question of allowing weighted deduction on the same. Therefore, we sustain the order of the CIT(A) on this point. We may add that there is no provision for making weighted disallowance.

11. In ITA No. 216(Coch)/87, the grievance of the appellant is against the disallowance of the provision for leave with wages. The IAC (Asst.) disallowed a sum of Rs. 35,666 being the provision made for leave with wages. The CIT(A) sustained the disallowance for the reason that the issue had been decided against the assessee in the preceding year.

However, he noticed that the IAC (Asst.) has rectified the assessment wherein the amount of Rs. 29,078 was allowed on payment basis and this was upheld by the CIT(A).

12. We have heard rival submissions. Since the Revenue is allowing the expenditure on payment basis, we decline to interfere.

13. The next point at dispute in ITA No. 216(Coch)/87 is about the disallowance of foreign travel expenses in a sum of Rs. 41,091 as capital expenditure. The IAC (Asst.) made the disallowance of Rs. 61.091 as being capital in nature. On appeal, the CIT(A) at para 8 of his order held that the expenditure was a revenue expenditure, but then details were not available for a sum of Rs. 20,000 and at the most only a sum of Rs. 20,000 could be disallowed. Having held thus, he directed the IAC (Asst.) to reduce the disallowance to Rs. 41,091. Obviously, this is a mistake apparent from record. The disallowance sustained by the CIT(A) is only in a sum of Rs. 20,000 for want of details and that alone will stand. To this extent, the order of the CIT(A) is modified.

14. Another related issue in ITA No. 216 (Coch)/87 is whether the assessee would be entitled to weighted deduction under S. 35B of the IT Act, 1961, on the above sum of Rs. 20,000. When the expenditure itself is disallowed and is not admitted for consideration, there can be no question of granting weighted deduction on a disallowed expenditure.

This ground should fail.