SUHAS CHANDRA SEN, J. ( 1 ) THE following question of law has been referred by the Tribunal under Section 256 (2) of the Income-tax Act, 1961 :"whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in disallowing the loss of irrecoverable advance of rupees twenty lakhs in computing the assessee's profits on the ground that the amount was spent by Saksaria Cotton Mills Ltd. on the modernisation and improvement of the machinery. " ( 2 ) THE facts of the case are set out in detail in the judgment that has been delivered in the assessee's own case being Income-tax Reference No. 100 of 1977 ; CIT v. Hashimara Industries Ltd. ( 3 ) IN this reference, the dispute is about the allowability of a sum of Rs. 20,00,000 given by way of advance to Saksaria Cotton Mills Limited for modernisation of its plant. The assessment year involved is 1968-69 for which the previous year ended on March 31, 1968. ( 4 ) THE assessee advanced a sum of Rs. 20,00,000 to Saksaria Cotton Mills Limited in terms of Clause 13 of the leave and licence agreement entered into by the assessee-company with Saksaria Cotton Mills Limited. The agreement originally was for a period of three years from April 1, 1963, to March 31, 1966. Thereafter, it was extended by mutual agreement up to June 30, 1966. ( 5 ) THE amount of Rs. 20,00,000 was given by way of advance for modernisation of the mills. Clause 13 of the agreement provided :"in the event of any new and complete unit or plant and/or machinery and/or equipment being installed by the licensee at the licensee's own cost within the licensed premises, no depreciation will be paid by the licensee to the licensor in respect thereof and on the expiry of the period of the licence or its earlier determination by the licensor, the licensee will be entitled to remove and take away at the licensee's own cost such new plant, machinery and equipment provided that the licensee will, in that event, restore the licensed premises to the condition in which they were at the time of the commencement of the licence and make good the damage, if any, caused to the licensed premises by removal of such new plant, machinery and equipment. In the event of any new part or parts of any of the mills machinery, plant, equipment, fittings and fixtures being provided by the licensee in replacement of any existing part or parts of such machinery, the licensee will be entitled in lieu thereof to retain such old part or parts of such machinery so replaced and to deal with the same in such manner as the licensee deems fit. If the licensee desires that the licensor shall bring any new plant, machinery or equipment or unit, it will be in the absolute and uncontrolled discretion of the licensor whether to do so or not and on such terms as may be agreed to at that time. " ( 6 ) THERE is no dispute that the amount was paid for modernisation of the mills. The loan was not repaid by Saksaria Cotton Mills Limited at the expiry of the leave and licence agreement on June 30, 1966. The Tribunal has found that with effect from July 1, 1966, Saksaria Cotton Mills Limited had its own business but suffered loss on account of labour trouble. Ultimately, the mill was closed down on October 18, 1967, and the company went into liquidation on March 12, 1969. ( 7 ) IN the assessee-company's accounting year which ended on March 31, 1968, the assessee claimed the advance of Rs. 20,00,000 as a deduction on the ground that it had become irrecoverable on account of the incapacity of Saksaria Cotton Mills Limited to repay the loan. ( 8 ) THE Income-tax Officer disallowed the claim on the ground that the amount of Rs. 20,00,000 represented money advanced to Saksaria Cotton Mills Limited for modernisation of its factory. The said amount was not taken into consideration in computing the income of the assessee in any assessment year. It also did not represent the money lent in the ordinary course of business. The Income-tax Officer observed that even otherwise the sum was not allowable because it had not become a bad debt in the relevant year of account. The assessee had made no effort to recover the sum. ( 9 ) THE Appellate Assistant Commissioner held that the advance given by the assessee-company which could not be recovered from Saksaria Cotton Mills Limited had to be allowed as deduction as revenue expenditure. The assessee had made no effort to recover the sum. ( 9 ) THE Appellate Assistant Commissioner held that the advance given by the assessee-company which could not be recovered from Saksaria Cotton Mills Limited had to be allowed as deduction as revenue expenditure. The Appellate Assistant Commissioner held that the assessee company could not have removed the plant and machinery as the debenture holders of Saksaria Cotton Mills Limited had Hen over the entire plant and machinery. The Appellate Assistant Commissioner held that the aforesaid amount of Rs. 20,00,000 represented loss incurred by the assessee in the course of the carrying on of its cotton business and should be allowed as a deduction on ordinary commercial principles. ( 10 ) THE Tribunal, on appeal, referred to the resolutions of the board of directors of the assessee-company in sanctioning the advance of Rs. 20,00,000. It was noted that in the resolution, it was clearly stated that the amount was to be treated as capital investment. Before the Tribunal, it was argued on behalf of the department that by making this advance of Rs. 20,00,000, the assessee had acquired an advantage of enduring nature and the claim of the assessee was not allowable as business loss. The amount was spent on the improvement of the mills. It was not advanced in the ordinary course of the assessee's business nor was it incidental to such business. ( 11 ) ON behalf of the assessee, it was argued that the assessee did not acquire any advantage of an enduring nature. The assessee was only creditor as interest was to be received on the advance and that the advance was made in the normal course of business to get better income from the business. According to him, the advance was only incidental to the assessee's business and the loss was a business loss. ( 12 ) THE Tribunal held :"the assessee made the advances for the modernisation of the mills of Saksaria Cotton Mills Ltd. So far as Saksaria Cotton Mills Ltd. are concerned, the expenditure on modernisation resulted in the improvement of the plant and machinery ; making of the improvement in the plant and machinery was not the business of the assessee. The advance was made to obtain improvement in the source of income. The advance of Rs. 20 lakhs for modernisation, therefore, cannot be said to be a business loss. The advance was made to obtain improvement in the source of income. The advance of Rs. 20 lakhs for modernisation, therefore, cannot be said to be a business loss. " ( 13 ) IT is well settled that loss of money lent on advance would be a capital loss unless the loan was made by a money-lender for whom money was his stock-in-trade. Any loss of capital would be on capital account. In the case of a banking or money-lending business, money is treated as stock-in-trade : Arunachalam Chettiar (Rm. Ar. Ar. Rm.) v. CIT [1936] 4 ITR 173 at p. 183 (PC) : Although the assessee did some money-lending business, this amount of Rs. 20,00,000 was not lent to Saksaria Cotton Mills Limited simply for the purpose of earning interest. Under Clause 13 of the agreement, the assessee could install new plant and machinery and remove the same after the expiry of the agreement. If the assessee so desired, Saksaria Cotton Mills Limited, at its absolute discretion, could install new plant, machinery and equipment or unit "on such terms as may be agreed at that time". There is no finding of the Tribunal as to whether the assessee requested Saksaria Cotton Mills Limited to install new plant, machinery and equipment and, if so, the terms on which Saksaria Cotton Mills Limited agreed to install new plant, machinery, equipment, etc. The finding of the Tribunal is that the money was given by way of advance for the specific purpose of modernisation of the cotton mills. The assessee-company, in one way or another, was running the mills since the scheme was approved by the Bombay High Court in the winding up proceedings of Saksaria Cotton Mills Limited. Even before this particular agreement was entered into, the assessee was running the mill either singly or in partnership since February 28, 1961. The agreement that was entered into for a period of three years with effect from April 1, 1963, to March 31, 1966, provided for installation of a new and complete unit or plant and/or machinery and/or equipment by the assessee as licensee at its own cost. If the assessee actually installed new plant, machinery, equipment or unit at its own cost, the expenditure would have been of capital nature. What the assessee did was to advance Rs. If the assessee actually installed new plant, machinery, equipment or unit at its own cost, the expenditure would have been of capital nature. What the assessee did was to advance Rs. 20,00,000 so that new plant and machinery could be bought by Saksaria Cotton Mills Limited for the use of the assessee during the period of the agreement. In other words, the assessee had the advantage of using a new and more modern profit-making apparatus. ( 14 ) THERE are certain features of the loan which must also be noted. The amount of Rs. 20,00,000 was not given by way of any advance payment and was not to be adjusted against any dues payable by the assessee-company. It was not a trade debt at all. If the amount was returned, it would not have been shown in the profit and loss account. From the finding of the Tribunal, it appears that it was not a simple loan of money by the assessee-company in the capacity of a money-lender for the purpose of earning interest. The money that was lent was not treated by the company itself on revenue account. The amount was treated by the assessee itself as on capital account and this was evidenced by the resolution passed by the board of directors of the assessee-company at the time of granting of loan, ( 15 ) IT cannot be denied from the findings made by the Tribunal that the loan was given for the purpose of the assessee's business. But that by itself is not conclusive. It has to be seen whether the transaction was on capital account or on revenue account. If there is any loss on capital account, that cannot be allowed as business loss. ( 16 ) THERE is a line of cases where it has been held that any loss directly connected with the business operation and incidental to the carrying on of the business of an assessee must be allowed as business loss. This line of decisions was reviewed by the Supreme Court in the case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263. If money is embezzled by employees or if money kept by bank or the money-lender as stock-in-trade is stolen or if money is handled in the course of business and is lost on any account, such loss may be shown on revenue account. If money is embezzled by employees or if money kept by bank or the money-lender as stock-in-trade is stolen or if money is handled in the course of business and is lost on any account, such loss may be shown on revenue account. In such cases, it may not be very relevant to find out whether the money was being held as stock-in-trade of the company or not. But in this case money has been advanced by way of transfer of capital and it has not been possible to recover the loan. For claiming an irrecoverable loan as business loss, it must be established that the loan was not given on capital account. ( 17 ) THERE are some cases where deduction was allowed where money was lent in the usual course of business by managing agencies to managed companies. But those cases are of no relevance for the purpose of the instant case. Here, the assessee-company was not managing Saksaria Cotton Mills Limited. It had merely taken the mills of the company on lease or on leave and licence agreement. The right of the assessee-company was to use the cotton mills. The assessee-company did not have any other interest in the management of Saksaria Cotton Mills Limited. If the assessee did not want Saksaria Cotton Mills Limited to modernise its plant and machinery, no question would have arisen of any loan being advanced. The modernisation took place at the behest of the assessee so that the assessee could have use of better plant and machinery. ( 18 ) IN view of the aforesaid facts and circumstances and especially in view of the resolution passed by the board of directors of the assessee-company at the time of granting the loan to treat the loan as on capital account, in my judgment, the Tribunal was entitled to come to the conclusion that the loan that was given was on capital account and could not be allowed as deduction in computing the assessee's commercial profit. ( 19 ) THE question is, therefore, answered in the affirmative and in favour of the Revenue. ( 20 ) THERE will be no order as to costs.