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PETITIONER: THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY I

       Vs.

RESPONDENT: M/S.  JAGANNATH KISSONLAL, BOMBAY

DATE OF JUDGMENT: 24/11/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR  748            1961 SCR  (2) 644  CITATOR INFO :  R          1961 SC 668  (8)  R          1965 SC 321  (18)

ACT: Income  Tax--Money borrowed by two Persons for business pur- Poses on joint and several liability--One failing to pay his share--Whole Paid by another--Unpaid sum by  Co-borrower--If deductible  as  business loss--Commercial  custom  of  joint borrowing--Mutuality--Indian  Income  Tax Act, 1922  (11  of 1922), S. 10(2)(XV).

HEADNOTE: For  the purposes of its business the respondent borrowed  a certain  sum  of money from the Bank of India on  a  pronote executed  jointly  by him and one Kishorilal  in  accordance with  a  commercial  practice of  carrying  on  business  by borrowing  money from Banks on joint and several  liability. The  money was divided half and half between the  respondent and  Kishorilal  but  Kishorilal  failed  to  pay  off   his liability as he became a bankrupt and the respondent had  to pay the whole amount to the Bank.  The respondent,  however, received from the Official Assignee a part of the sum  taken by  the  Kishorilal  leaving a balance  still  unpaid.   The respondent’s  claim to deduct this unpaid balance  under  s. 10(2)(XV)  of the Income-tax Act was refused by the  Income- tax Officer and the Appellate Assistant Commissioner but was allowed by the Income-tax Appellate Tribunal on appeal.   On a  reference made at the instance of the appellant the  High Court  decided  the  question in favour  of  the  respondent assessee.  On appeal by the appellant by special leave, Held, that the view taken by the High Court was correct.  On the  finding  that there was a  well  establised  Commercial practice  of financing business by borrowing money on  joint and  several liability and by so doing the respondent  could borrow  at  a  lower rate of interest, and  that  there  was mutuality between the borrowers for standing surety for each other for loans taken for business purposes, the  respondent assessee  in computing his business profits was entitled  to deduct  the loss suffered by him in paying the sum not  paid by his co-borrower. Commissioner of Income-tax v. Ramaswami Chettiar, [1946]  14

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I.T.R. 236, applied. Madan  Gopal  Bagla  v.  Commissioner  of  Income-tax,  West Bengal,  [1956] S. C. R. 551, Commissioner or Income-tax  v. S. R. Subramanya Pillai, [1950] 18 I T. R. 85 distinguished. Montreal Coke and Manufacturing Co. v. Minister of  National Revenue, [1945] 13 I.T.R. Supp. 1, not applicable.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 358 of 1958. 645 Appeal  by special leave from the judgment and  order  dated 8th  March, 1956, of the former Bombay High Court in  I.T.R. No. 55 of 1955. A. N. Kripal and D. Gupta, for the appellant. N. A. Palkhivala and B. P. Maheshwari, for the respondents. 1960.  November 24.  The Judgment of the Court was delivered by KAPUR,  J. -This is an appeal by special leave  against  the judgment and order of the High Court of Bombay in Income-tax Reference No. 55 of 1955, in which two questions of law were stated  for opinion and both were answered in favour of  the assessee  and against the Commissioner of Income-tax who  is the appellant before us and the assessee is the respondent. The facts of this case are these: The respondent is a registered firm carrying on business  as commission  agents in Bombay.  For purposes of its  business it  borrowed  money from time to time from  Banks  on  joint promissory notes executed by it and by others with joint and several  liability.  On September 26, 1949,  the  respondent borrowed  Rs. 1,00,000 from the Bank of India on  a  pronote executed jointly with one Kishorilal.  Out of this amount  a sum  of Rs. 50,000 was taken by the respondent for  purposes of  its  business and the rest  by  Kishorilal.   Kishorilal however failed to meet his liability and became a  bankrupt. The  respondent  had  therefore to pay the  Bank  the  whole amount, i.e., Rs. 1,00,000 with interest.  Out of the amount taken   by  Kishorilal  the  respondent  received   in   the accounting  year, from the Official Assignee, a sum  of  Rs. 18,805  and  claimed  the  balance,  i.e.,  Rs.  31,740   as deduction.  The accounting year was from August 26, 1949  to July  17,  1950, the assessment year  being  1951-52.   This claim was disallowed both by the Income-tax Officer as  well as  the Appellate Assistant Commissioner.  On Appeal to  the Income-tax  Appellate Tribunal this sum was allowed  ,as  an allowable deduction under s. 10(2)(xv) of the Income-tax Act and as business loss. 82 646 At the instance of the Commissioner a case was stated to the High Court of Bombay by the Income-tax  Appellate  Tribunal. In  the  statement of the case which was agreed to  by  both parties the Tribunal said: "For  the purpose of his business, he borrows from  time  to time  money on joint and several liability from  banks.  The Commercial  practice is to borrow money from banks on  joint and several liability.  An illustration will explain what we mean.  A and B require Rs. 50,000 each.  They find that  the Bank would not advance Rs. 50,000 to each on his  individual security.   They  however,  find  that  the  Bank  would  be prepared  to  advance  Rupees one lach on  their  joint  and several  liability.  They take Rupees one lac on  joint  and several liability and then divide the money equally  between themselves."

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It  also  found  that  the Banks  advanced  monies  to  some constituents on their personal security also but they had to pay  a  higher  rate of interest than  when  the  money  was borrowed  on  joint  and several  responsibility;  that  Rs. 1,00,000  borrowed from the Bank was in accordance with  the commercial practice of Bombay. On  these  facts  the following two questions  of  law  were referred to the High Court:- "(1)  Whether  the assessee’s claim  is  sustainable   under section 10(2)(xv) of the Act? (2)  Whether  the  assessee’s  claim that  the  loss  was  a business  loss and, therefore, allowable as a  deduction  in computing   the  profits  of  the  assessee’s  business   is sustainable under law?" Both  these  questions  were  answered  in  favour  of   the respondent and against the appellant. Counsel for the Commissioner challenged the findings of  the Tribunal  in regard to the existence of commercial  practice in Bombay but this ground of attack is not available to  him because  not only did the Tribunal give this finding in  its Order,  but  in the agreed statement of the case  also  this finding  was  repeated  as is shown by  the  passage  quoted above.   The High Court also has proceeded on the  basis  of this commercial practice.  In the judgment under appeal  the learned Chief Justice said: 647 "The finding of the Tribunal is clear and explicit that what the  assessee  was  doing  was  not  something  out  of  the ordinary,  but in borrowing this money on joint and  several liability he was following a practice which was  established as  a commercial practice.  Therefore, the  transaction  was clearly in the course of the business and incidental to  the business and it is this transaction which resulted in a loss to  the  assesses,  he having to pay the  liability  of  the surety." Therefore this appeal has to be decided on the basis that  a commercial practice of financing business by borrowing money on joint and several liability was established. It was argued on behalf of the appellant that this court  in Madan Gopal Bagla v. Commissioner of Income Tax, West Bengal (1)  had  decided against the allowability of  such  losses. But  the facts of that case when carefully  scrutinised  are distinguishable  and  the  decision  does  not  support  the contentions of the appellant.  No doubt certain features  of that case and the present one are similar but they differ in essential features.  In that case the assessee was a  timber merchant  who obtained a loan of Rs. 1 lac from the Bank  of India on the joint security of himself and one Mamraj, which the  assessee paid off.  Mamraj also obtained a loan of  Rs. I  lac  on the joint security of himself and  the  assessee. Mamraj  became an insolvent and the assessee had to pay  the whole  of  the amount borrowed with interest  thereon.   The assessee there received a certain amount of money by way  of dividends from the Receiver and the balance he wrote off  as bad  debt  in  the  assessment year and  claimed  it  as  an allowable deduction under s. 10.  The High Court there  held that  the debt could not be said to be a debt in respect  of the  business of the assessee as he was not carrying on  the business  of standing surety for other persons nor was he  a money-lender, he being simply a timber merchant; that it had not  been established nor was it alleged that he was in  the habit of standing surety for other persons "along with  them for  purposes of securing loans for their use  and  benefit" and even if money (1)  [1956] S.C.R. 551.

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648 had  been  so borrowed and there had been a  loss  the  loss would  have been a capital loss and not a business  loss  to the  assessee.   This statement of the law was  approved  by this  Court but there mutuality, as an essential  ingredient of the custom established, was found to    be lacking as  is shown  by  the following passage from  the judgment  of  the court. "The   custom   stated  before   the   Appellate   Assistant Commissioner was that persons carrying on business in Bombay used  to borrow monies on joint security from the  Banks  in order  to facilitate getting financial assistance  from  the Banks   and  that  too  at  lower  rates  of  interest.    A businessman  could  procure financial  assistance  from  the Banks  on his own, but he would in that case have to  pay  a higher rate of interest.  He would have to pay a lower  rate of interest if he could procure as surety another  business- man, who would be approved by the Bank.  This, however,  did not  mean  that  mutual  accommodation  by  businessmen  was necessarily  an  ingredient part of that  custom.   A  could procure B, C or D to join him as surety in order to  achieve this objective, but it did not necessarily follow that if  A wanted  to procure B, C or D to thus join him as  surety  he could  only do so if he in his own turn joined B, C or D  as surety in the loans which B, C or D procured in their  turns from  the Banks for financing their  respective  businesses. Unless that factor was established, the mere procurement  by A  of  B,  C  or D as surety  would  not  be  sufficient  to establish  the  custom  sought  to be  relied  upon  by  the appellant so as to make the transaction of his having joined Mumraj  Rambhagat as surety in the loan procured  by  Mumraj Rambhagat from Imperial Bank of India, a transaction in  the course  of carrying on his own timber business and  to  make the loss in the transaction a trading loss or a bad debt  of the timber business of the appellant." Continuing at page 558 it was observed: "There  were  thus elements of mutuality and  the  essential ingredient in the carrying on of the money lending business, which were elements of the custom 649 proved in that case, both of which are wanting in the present case before us." Mr. Palkhivala for the respondent rightly argued that  Madan Gopal  Bagla’s  case (1) was decided  against  the  assessee because the custom of persons standing surety for each other for  borrowing money and the element of mutuality which  was an  essential  ingredient  in the case  of  Commissioner  of Income  Tax, Madras v. S. A. S. Ramaswamy Chettiar  (2)  was not  proved.   In the latter case it  was  established  that there  was  a well recognised custom  amongst  Chettiars  of raising  funds  for their business of money lenders  by  the execution of joint pronotes and that if a loss was sustained by one of the executants having to pay the whole on  account of inability of the other it was a deductible loss. The  appellant also relied on a judgment of the Madras  High Court  in  Commissioner of Income Tax v.  S.  R.  Subramanya Pillai (3).  In that case the assessee was a book-seller who from time to time jointly with another person borrowed money out of which he employed a portion in his business.  One  of such  amounts  borrowed  was Rs. 16,200  out  of  which  the assessee  took  Rs. 10,450 for his business  needs  and  the other debtor took the balance.  The latter became  insolvent and the assessee had to pay the whole of the money  borrowed and claimed it as allowable deduction under s. 10(2)(xi)  or s. 10(2)(xv) of the Act or as business loss and it was  hold

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that he was not entitled, because the loss sustained by  the assessee  was too remote from the business  of  book-selling carried  on by him and was not sufficiently  connected  with the  trade  and therefore fell outside the  range  of  those amounts which could properly be brought into profit and loss account  of the business.  The decision in  Commissioner  of Income  Tax  v. S. A. S. Ramaswamy Chettiar  (2)  was  there distinguished  on  the  ground that  the  decision  must  be confined  to  its own peculiar facts and did  not  apply  to business  as the one in Subramanya Pillai’s Case  (3).   The following passage from (1) (1956) S.C.R, 551,       (2) (1946) 14 I.T.R. 236. (3) [1950] 18 I.T.R. 85. 650 the  judgment  of  Viswanatha Sastri, J., in  that  case  is relevant:- "But  there  the business was one of money lending  and  the Court  found  that  according to  the  wellknown  and  well- recognised  mercantile custom of Nattukottai  bankers,  they were in the habit of raising ’funds which formed the  stock- in-trade of their money lending business by the execution of joint  promissory  notes  in favour of  bankers.   That  was apparently  the usual technique of obtaining credit  adopted by  the Nattukottai Chetti community money-lenders.  In  the context  this  Court held that where  a  Nattukottai  Chetti money-lender  paid off in their entirety the  debts  jointly due by him and another as a result of the latter’s inability to  pay, the loss sustained as a result of this  transaction was a loss of the moneylending business itself and therefore a deductible item in computing profits." In the instant case it has been found that there was a  well recognised  commercial  practice in Bombay  of  carrying  on business by borrowing money from Banks on joint and  several liability.  It was also found that by so doing the  borrower could  borrow  money  at a lower rate of  interest  than  he otherwise  would  have  paid; that the  respondent  had,  in accordance with the commercial practice, borrowed the money, the  whole  of  which he had to  return  because  the  joint promisor Kishori Lal had become bankrupt; mutuality was also held  proved.  It cannot be said that the essential  feature of  the  case now before us is in principle  different  from that of the Commissioner of Income-tax v. Ramaswamy Chettiar (1).   In both cases the finding is that there is  mutuality and  custom  of borrowing money on joint  pronotes  for  the carrying   on   of  business.   In  our   opinion   in   the circumstances  proved in the present case, and on the  facts established  and on the findings given, the  respondent  was rightly  held  to be entitled to deduct the loss  which  was suffered by him in the transaction in dispute. Counsel for the assessee drew our attention to a (1)  (1946) 14 I.T.R. 236. 651 Privy  Council judgment Montreal Coke and Manufacturing  Co. v. Minister of National Revenue (1) but that, case can  have no  application to the facts of the present case because  it was  found  there as a fact that the  assessees’s  financial arrangements  were  quite distinct from  the  activities  by which  they earned their income and expenditure incurred  in relation  to  the  financing’  of  their  business  was  not expenditure  in  the  earning of  their  income  within  the statute. It was then contended that the loss of the respondent was  a 0capital loss and for this again reliance was placed on  the judgment of this Court in Madan Gopal Bagla’s case (2 )  and particularly on the observation at page 559 where  Bhagwati,

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J., quoted with approval the observations of the High  Court in the judgment but as we have pointed out the facts of that case  are  distinguishable and what was said  there  has  no application  to  the facts and circumstances proved  in  the present case. In  our view the judgment of the High Court is right and  we therefore dismiss this appeal with costs.                                 Appeal dismissed.