08 May 1956
Supreme Court


Case number: Appeal (civil) 6 of 1954






DATE OF JUDGMENT: 08/05/1956


CITATION:  1956 AIR  571            1956 SCR  551

ACT:        Income-tax-Allowable  deduction-Timber  business-Surety   to        third  party-Bad debt-Capital loss or  business  loss-Indian        Income -tax Act, 1922 (XI of 1922), s. 10 (2) (xi).’

HEADNOTE:        The appellant who was a timber merchant obtained a loan from        the  Bank  of India on the joint security of himself  and  a        third  party, M. On the same day M obtained a loan from  the        Imperial Bank of India on the joint security of himself  and        the  appellant.  M failed in his business and  the  Imperial        Bank  of  India  realised the amount of the  loan  from  the        appellant   who  after  getting  some  dividends  from   the        receivers,  wrote  off  the  balance  as  bad  debt  in  the        assessment  year in question and claimed it as an  allowable        deduction under s. 10 of the Indian Income-tax Act, 1922  on        the  footing that it was in the course of securing  finances        for  the business of timber that he stood surety with M  and        that  it was the usual custom to secure loans on  the  joint        security from Banks by persons carrying on business.  It was        not  established  that  the appellant was in  the  habit  of        standing  surety for other persons along with them  for  the        purpose of securing loans for their use and benefit.        Held,  that the debt in question could not be  considered  a        debt in respect of the. business of the assesses who was not        a person carrying on a business of standing surety for other        persons and that, in any event, -the loss suffered by reason        of having to pay a debt borrowed for the benefit of  another        would be a capital loss and not a business loss and was  not        an allowable deduction under s. 10(2)        (xi) of the Indian Income-tax Act.        Commissioner  of  Income-tax, Madras v. S. A.  S.  Bamaswamy        Chettiar ([1946] 14 I.T.R. 236), distinguished.        Commissioner  of  Income-tax,  Madras v.  S,  B.  Subramanya        Pillai ([1950] 18 I.T.R. 85), approved.

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6 of 1954.        Appeal  from  the judgment -and order dated the 8th  day  of



      June 1951 of Calcutta High Court in Income-tax Reference No.        1 of 1951.        R.   J. Kolah and P.  K. Ghosh, for the appellant.        552        G.   N.  Joshi,  Porus A. Mehta and R. H.  Dhebar,  for  the        respondent.        1956.  May 8. The Judgment of the Court was delivered by        BHAGWATI J.-This is an appeal with certificate under section        66-A(2) of the Indian Income-tax Act, 1922 from the judgment        and order passed by the High Court of Judicature at Calcutta        on  a reference under section 66(1) of the Act, whereby  the        High Court answered the referred question in the negative.        The  appellant is a timber merchant.  On 5th February  1930.        he obtained a loan of Rs. 1 lakh  from the Bank of India  on        the joint security of himself and one Mamraj Rambhagat.   On        the same day Mamrai Rambhagat obtained -a loan of Rs. 1 lakh        from  the  Imperial  Bank of India.,  Bombay  on  the  joint        security  of himself and the appellant.  The appellant  paid        off his loan of Rs.  I lakh to the Bank of India but  Mamraj        Rambhagat failed to make good the amount of his loan to  the        Imperial Bank of India, Bombay.  This sum of Rs. 1 lakh  was        realised  by the Imperial Bank of India from  the  appellant        with interest thereon of Rs. 626 on 24th March 1930.        Mamraj Rambhagat failed in his business and his estate  went        into  the  hands of the receivers on 25th April  1930.   The        appellant  opened  a ledger account in the  name  of  Mamraj        Rambhagat and the total amount of Rs. 1,00,626, was  debited        to this account.  The appellant received the dividends  from        the receivers: Rs.31,446 on 30th October 1930, Rs. 9,434  on        25th April 1934 and Rs. 4,716 on 17th May 1938,  aggregating        to Rs. 45 596 leaving a balance of Rs. 55,030 unpaid,  which        sum he wrote off as bad debt in the assessment year  1941-42        (the  account  year being 1997 Ramnavmi) and claimed  as  an        allowable deduction under section 10 of the Act.        The Income-tax Officer disallowed the claim holding that the        said  loss  was  a capital loss, and so  did  the  Appellate        Assistant  Commissioner.   It was argued on  behalf  of  the        appellant before the Appellate Assis-        553        tant Commissioner that it was the usual custom in Bombay  to        secure  loans  on  joint  security  from  Banks  by  persons        carrying  on  business.  It was stated that this  manner  of        securing loans on joint security was preferred by the  Banks        and it was also in the interest of the traders as lower rate        of interest was charged, if the loan was on joint  security.        It  was also stated that the appellant used to borrow  money        on  joint  security  frequently and  certain  old  pro-notes        jointly executed were submitted before the Appellate  Assis-        tant  Commissioner.   Reference  was made  to  the  case  of        Commissioner  of  Income-tax, Madras v. S. A.  S.  Ramaswamy        Chettiar(1), where it was held that it was a custom  amongst        Nattukottai  Chettiars to stand surety-for one  another  for        borrowing  from’  Banks for the purpose of  lending  out  at        higher  rates of interest and that the loss  incurred  under        the  agreement of guarantee by the Chettiar firm  should  be        allowed   as   a   deduction.    The   Appellate   Assistant        Commissioner,  however, distinguished the case on facts  and        held that even though the appellant stood surety for  Mamraj        Rambhagat in course of securing finance for his business  of        timber,  it was the loss of a sum borrowed by  another,  the        sum borrowed was capital in its nature and the loss suffered        by the appellant on account of Mamraj Rambhagat’s failure to        pay was a capital loss.        On  appeal  taken  by the appellant before  the  Income  Tax        Appellate Tribunal, the Tribunal was of the opinion that the



      Appellate  Assistant  Commissioner  had  not  expressed  any        opinion in his order as to whether there was such custom  or        not nor had he asked the appellant to establish the  custom.        The  Tribunal in these circumstances held that  -the  custom        was  accepted by the Department.  The Tribunal did  not  see        any  distinction  between  the money  lending  business  and        timber  business  which were both financed by this  type  of        borrowing   and  differing  from  the  Appellate   Assistant        Commissioner  followed  the  decision  in  Commissioner   of        Income-tax, Madras V. S. A. S. Ramaswamy Chettiar  (supra).,        and came to        (1) [1946] 14 I.T.R. 236.        554        the conclusion that the loss suffered by standing surety was        an   allowable  loss  and  upheld  the  contention  of   the        appellant.        At the instance of the respondent the Tribunal stated a case        to  the  High  Court  under section 66(1)  of  the  Act  and        referred the following question for its decision:-        "Whether  on  the  facts  found the sum  of  Rs.  55,030  is        allowable  as  a bad debt under the  provisions  of  section        10(2)(xi) of the Indian Income-tax Act".        The  said reference was heard by the High Court and  in  its        judgment the High Court held that the Tribunal had proceeded        on  an erroneous assumption as to the facts of the case  and        the  application of the money.’ Since’ no part of the  loan,        which  had  been taken from the Imperial Bank  of  India  by        Mamraj  Rambhagat on the joint security of himself  and  the        appellant,  was  applied to the  appellant’s  own  business,        there was no question of an allowable deduction in  relation        to the business of the appellant.  The High Court held  that        the  Tribunal  was in error even in law  inasmuch  as  under        section 10(2) (xi) it is only a trading. or business debt of        the  trade  or  business of the appellant,  which  could  be        claimed as a loss and as the debt claimed was not in respect        of the business of the appellant, which -was the business of        trading  in  timber  and not of a  person  carrying  on  the        business  of  standing surety for other  persons,  the  loss        suffered  by  the  appellant was a capital loss  and  not  a        business loss at all.  Regarding the decision relied upon by        the Tribunal, the High Court referred to a later decision in        Commissioner  of  Income-tax,  Madras v.  S.  R.  Subramanya        Pillai(1), which held that the earlier decision must be read        as  confined  to its peculiar facts and  not  applicable  to        business  other than money lending business  of  Nattukottai        Chettiars.  The High Court, therefore, answered the referred        question in the negative. Hence this appeal.        The  sole question for our determination in this  appeal  is        whether the loss of Rs. 55,030 suffered by the appellant  in        this transaction was a capital loss or        (1)  [1950] 18 I.T R. 85.                            555        was  a trading loss or a bad debt incurred by the  appellant        in the course of carrying on his business of timber.  It  is        clear  that  no  part of the monies borrowed  on  the  joint        security  of  the appellant and Mamraj  Rambhagat  from  the        Imperial  Bank of India, Bombay went to finance  the  timber        business  of  the appellant, but they were all  utilised  by        Mamraj Rambhagat in his own business.  These monies were not        required  to finance the timber business of  the  appellant,        nor  was the debt due by Mamraj Rambhagat and in respect  of        which the account was opened by the appellant in his  ledger        in  the  name  of Mamraj Rambhagat a  debt  due  by  Mamraj.        Rambhagat  to the timber business of the appellant.  If  any        monies  had  been borrowed by the appellant  in  his  timber



      business,  they  would certainly have been his  capital  and        whatever  loss  he  incurred therein  would  have  been  his        capital loss.  The manner in which these monies were  sought        to  be connected with the timber business and treated  as  a        trading  loss  or  bad debt of the timber  business  was  by        showing that it was the custom amongst the persons  carrying        business  in  Bombay to borrow monies from  Banks  on  joint        security and if A wanted monies for financing his  business,        he  could  do so by asking B to join him as surety,  but  he        could  not ask B to join him as such unless he stood  surety        for  B  in the loans which B borrowed in his turn  from  the        Bank.  A s joining B as surety was thus a consideration  for        B’s  joining  A as surety in his transaction with  the  Bank        and, therefore, although no part of the monies borrowed by B        came  into the business of A, A joined B as surety  for  the        purpose of financing his own business, which he could not do        without B joining him as surety in the loan which he himself        obtained from the Bank for the purpose of financing his  own        business.  The transaction of A’s joining B as surety in the        matter  of  B’s procuring a loan for the  financing  of  his        business was thus an essential operation of the financing of        A’s business and was, therefore, an incident of A’s business        and any loss incurred by A in the transaction could thus  be        treated as a trading loss in the - course of carrying on  of        A’s        72        556        business.   The  loss  incurred  by  the  appellant  in  the        transaction of his joining Mamraj Rambhagat as surety in the        loan which Mamraj Rambhagat procured from the Imperial  Bank        of  India could, it was urged, thus be treated as a  trading        loss or bad debt of the appellant’s timber business.        It is necessary, therefore, to see what is the exact  nature        and  scope of the custom said to have been accepted  by  the        Department.    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        businessman,  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  of  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  Mamraj  Rambhagat  as  surety  in  the  loan        procured by Mamraj 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.        The  old  pronotes  jointly executed by  the  appellant  and        others, which were submitted before the Appellate  Assistant        Commissioner  did  not carry the case of the  appellant  far        enough and stopped



      557        short of proving the custom alleged by the appellant in, its        entirety.    The   transaction  in   question   could   not,        ’therefore,  be.  deemed  to  be one  entered  into  by  the        appellant  in  the course of or in carrying  on  his  timber        business.  Procuring finances for his timber business  would        no  doubt  be an essential operation in the  course  of  his        carrying. on -his business, but the same thing could not  be        predicated  of  this  transaction  of  his  joining   Mamraj        Rambhagat  as  surety  for procuring Rs.  1  lakh  from  the        Imperia  Bank of India, which was wholly to  finance  Mamraj        Rambhagat’s  business  and not the timber  business  of  the        appellant.        Learned  counsel for the appellant laid particular  emphasis        on the finding by the Appellate Assistant Commissioner  that        "it  was in the course of securing finance for the  business        of timber that he stood surety with Mamraj Rambhagat".  This        finding  merely records the statement of fact, but does  not        go  so  far as to establish the custom sought to  be  relied        upon  by the appellant.  The old pronotes submitted  by  the        appellant  before  the,  Appellate  Assistant   Commissioner        merely  related to his own transactions, where he  had  been        joined  by others as surety and did not -establish that  the        others had been similarly accommodated by him in the matters        of  loans  which they had in their turn  procured  from  the        Banks.   The  solitary instance of  the  appellant’s  having        joined Mamraj Rambhagat in the transaction in question could        not  be  sufficient  to establish the custom  sought  to  be        relied  upon by him and we do not see any reason to  enlarge        the  scope of the so-called custom beyond what is  warranted        by the facts as set out in the order passed by the Appellate        Assistant Commissioner.        The  custom among the Nattukottai Chettiars held  proved  in        Commissioner  of  Income-tax, Madras v. S. A.  S.  Ramaswamy        Chettiar (supra) was that they stood surety for one another,        when they borrowed from Banks for the purpose of lending out        at higher rates of interest.  It was, moreover, an essential        element in the carrying on of a money lender’s business that        558        money,  which Was thus lent out should be procured and  that        could  not  be  done unless it was  borrowed  on  the  joint        security of Nattukottai Chettiars, who stood surety for  one        another.  Unless that type of suretyship was resorted to,  a        Nattukottai  Chettiar  by himself could  never  procure  any        monies which he could invest in his money lending  business.        The following passage from the judgment at page 238 is every        apposite:---------------        "It is their custom to borrow from banks for the purpose  of        lending  out  the  sums  so  obtained  at  higher  rates  of        interest.    The  banks  require  such  overdrafts   to   be        guaranteed  by other Chettiars.  The Chettiars stand  surety        for one another in these borrowings.  If a Chettiar  refused        to accommodate another moneylender in this way, he would not        be  able  to  obtain  a  guarantor  for  his  own  essential        borrowings.  The assessee in this case borrowed money on the        guarantee  of  others  and in turn stood  surety  for  other        Chettiars".        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 proved in that case,  both        of which are wanting in the present case before us.        It  is significant to note that this case was  distinguished        by   the  learned  Judges  of  the  Madras  High  Court   in        Commissioner  of  Income-tax,  Madras V.  S.  B.  Subramanya        Pillai (supra), where it was held that that decision must be



      confined  to  its own peculiar facts and does not  apply  to        businesses  other  than  Nattukottai  Chetty  money  lending        business.   In that case the assessee was a bookseller,  who        borrowed  from time to time jointly with one L a sum of  Rs.        16,200  out of which the assessee took a sum of  Rs.  10,450        for  his business needs and L took the balance.   The  joint        borrowing was necessitated by the business needs of both the        borrowers  and  by  the insistence  of  money  lenders,  who        required the joint security of the two persons.  L failed in        his business and the assessee had to repay the creditors the        whole of the joint borrowing.  The assessee had also to        559        spend a sum of Rs. 658 in an unsuccessful attempt to recover        the  amount due from L. The assessee ’Claimed to deduct  the        sum  of Rs. 658 and also the sum of Rs. 520495 which he  had        to  pay the creditors on account of L’s share of  the  joint        loan;  in the computation of his business profits.   It  was        held that the assessee was not entitled to deduct these sums        in the computation of his business profit either under  sec-        tion 10 (2) (xi) or section 10 (2) (xv) or as business loss.        This  case furnishes the proper analogy to the present  case        and points to the right conclusion in regard to the claim of        the appellant.        The following passage from the judgment of the learned C. J.        under  appeal correctly sums up, in our opinion,  the  whole        position:-        "The debt must therefore be one which can properly be called        a trading debt and a debt of the trade, the profits of which        are being computed.  Judged by that test, it is difficult to        see  how  The debt in the present case can be said to  be  a        debt  in  respect  of the business  of  the  assessee.   The        assessee is not a person carrying on a business of  standing        surety for other persons.  Nor is he a money-lender.  He  is        simply  a  timber-merchant.  There seems to have  been  some        evidence before the Appellate Assistant Commissioner that he        had from time to time obtained finances for his business  by        procuring  loans on the joint security of himself  and  some        other  person.  But it is not established, nor does it  seem        to  have been alleged, that he in his turn was in the  habit        of standing surety for other persons along with them for the        purpose  of securing loans for their use and benefit.   Even        if  such, had been the case, any loss suffered by reason  of        having  to pay a debt borrowed for the benefit  of  another,        would  have  been a capital loss to him and not  a  business        loss at all.        The  result,  therefore, is that the appeal fails  and  must        stand dismissed with costs.        Appeal dismissed.        560