1962 (10) TMI 71 - HC - Income Tax

Summary

Issues Involved:
1. Whether the guarantee broking business ceased to exist after 1947.
2. Whether the legal expenses of Rs. 1,227 and Rs. 510 in the assessment years 1956-57 and 1957-58 respectively were allowable under the Act.
3. Whether the decreed amount of Rs. 11,314 paid by the assessee in the assessment year 1957-58 was allowable.

Detailed Analysis:

1. Ceasing of Guarantee Broking Business after 1947:
The primary issue was whether the guarantee broking business ceased to exist after 1947. The assessee argued that the money-lending business and the guarantee broking business were two branches of the same business. However, the court found that these two businesses were distinct and separate. The money-lending business involved lending money directly to clients, creating a creditor-debtor relationship, while the guarantee broking business involved introducing clients to Bharat Bank and standing as guarantors for loans, earning commission and interest in return. The court noted that there was no evidence of any activity in the guarantee broking business after April 30, 1947, and the notice given by the assessee to Bharat Bank on March 27, 1947, confirmed that no fresh clients would be introduced after April 30, 1947. Therefore, the court concluded that the guarantee broking business was discontinued after 1947.

2. Allowability of Legal Expenses:
The assessee claimed deductions for legal expenses incurred in defending a suit filed by Bharat Bank. The court examined whether these expenses were allowable under the Act. The assessee contended that the expenses were incurred to defend his reputation and protect his stock-in-trade. However, the court found no evidence that the deposit of Rs. 27,000 had become the stock-in-trade of the assessee's money-lending business. The legal expenses were incurred to get rid of a liability which was capital in nature. Consequently, the court held that the legal expenses of Rs. 1,227 and Rs. 510 were not allowable deductions.

3. Allowability of Decreed Amount:
The assessee also claimed a deduction for the decreed amount of Rs. 11,314 paid in the assessment year 1957-58. The court considered whether the loss sustained in respect of the discontinued guarantee broking business could be set off against the income from the money-lending business. The court reiterated that the guarantee broking business and the money-lending business were separate and distinct. The loss from a discontinued, separate business could not be set off against the income from another business. Additionally, there was no evidence that the assets and liabilities of the guarantee broking business were taken over as stock-in-trade by the money-lending business. Therefore, the court held that the decreed amount of Rs. 11,314 was not an allowable deduction.

Conclusion:
The court answered the first question in the affirmative, confirming that the guarantee broking business ceased to exist after 1947. The second and third questions were answered in the negative, denying the allowability of the legal expenses and the decreed amount as deductions. The assessee was ordered to pay the costs of the Commissioner.