TMI Blog1966 (1) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... to this court. This court asked for a further statement of the case on the following questions framed by it. They are as follows: "1. Whether there was any evidence in support of the Tribunal's finding that the assessee-company had stood guarantee for the loan given to Messrs. U. P. Sales Corporation Limited by the Gwalior Industrial Bank Limited? 2. If the answer to question No. 1 be in the affirmative, then whether there was any evidence to show that the assessee-company stood such guarantee in the ordinary course of its business? 3. If the answer either to question No. 1 or to question No. 2 be in the negative, then whether the sum of Rs. 5,60,199 was allowable as a deduction in computing the profits of the assessee?" Birla Brothers (Private) Limited, hereinafter called "the assessee" carried on, inter alia, banking and financing business and acted as the managing agents of various companies,one of which was Messrs. Starch Products Limited. Messrs. U. P. Sales Corporation Limited, a company incorporated on February 4, 1943, were the selling agents of Messrs. Starch Products Limited. The assessee, in the course of its business, stood guarantee for a loan of Rs. 6,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also held that, even if the assessee had given the guarantee to the Gwalior Industrial Bank Limited in discharge of the loan on behalf of Messrs. U. P. Sales Corporation Limited, such a guarantee was not given by the assessee in the usual course of business. On appeal to the Appellate Assistant Commissioner, he found that the assessee actually stood guarantee for the loan on behalf of the U. P. Sales Corporation Limited and advanced the loan as a matter of commercial expediency but concurred with the conclusion of the Income-tax Officer on the ground that the assessee did not advance the loan in the course of its money-lending business. The details regarding the findings of the Appellate Assistant Commissioner will be dealt with later. Against this order an appeal was taken to the Appellate Tribunal. It found that it was in the larger interest of the assessee's business that the assessee, as a guarantor, made the payment. According to it, if such a guarantee was not given, Messrs. Starch Products Limited, one of the managed companies, would have had to give extended credit to the selling agents and this could be possible if the managed company, in its turn, was financed either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on the ground that the advance was not made in the course of the company's money-lending business as no interest was charged for and that the manner in which the transaction was entered into, smacks of an oblique purpose for avoidance of income-tax. According to him, the Tribunal had come to its own conclusion in favour of the assessee merely on surmise. The Tribunal's conclusion that it was in the larger interest of the assessee's business that the guarantee was given, was based purely on hypothesis and the circuitous process of standing guarantee to acompany which was not its managed company cannot give rise to the assessee's contention that the case falls under section 10(2)(xi) of the Act. The Income-tax Officer found as a fact that, though technically the U. P. Sales Corporation Limited was not managed by the assessee, the entire finance of this company was provided by it. It has also been found by him that the Gwalior Industrial Bank Limited was also the concern of the Birlas (assessee). In spite, of this, fact, it came to the conclusion that, even assuming that really a guarantee was given, it was not done for an allied concern and, as the U. P. Sales Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion that there was a guarantee or that the guarantee arose in the ordinary course of the business of the respondent. Therefore, in this reference, we are mainly concerned with the question whether it fulfils the conditions as stated in section 10(2)(xi) of the Act and whether there was evidence before the Tribunal for its conclusion that it was in the larger interest of the assessee's business that the assessee, as a guarantor, made the payment. It also observed as stated before that if such a gurantee had not been given Messrs. Starch Products Limited, one of the managed companies, would have had to give extended credit to the selling agent and this could be possible if the managed company in its turn was financed either by the managing agents or a third party. It was further of the opinion that, in order to obviate the necessity of such borrowing by the managed company, the assessee-company stood guarantee for the loan given by Gwalior industrial Bank Limited to U.P. Sales Corporation Limited. Before dealing with the question whether there is any evidence to justify the finding of the Tribunal, it would be profitable to quote here the relevant portions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the selling agent and this could be possible if the managed company in its turn was financed either by the managing agents or a third party. This finding is borne out from the letters which were exchanged between the U. P. Sales Corporation Limited dated 10th December, 1946, as also from the letter of the assessee dated 21st December, 1946, wherein it was clearly stated by the assessee that necessary undertaking was given to the Gwalior Industrial Bank Limited and a commitment to indemnify the bank was made against any loss or inconvenience due to the non-payment of a loan by the company up to a maximum of Rs. 6,00,000. There is also the letter of the assessee addressed to the Income-tax Officer dated 15th February, 1958, to the effect that, as this loan was one of the many loans advanced by the company, it was not necessary to mention these facts in the board's meeting as per the usual practice of the company. Further, it was stated in this letter that the money was advanced in the usual course of business. As the company failed to repay the bank, the assessee had to pay the money in question on their behalf. It further appears that the U. P. Sales Corporation had considerable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess loans. Obviously, the said amounts were not taken into account for computation of the business profits on the ground that the joint loan was not taken for the assessee's business, profession or vocation, nor was it incidental to it. Furthermore, it appears that such a loan was not taken jointly in the ordinary course of business. The facts on which this decision was made have no semblance with those of the instant case. Accordingly the decision cannot be invoked in aid of the applicant's case. Mr. Balai Pal has at the next place urged before us that the payment by the assessee to the Gwalior Industrial Bank Limited, three days after it had gone into liquidation smacks of an oblique purpose and cannot, therefore, be taken into consideration in computing the business profits of the assessee. The materials placed before us do not show that the irresistible inference is that the payment was made with an oblique purpose. Because a bank has gone into liquidation, it did not mean that the assessee was absolved from his liability on the guarantee. Really what the court is concerned to see is, as to whether the Tribunal had some evidence before it to come to the conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les Corporation Limited was not managed by the Birlas, the entire finance of the company was provided by Birla Brothers Limited. Further, it appears that on the 31st March, 1947, the debtors, viz., U.P. Sales Corporation Limited, had considerable amount of loans and there was an accumulation of loans of several lakhs of rupees. Further, it appears that the U. P. Sales Corporation Limited was the selling agent of Indian Starch Products Limited, the managed company of the assessee. From these facts, it appears that both the U. P. Sales Corporation Limited and the Starch Products Limited were the proteges of the assessee. Now on these facts the Tribunal had come to its conclusion that it was now well established that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be an allowable deduction in computing the profits and gains of the business. The Tribunal has undoubtedly relied upon the observation of Viscount Cave in the case of Atherton v. British Insulated and Helsby Cables Ltd. At page 191 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income-tax v. Malayalam Plantations Limited. Their Lord ships in this case discussed the scope of the words 'for the purpose of the business' appearing in section 10(2)(xi) of the Act. As no decision as to the scope of section 10(2)(xi) has been made in that case, we do not think that it has any bearing to the instant case, inasmuch as the assessee's case is that it comes under section 10(2)(xi), the scope of which has been discussed before. The next case to which reference has been made by Mr. Pal is in Commissioner of Income-tax v. Abdullabhai Abdulkadar. On a perusal of this judgment it appears that the facts are entirely dissimilar. It has been observed by their Lordships, inter alia, that under clause (xi) of section 10(2) of the Income-tax Act, a debt was only allowable when it was a debt and arises out of and as an incident to the trade. If it was not of that character it would be a capital loss. We have already shown in detail that the advancing of the loan by the assessee was incidental to the business, which comes within the ambit of clause (xi) of section 10(2) of the Act. As such, it cannot be said that we are proceeding upon a principle which was contrary to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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