TMI Blog1983 (9) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 50,000 agreeing to repay the same with interest thereon at 15% per annum. The assessee had given a letter of guarantee to the company on January 27, 1972, guaranteeing due repayment of the aforesaid sum of Rs. 50,000 together with interest thereon by Shri Gandhi. Sri Gandhi paid interest on the sum borrowed up to the end of April, 1972. However, he defaulted to pay interest thereafter. In view of the said default, the company called upon Shri Gandhi to repay the loan. Shri Gandhi did not repay the loan and pleaded his inability to repay by his letter dated August 9, 1972. The company, however, called upon him to pay the amount immediately by a letter dated September 11, 1972. The assessee also wrote to Shri Gandhi on September 26, 1972, calling upon him to pay the amount and informing him that otherwise the guarantee letter executed by the assessee would be enforced by the company. Shri Gandhi by his letter dated September 30, 1972, informed the assessee that he is not in a position to repay any part of the principal or interest due to the company. The company thereupon recovered the said loan of Rs. from the assessee along with interest of Rs. 2,083.30. Thereafter the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no extinguishment of the right of the assessee in the debt owing to him by Shri Gandhi and hence there is no question of any capital loss at all. He, accordingly, confirmed the assessment for both the years. Aggrieved by the orders of the AAC, the assessee preferred appeals to the Income-tax Appellate Tribunal reiterating the same contentions that had been put forward before the lower authorities. The Tribunal found that there was nothing on record to show that Shri Gandhi had requested the assessee in the first instance for a loan of Rs. 50,000, that the assessee had not charged anything for his having guaranteed the repayment of the loan by Shri Gandhi to the company and that the assessee had not given such a guarantee to any other loan on any other occasion. On those facts the Tribunal held that the transaction as a result of which the assessee came to pay Rs. 52,083 to the company was not one in the course of the assessee's money-lending business. The Tribunal, however, held that the payment of the sum of Rs. 52,083 by the assessee to the company in discharge of the loan due by Shri Gandhi should be taken to have arisen in the course of the assessee's money-lending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business, the court has to consider the nature of the liability irrespective of the assessee's unilateral conduct. If, as found by the Tribunal, the transaction of guarantee is not in the course of the assessee's business, then it should be taken to be his personal liability. In discharge of that personal liability, he has been made to pay the amount borrowed by Shri Gandhi along with interest to the company which lent it. That cannot be taken to arise in the course of the assessee's business as a financier. It may be that the assessee had treated his personal liability as the liability arising out of the business. But that cannot be taken to be decisive or conclusive on the question whether the debt has been incurred in the course of the business. The character of the debt or the liability due by Shri Gandhi cannot be different from the character and nature of the guarantee transaction. If the guarantee transaction is not in the course of the assessee's business, the liability arising out of the transaction cannot be taken to arise in the course of the assessee's business. It is no doubt true that as a result of discharging the liability arising out of the guarantee, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain loans advanced by a bank to a company of which the assessee was director. When the bank pressed for payment, the assessee sold his house and paid a certain sum towards satisfaction of the loan. The amount borrowed by the company became irrecoverable. The assessee claimed the amount paid by him as an allowable deduction either as a bad debt under s. 10(2)(xi) or as a business expenditure. The court held that the transaction of guarantee did not arise out of the assessee's money-lending business and was not related to it in any way, that there was no consideration for the guarantee given by the assessee to the bank and the loss which the assessee sustained in the enforcement of the guarantee was a capital loss and did not amount to a business loss and, therefore, the assessee was not entitled to claim deduction either under clause (xi) or clause (xv) of s. 10(2), nor in general terms of the I.T. Act. The said decision applies on all fours here. Here also, as pointed out earlier, there was no consideration for the guarantee given by the assessee to the company for repayment of the loan advanced to Shri Gandhi and, therefore, the transaction of guarantee cannot be said to have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n referred to above, the assessee will not be entitled to claim deduction for the guarantee given by him, as it is not proved to be in the course of his business. In CIT v. Birla Bros. P. Ltd. [1970] 77 ITR 751 (SC), the assesseecompany carried on business of banking and financing and also of managing agency. One of the managed companies appointed a selling agent and the assessee company stood as guarantee for a loan of Rs. 6 lakhs which was advanced by a bank to the said selling agent. The selling agent failed to pay the loan which at the relevant time stood at Rs. 5,60,199. The assessee was forced to pay the said amount pursuant to the guarantee and, thereafter, the assessee treated the selling agent as his debtor for the amount. The selling agent ultimately went into liquidation and the assessee was not able to recover any part of the amount. He, therefore, wrote off the sum of Rs. 5,60,199 in its accounts and claimed deduction thereof as a bad debt under s. 10(2)(xi) of the Act. On those facts, the question arose as to whether the assessee was entitled to make the said claim for deduction. The Supreme Court held that neither the memorandum of association of the company nor th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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