TMI Blog1956 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. - - - - - Dated:- 8-5-1956 - Judge(s) : BHAGWATI., S. R. DAS., VENKATARAMA AIYAR JUDGMENT The Judgment of the Court was delivered by BHAGWATI, J.--This is an appeal with certificate under section 66A(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 Mamraj 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. 1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tom. 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 and, came to 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surety for procuring Rs. 1 lakh from the Imperial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had also to 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. 5,049, 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 section 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 Chief Justice 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 merc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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