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TMI Blog1956 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assistant 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication 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, 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 referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 very 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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