Civil Appeal No 6 of 1954
Appeal from the judgment and order dated the 8th day of June 1951 of Calcutta High Court in Income tax Reference No 1 of 1951
R J Kolah and P K Ghosh for the appellant
552 G N Joshi Porus A Mehta and R H Dhebar for the respondent
May 8
The Judgment of the Court was delivered by BHAGWATI J
This is an appeal with certificate under section 66 A2 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 661 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 Mamrai 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
I 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 25th April 1930
The appellant opened a ledger account in the name of Mamraj Rambhagat and the total amount of Rs 100626 was debited to this account
The appellant received the dividends from the receivers Rs31446 on 30th October 1930 Rs 9434 on 25th April 1934 and Rs 4716 on 17th May 1938 aggregating to Rs 45 596 leaving a balance of Rs 55030 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 Assis 553 tant 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 traders as lower rate of interest was charged if the loan was on joint security
It was also stated that the appellant used to borrow money on joint security frequently and certain old pro notes jointly executed were submitted before the Appellate Assis tant Commissioner
Reference was made to the case of Commissioner of Income tax Madras vs section A section Ramaswamy Chettiar1 where it was held that it was a custom amongst Nattukottai Chettiars to stand surety for one another for borrowing from  Banks for the purpose of lending out at higher rates of interest and that the loss incurred under the agreement of guarantee by the Chettiar firm should be allowed as a deduction
The Appellate Assistant Commissioner however distinguished the case on facts and held that even though the appellant stood surety for Mamraj Rambhagat in course of securing finance for his business of timber it was the loss of a sum borrowed by another the sum borrowed was capital in its nature and the loss suffered by the appellant on account of Mamraj Rambhagat s failure to pay was a capital loss
On appeal taken by the appellant before the Income Tax Appellate Tribunal the Tribunal was of the opinion that the Appellate Assistant Commissioner had not expressed any opinion in his order as to whether there was such custom or not nor had he asked the appellant to establish the custom
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 section A section Ramaswamy Chettiar supra and came to 1 554 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 661 of the Act and referred the following question for its decision Whether on the facts found the sum of Rs 55030 is allowable as a bad debt under the provisions of section 102xi 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 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 102 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 vs section R Subramanya Pillai1 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 referred question in the negative
Hence this appeal
The sole question for our determination in this appeal is whether the loss of Rs 55030 suffered by the appellant in this transaction was a capital loss or 1 555 was a trading loss or a bad debt incurred by the appellant in the course of carrying on his business of timber
It is clear that no part of the monies borrowed on the joint security of the appellant and Mamraj Rambhagat from the Imperial Bank of India Bombay went to finance the timber business of the appellant but they were all utilised by Mamraj Rambhagat in his own business
These monies were not required to finance the timber business of the appellant nor was the debt due by Mamraj Rambhagat and in respect of which the account was opened by the appellant in his ledger in the name of Mamraj Rambhagat a debt due by Mamraj
Rambhagat to the timber business of the appellant
If any monies had been borrowed by the appellant in his timber business they would certainly have been his capital and whatever loss he incurred therein would have been his capital loss
The manner in which these monies were sought to be connected with the timber business and treated as a trading loss or bad debt of the timber business was by showing that it was the custom amongst the persons carrying business in Bombay to borrow monies from Banks on joint security 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 72 556 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 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 or D to thus join him as surety he could only do so if he in his own turn joined B C or D as surety in the loans which B C of D procured in their turns from the Banks for financing their respective businesses
Unless that factor was established the mere procurement by A of B C or D as surety would not be sufficient to establish the custom sought to be relied upon by the appellant so as to make the transaction of his having joined Mamraj Rambhagat as surety in the loan procured by Mamraj Rambhagat from Imperial Bank of India a transaction in the course of carrying on his own timber business and to make the loss in the transaction a trading loss or a bad debt of the timber business of the appellant
The old pronotes jointly executed by the appellant and others which were submitted before the Appellate Assistant Commissioner did not carry the case of the appellant far enough and stopped 557 short of proving the custom alleged by the appellant in its entirety
The transaction in question could not therefore be
deemed to be one entered into by the appellant in the course of or in carrying on his timber business
Procuring finances for his timber business would no doubt be an essential operation in the course of his carrying
on his business but the same thing could not be predicated of this transaction of his joining Mamraj Rambhagat as surety for procuring Rs 1 lakh from the Imperia 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 by the Appellate Assistant Commissioner
The custom among the Nattukottai Chettiars held proved in Commissioner of Income tax Madras vs section A section Ramaswamy Chettiar supra 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 558 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 every 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 one another in these borrowings
If a Chettiar refused to accommodate another moneylender in this way he would not be able to obtain a guarantor for his own essential borrowings
The assessee in this case borrowed money on the guarantee of others and in turn stood surety for other Chettiars
There were thus elements of mutuality and the essential ingredient in the carrying on of the money lending business which were elements of the custom proved in that case both of which are wanting in the present case before us
It is significant to note that this case was distinguished by the learned Judges of the Madras High Court in Commissioner of Income tax Madras V section B Subramanya Pillai supra where it was held that that decision must be confined to its own peculiar facts and does not apply to businesses other than Nattukottai Chetty money lending business
In that case the assessee was a bookseller who borrowed from time to time jointly with one L a sum of Rs 16200 out of which the assessee took a sum of Rs 10450 for his business needs and L took the balance
The joint borrowing was necessitated by the business needs of both the borrowers and by the insistence of money lenders who required the joint security of the two persons
L failed in his business and the assessee had to repay the creditors the whole of the joint borrowing
The assessee had also to 559 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 520495 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 sec tion 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 C J 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 merchant
There seems to have been some evidence before the Appellate Assistant Commissioner that he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person
But it is not established nor does it seem to have been alleged that he in his turn was in the habit of standing surety for other persons along with them for the purpose of securing loans for their use and benefit
Even if such had been the case any loss suffered by reason of having to pay a debt borrowed for the benefit of another would have been a capital loss to him and not a business loss at all
The result therefore is that the appeal fails and must stand dismissed with costs
Appeal dismissed


Summary:
The appellant who was a timber merchant obtained a loan from the Bank of India on the joint security of himself and a third party M
On the same day M obtained a loan from the Imperial Bank of India on the joint security of himself and the appellant
M failed in his business and the Imperial Bank of India realised the amount of the loan from the appellant who after getting some dividends from the receivers wrote off the balance as bad debt in the assessment year in question and claimed it as an allowable deduction under section 10 of the Indian Income tax Act 1922 on the footing that it was in the course of securing finances for the business of timber that he stood surety with M and that it was the usual custom to secure loans on the joint security from Banks by persons carrying on business
It was not established that the appellant was in the habit of standing surety for other persons along with them for the purpose of securing loans for their use and benefit
Held that the debt in question could not be considered a debt in respect of the
business of the assesses who was not a person carrying on a business of standing surety for other persons and that in any event the loss suffered by reason of having to pay a debt borrowed for the benefit of another would be a capital loss and not a business loss and was not an allowable deduction under section 102 xi of the Indian Income tax Act
Commissioner of Income tax Madras vs section A section Bamaswamy Chettiar 1946  distinguished
Commissioner of Income tax Madras vs S B Subramanya Pillai 1950  approved