Case: The Commissioner Of Income-Tax, Bombay City I Vs. M/S. Jagannath Kissonlal, Bombay

custom sought to be relied upon by the appellant so as to make the transaction of his having joined Mumraj Rambhagat as surety in the loan procured by Mumraj 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."Continuing at page 558 (of SCR): (at p. 574 of AIR) it was observed:"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."Mr. Palkhivala for the respondent rightly argued that Madan Gopal Baglas case, 1956 SCR 551 : ((S) AIR 1956 SC 571 ) was decided against the assessee because the custom of persons standing surety for each other for borrowing money and the element of mutuality which was an essential ingredient in the case of Commissioner of Income-Tax, Madras v. S. A. S. Ramaswamy Chettiar, 1946-14 ITR 236: (AIR 1946 Mad 508) was not proved. In the latter case it was established that there was a well recognised custom amongst Chettiars of raising funds for their business of money lenders by the execution of joint pronotes and that if a loss was sustained by one of the executants having to pay the whole on account of inability of the other it was a deductible loss.6. The appellant also relied on a judgment of the Madras High Court in Commissioner of Income-Tax v. S. R. Subramanya Pillai, 1950-18 ITR 85 : (AIR 1950 Mad 626 ). In that case the assessee was a book-seller who from time to time jointly with another person borrowed money out of which he employed a portion in his business. One of such amounts borrowed was Rs. 16,200 out of which the assessee took Rs. 10,450 for his business needs and the other debtor took the balance. The latter became insolvent and the assessee had to pay the whole of the money borrowed and claimed it as allowable deduction under S. 10(2) (xi) or S. 10(2) (v) of the Act or as business loss and it was held that he was not entitled, because the loss sustained by the assessee was too remote from the business of book-selling carried on by him and was not sufficiently connected with the trade and therefore fell outside the range of those amounts which could properly be brought into profit and loss account of the business. The decision in 1946-14 ITR 236: (AIR 1946 Mad 508) was there distinguished on the ground that the decision must be confined to its own peculiar facts and did not apply to business as the one in Subramanya Pillais case, 1950-18 ITR 85 : (AIR 1950 Mad 626 ). The following passage from the judgment of Viswanatha Sastri, J. in that case is relevant:"But there the business was one of money lending and the Court found that according to the well-known and well-recognised mercantile custom of Nattukottai bankers, they were in the habit of raising funds which formed the stock-in-trade of their money lending business by the execution of joint promissory notes in favour of bankers. That was apparently the usual technique of obtaining credit adopted by the Nattukottai Chetti community money-lenders. In the context this Court held that where a Nattukottai Chetti money-lender paid off in their entirety the debts jointly due by him and another as a result of the latters inability to pay, the loss sustained as a result of this transaction was a loss of the money lending business itself and therefore a deductible item in computing profits."7. In the instant case it has been found that there was a well recognised commercial practice in Bombay of carrying on business by borrowing money from Banks on joint and several liability. It was also found that by so doing the borrower could borrow money at a lower rate of interest than he otherwise would have paid; that the respondent had, in accordance with the commercial practice, borrowed the money, the whole of which he had to return because the joint promisor Kishori Lal had become bankrupt; mutuality was also held proved. It cannot be said that the essential feature of the case now before us is in principle different from that of 1946-14 ITR 236 : (AIR 1946 Mad 508). In both cases the finding is that there is mutuality and custom of borrowing money on joint pronotes for the carrying on the business. In our opinion in the circumstances proved in the present case, and on the facts established and on the findings given, the respondent was rightly held to be entitled to deduct the loss which was suffered by him in the transaction in dispute.8. Counsel for the assessee drew our attention to a Privy Council judgment Montreal Coke and Manufacturing Co. v. Minister of National Revenue, 1945-13 ITR (Supp) 1 but that case can have no application to the facts of the present case because it was found there as a fact that the assessees financial arrangements were quite distinct from the activities by which they earned their income and expenditure incurred in relation to the financing of their business was not expenditure in the earning of their income within the statute.9. It was then contended that the loss of the respondent was a capital loss and for this again reliance was placed on the judgment of this Court in Madan Gopal Baglas case, 1956 SCR 551 : ( (S) AIR 1956 SC 571 ) and particularly on the observation at page 559 where Bhagwati, J., quoted with approval the observations of the High Court in the judgment but as we have pointed out the facts of that case are distinguishable and what was said there has no application to the facts and circumstances proved in the present case.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]7. In the instant case it has been found that there was a well recognised commercial practice in Bombay of carrying on business by borrowing money from Banks on joint and several liability. It was also found that by so doing the borrower could borrow money at a lower rate of interest than he otherwise would have paid; that the respondent had, in accordance with the commercial practice, borrowed the money, the whole of which he had to return because the joint promisor Kishori Lal had become bankrupt; mutuality was also heldour opinion in the circumstances proved in the present case, and on the facts established and on the findings given, the respondent was rightly held to be entitled to deduct the loss which was suffered by him in the transaction in dispute.It was then contended that the loss of the respondent was a capital loss and for this again reliance was placed on the judgment of this Court in Madan Gopal Baglas case, 1956 SCR 551   : ( (S) AIR 1956 SC 571  ) and particularly on the observation at page 559 where Bhagwati, J., quoted with approval the observations of the High Court in the judgment but as we have pointed out the facts of that case are distinguishable and what was said there has no application to the facts and circumstances proved in the present case.