Case: Commissioner of Income Tax (Central), Calcutta Vs. Birla Brothers Private Limited

on the cash basis, of such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, of such sum in respect of loan made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the book of the assessee.Now bad debt means a debt which would have gone into the balance sheet as a trading debt in the business or trade. It must arise in the course of and as a result of the assessees business. The deduction claimed should not be too remote from the business carried on by the assessee.In Madan Gopal Bagla v. Commr. of I. T. W. B., 30 ITR 174 = (AIR 1956 SC 571 ) the principle which was accepted was that the debt in order to fall within Section 10(2)(xi) must be one which can properly be called a trading debt i. e. a debt of the trade, the profits of which are being computed. It was observed that the assessee in that case was not a person carrying on business of standing surety for other persons nor was he a money-lender. He was simply a timber merchant. There was some evidence 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 was not established that he 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 reasons 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. A businessman may have to stand surety for some one in order to get monies for his own business. There may be a custom of the business by which that may be the only method whereby he could get money for the purpose of his own business. If he is to discharge a surety debt and if any such custom is established it would be a business debt. If the assessee has made a payment not voluntarily but to discharge a legal obligation which arises from his business he would be entitled to have the amount deducted as a bad debt under Section 10(2)(xi); see Commr. of I. T. Bombay v. Abdullabhai Abdulkadar, (1957) 31 ITR 72 (Bom) . In Essen Private Ltd. v. Commr. of I. T. Madras, (1967) 65 ITR 65 (SC) the appellant carried on business as a managing agent of several concerns. Pursuant to the agreement with one of the companies managed by it it advanced large sums of money to the managed company and also guaranteed a loan of Rs. 12 lakhs obtained by that company from a Bank. The managed company failed in its business and upon the bank pressing for payment the appellant in accordance with its guarantee made certain payments to that bank. The assessee had ultimately to write off certain sums in its books as bad debts and it claimed that allowance under Section 10(2)(xi). The Tribunal found that the advances to the managed company and the agreement guaranteeing the loan to the managed company were in pursuance of its objects and were made in the course of its business and the claim was allowed. That decision was finally affirmed by this court. In this case there was a clause in the memorandum of association by which the assessee was entitled to lend monies and to guarantee the performance of contracts. Similarly the managing agency agreement contained a clause about lending and advancing of money to the managed company. It was found by the appellate tribunal that it was a part of the managing agency to provide funds to the managed company.In the present case none of those facts has been found. Neither the memorandum of association nor the managing agency agreement contained any such provision by which it could be said that the guaranteeing of the loan made by the Bank to the selling agents was done in the course of the managing agency business.6. In our judgment the facts relied upon by the appellate tribunal and the High Court are barely sufficient for bringing the allowance claimed under Section 10(2)(xi). It may be mentioned that the case of the assessee was confined to that provision and no reliance was placed on any other provision under which such an allowance could be claimed.There was no privity of contract or any legal relationship between the assessee and the selling agent. Neither under custom nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the Bank to the selling agent. It is difficult how it was in the interest of the assessees business that the guarantee was given.There was even no material to establish that the managed company was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on of the assessees business. It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of the assessees business that the guarantee was given. In our opinion the view of the appellate tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not allwithin Section 10(2)(xi). No attempt was made nor indeed it could be usefully made to claim any allowance under Section 10(2)(xv) of the Act.

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

Explanation:
1[ds]6. In our judgment the facts relied upon by the appellate tribunal and the High Court are barely sufficient for bringing the allowance claimed under Section 10(2)(xi). It may be mentioned that the case of the assessee was confined to that provision and no reliance was placed on any other provision under which such an allowance could be claimed.There was no privity of contract or any legal relationship between the assessee and the selling agent. Neither under custom nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the Bank to the selling agent. It is difficult how it was in the interest of the assessees business that the guarantee was given.There was even no material to establish that the managed company was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on of the assessees business. It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of the assessees business that the guarantee was given. In our opinion the view of the appellate tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not allwithin Section 10(2)(xi). No attempt was made nor indeed it could be usefully made to claim any allowance under Section 10(2)(xv) of the Act.