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

The respondent is a registered firm carrying on business as commission agents in Bombay. For purposes of its business it borrowed money from time to time from Banks on joint promissory notes executed by it and by others with joint and several liability. On September 26,1949, the respondent borrowed Rs. 1,00,000 from the Bank of India on a pronote executed jointly with one Kishorilal. Out of this amount a sum of Rs. 50,000 was taken by the respondent for purposes of its business and the rest by Kishorilal. Kishorilal however failed to meet his liability and became a bankrupt. The respondent had therefore to pay the Bank the whole amount, i. e., Rs. 1,00,000 with interest. Out of the amount taken by Kishorilal the respondent received in the accounting year, from the Official Assignee, a sum of Rs. 18,805/- and claimed the balance, i.e., Rs. 31,740/- as deduction. The accounting year was from August 26, 1949 to July 17, 1950 the assessment year being 1951-52. This claim was disallowed both by the Income-tax Officer as well as the Appellate Assistant Commissioner. On Appeal to the Income-tax Appellate Tribunal this sum was allowed as an allowable deduction under S. 10 (2) (xv) of the Income-tax Act and as business loss.3. At the instance of the Commissioner a case was stated to the High Court of Bombay by the Income-tax Appellate Tribunal. In the statement of the case which was agreed to by both parties the Tribunal said:"For the purpose of his business, he borrows from time to time money on joint and several liability from banks. The Commercial practice is to borrow money from banks on joint and several liability. An illustration will explain what we mean. A and B require Rs. 50,000 each. They find that the Bank would not advance Rs. 50,000/- to each on his individual security. They however, find that the Bank would be prepared to advance Rupees one lac on their joint and several liability. They take Rupees one lac on joint and several liability and then divide the money equally between themselves."It also found that the Banks advanced monies to some constituents on their personal security also but they had to pay a higher rate of interest than when the money was borrowed on joint and several responsibility; that Rs. 1,00,000 borrowed from the Bank was in accordance with the commercial practice of Bombay.4. On these facts the following two questions of law were referred to the High Court:-"(1) Whether the assessees claim is sustainable under Section 10(2) (xv) of the Act?(2) Whether the Assessees claim that the loss was a business loss and, therefore, allowable as a deduction in computing the profits of the assessees business is sustainable under law?"Both these questions were answered in favour of the respondent and against the appellant.(4a)Counsel for the Commissioner challenged the findings of the Tribunal in regard to the existence of commercial practice in Bombay but this ground of attack is not available to him because not only did the Tribunal give this finding in its Order, but in the agreed statement of the case also this finding was repeated as is shown by the passage quoted above. The High Court also has proceeded on the basis of this commercial practice. In the judgment under appeal the learned Chief Justice said:"The finding of the Tribunal is clear and explicit that what the assessee was doing was not something out of the ordinary but in borrowing this money on joint and several liability he was following a practice which was established as a commercial practice. Therefore, the transaction was clearly in the course of the business and incidental to the business and it is this transaction which resulted in a loss to the assessee, he having to pay the liability of the surety."Therefore this appeal has to be decided on the basis that a commercial practice of financing business by borrowing money on joint and several liability was established.

Reasoning: 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.