Case: Madan Gopal Bagla Vs. The Commissioner Of Income-Tax,West Bengal

2. The appellant, is a timber merchant. On 5-2-1930 he obtained a loan of Rs. 1 lakh for the Bank of India on the joint security of himself and one Mamraj Rambhagat. On the same day Mamraj 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. 1 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 of Rs. 626 on 24-3-19304. The Income-Tax Officer disallowed the claim holding that the said loss was a capital loss, and so did the Appellant 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 in joint security from Banks by persons carrying on business. It was stated that this manner of securing loans in 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 Assistant Commissioner5. On appeal taken by the Department before the Income-tax Appellate Tribunal, the Tribunal was of 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 be asked the appellant to establish the custom. The Tribunal in these circumstances held that the custom was accepted by the DepartmentThe 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 decision in 1946 Mad 508 (AIR V 33) (A), and came to the conclusion that the loss suffered by standing surety was an allowable loss and upheld the contention of the appellant6. At the instance of the respondent the Tribunal stated a case to the High Court under S. 66(1) of the Act and referred the following question for its decision : -Whether on the facts found the sum of Rs. 55,030 is allowable as a bad debt under the provisions of S. 10(2)(xi), Indian Income tax ActThe 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 appellants own business, there was no question of an allowable deduction in relation to the business of the appellantThe High Court held that the Tribunal was in error even in law inasmuch as under S. 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 allRegarding 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, 1950 Mad, 626 (AIR V 37) (B), Which held that earlier decision must be read as confined to its peculiar facts and not applicable to business other than money lending business of Natukottai Chettairs. The High Court, therefore, answered the referred question in the negative. Hence this appeal.

Court's reasoning:
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.A businessman could procure financial assistant 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 accomodation by businessmen was necessarily an ingredient part of that customThe 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 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 Imperial Bank of India, which was wholly to finance Mamraj Rambhagats business and not the timber business of the appellantThis 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 mater of loans which they had in their turn procured from the BanksThe solitary instance of the appellants having joined Mamraj Rambhagat in the transaction in question could not be sufficient to establish the custom sought to be relied upon by him 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 CommissionerThere 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 us11. It is significant to note that this case was distinguished by the learned Judges of the Madras High Court in 1950 Mad. 626   (AIR V 37) (B) (Supra),s case furnishes the proper analogy to the present case and points to the right conclusion in regard to the claim of the appellant13. 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. Judge 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 Appellant 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 personsBut 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 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.