Shyam Singh Vs. Daryao Singh [1960] INSC
222 (24 November 1960)
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1961 AIR 748 1961 SCR (2) 644
CITATOR INFO :
R 1961 SC 668 (8) R 1965 SC 321 (18)
ACT:
Income Tax--Money borrowed by two Persons for
business purPoses on joint and several liability--One failing to pay his
share--Whole Paid by another--Unpaid sum by Co-borrower--If deductible as
business loss--Commercial custom of joint borrowing--Mutuality--Indian Income
Tax Act, 1922 (11 of 1922), S. 10(2)(XV).
HEADNOTE:
For the purposes of its business the
respondent borrowed a certain sum of money from the Bank of India on a pronote
executed jointly by him and one Kishorilal in accordance with a commercial
practice of carrying on business by borrowing money from Banks on joint and
several liability.
The money was divided half and half between
the respondent and Kishorilal but Kishorilal failed to pay off his liability as
he became a bankrupt and the respondent had to pay the whole amount to the
Bank. The respondent, however, received from the Official Assignee a part of
the sum taken by the Kishorilal leaving a balance still unpaid. The
respondent's claim to deduct this unpaid balance under s.
10(2)(XV) of the Income-tax Act was refused
by the Incometax Officer and the Appellate Assistant Commissioner but was
allowed by the Income-tax Appellate Tribunal on appeal. On a reference made at
the instance of the appellant the High Court decided the question in favour of
the respondent assessee. On appeal by the appellant by special leave, Held,
that the view taken by the High Court was correct. On the finding that there
was a well establised Commercial practice of financing business by borrowing
money on joint and several liability and by so doing the respondent could
borrow at a lower rate of interest, and that there was mutuality between the
borrowers for standing surety for each other for loans taken for business
purposes, the respondent assessee in computing his business profits was
entitled to deduct the loss suffered by him in paying the sum not paid by his
co-borrower.
Commissioner of Income-tax v. Ramaswami
Chettiar, [1946] 14 I.T.R. 236, applied.
Madan Gopal Bagla v. Commissioner of
Income-tax, West Bengal, [1956] S. C. R. 551, Commissioner or Income-tax v. S.
R. Subramanya Pillai, [1950] 18 I T. R. 85 distinguished.
Montreal Coke and Manufacturing Co. v.
Minister of National Revenue, [1945] 13 I.T.R. Supp. 1, not applicable.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
358 of 1958.
645 Appeal by special leave from the judgment
and order dated 8th March, 1956, of the former Bombay High Court in I.T.R. No.
55 of 1955.
A. N. Kripal and D. Gupta, for the appellant.
N. A. Palkhivala and B. P. Maheshwari, for
the respondents.
1960. November 24. The Judgment of the Court
was delivered by KAPUR, J. -This is an appeal by special leave against the
judgment and order of the High Court of Bombay in Income-tax Reference No. 55
of 1955, in which two questions of law were stated for opinion and both were
answered in favour of the assessee and against the Commissioner of Income-tax
who is the appellant before us and the assessee is the respondent.
The facts of this case are these:
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.
82 646 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 lach 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.
On these facts the following two questions of
law were referred to the High Court:"(1) Whether the assessee's claim is
sustainable under section 10(2)(xv) of the Act? (2) Whether the assessee's
claim that the loss was a business loss and, therefore, allowable as a
deduction in computing the profits of the assessee's business is sustainable
under law?" Both these questions were answered in favour of the respondent
and against the appellant.
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:
647 "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 assesses,
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.
It was argued on behalf of the appellant that
this court in Madan Gopal Bagla v. Commissioner of Income Tax, West Bengal (1)
had decided against the allowability of such losses.
But the facts of that case when carefully
scrutinised are distinguishable and the decision does not support the
contentions of the appellant. No doubt certain features of that case and the
present one are similar but they differ in essential features. In that case the
assessee was a timber merchant who obtained a loan of Rs. 1 lac from the Bank
of India on the joint security of himself and one Mamraj, which the assessee
paid off. Mamraj also obtained a loan of Rs. I lac on the joint security of
himself and the assessee.
Mamraj became an insolvent and the assessee
had to pay the whole of the amount borrowed with interest thereon. The assessee
there received a certain amount of money by way of dividends from the Receiver
and the balance he wrote off as bad debt in the assessment year and claimed it
as an allowable deduction under s. 10. The High Court there held that the debt
could not be said to be a debt in respect of the business of the assessee as he
was not carrying on the business of standing surety for other persons nor was
he a money-lender, he being simply a timber merchant; that it had not been
established nor was it alleged that he was in the habit of standing surety for
other persons "along with them for purposes of securing loans for their
use and benefit" and even if money (1) [1956] S.C.R. 551.
648 had been so borrowed and there had been a
loss the loss would have been a capital loss and not a business loss to the
assessee. This statement of the law was approved by this Court but there
mutuality, as an essential ingredient of the custom established, was found to
be lacking as is shown by the following passage from the judgment of the court.
"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 or 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 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 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 649 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 Bagla's case (1) 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 (2)
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.
The appellant also relied on a judgment of
the Madras High Court in Commissioner of Income Tax v. S. R. Subramanya Pillai
(3). 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)(xv) of the Act or as business loss and it was hold 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 Commissioner of Income Tax v. S. A. S. Ramaswamy Chettiar (2) 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 Pillai's
Case (3). The following passage from (1) (1956) S.C.R, 551, (2) (1946) 14
I.T.R. 236.
(3) [1950] 18 I.T.R. 85.
650 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 wellknown and wellrecognised mercantile
custom of Nattukottai bankers, they were in the habit of raising 'funds which
formed the stockin-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 latter's inability to pay, the loss sustained as a result of
this transaction was a loss of the moneylending business itself and therefore a
deductible item in computing profits." 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 the
Commissioner of Income-tax v. Ramaswamy Chettiar (1). In both cases the finding
is that there is mutuality and custom of borrowing money on joint pronotes for
the carrying on of 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.
Counsel for the assessee drew our attention
to a (1) (1946) 14 I.T.R. 236.
651 Privy Council judgment Montreal Coke and
Manufacturing Co. v. Minister of National Revenue (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's 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.
It was then contended that the loss of the
respondent was a 0capital loss and for this again reliance was placed on the
judgment of this Court in Madan Gopal Bagla's case (2 ) 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.
In our view the judgment of the High Court is
right and we therefore dismiss this appeal with costs.
Appeal dismissed.
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