Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, CALCUTTA
Vs.
RESPONDENT:
BIRLA BROS. (P) LTD.
DATE OF JUDGMENT:
23/04/1970
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
SHAH, J.C.
HEGDE, K.S.
CITATION:
1970 AIR 1531 1971 SCR (1) 357
1970 SCC (2) 88
ACT:
Indian Income-tax Act, 1922, s. 10(2)(xi)-Assessee company a
Managing Agent-Selling agent of company managed by assessee
taking loan front a bank and assessee standing guarantee for
the loan-Loan not re-paid by selling agent but by assessee
as guarantor-Assessee failing to recover loan from selling
agent-Loan amount claimed as a bad debt Admissibility of
claim.
HEADNOTE:
The assessee was a Private Limited Company. It carried on
the business of banking and financing as also of managing
agency. Starch Products Ltd., was one of various companies
which was being managed by the assessee. Starch Products
had appointed the U.P. Sales Corporation Ltd., as its
selling agent. The assessee claimed to have stood guarantee
for a loan of Rs. 6 lacs which was advanced to U.P. Sales
Corporation Ltd., by the Gwali Industrial Bank. The
borrower failed to pay the loan which on August 2, 1948
stood at Rs. 5,60,199. This amount was paid by the assessee
pursuant to the guarantee. Thereafter the assessee treated
the U.P. Sales Corporation as its debtor for the aforesaid
amount. That company went into liquidation and as the
assessee could not recover anything from it, a sum of Rs.
5,60,199 was written off in the books of the assessee
company. Before the Income-tax Officer the said amount was
claimed as a bad debt under s. 10(2) (xi) of the Income-tax
Act, 1922. The Income-tax Officer rejected the claim. The
assessee’s appeal before the Assistant Commissioner failed.
The Appellate Tribunal, however, held that the guarantee
given by the assessee was of indirect benefit to the
assesse’s business because if it had not guaranteed the loan
in question the company managed by it would have had to give
extended credit to its selling agent which it could not have
done without borrowing money either from the assessee or
some third party. In reference, the High Court also held
that the guarantee was in the larger interest of the
assessee’s business. The Commissioner of Income-tax
appealed to this Court by special leave.
HELD : (i) While computing profits or gains of business
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under s. 10 certain allowances have to be made under sub-s.
(2). The allowance covered by cl. (xi) thereof has to be
made, when the assessee’s accounts in respect of any part of
his business, profession or vocation are not kept on a cash
basis, of such sum, in respect of the bad and doubtful
debts, due to the assessee in respect of that part of his
business profession and vocation and in the case of an
assessee carrying an a banking or money lending business of
such sum in respect loans 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 books of the assessee. A 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 assessee’s
business. The deductions claimed should not be too remote
from the business carried on by the assessee. [361 B-E]
12 Sup. C 1/70-9
358
In the present case, neither the memorandum of association
nor the managing agency agreement contained any such
provisions by which it could be said that he guarantee of
the loan made by the bank to the selling agents was done in
the course of the managing agency business. 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. ’The guarantee could not be said
to be indirectly in the interest of the assessee’s business,
or as held by the High Court, in its larger interest. The
Tribunal and the High Court were, therefore, in error in
holding that the sum in question was allowable as a
deduction under s. 10 (2) (xi). [362 D-E, F-H]
Madan Gopal Bagla v. Commissioner of Income-tax, West
Bengal, 30 I.T.R. 174 and Commissioner of Income-tax, Bombay
v. Abdullabhai Abdulkadar, 31 I.T.R. 72, applied.
Essen Private Ltd. v. Commissioner of Income-tax, 65 I.T.R.
625, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2380 and
2381 of 1966.
Appeals from the judgment and order dated January 7, 1966 of
the Calcutta, High Court in Income-tax References Nos. 7 and
176 of 1961.
S. Mitra, S. K. Aiyar, R, N. Sachthey and B. D. Sharma,
for the appellant (in both the appeals).
A. K. Sen, O. P. Khaitan and B. P. Maheshwari, for the
respondent (in both the appeals).
The Judgment of the Court was delivered by
Grover, J. These appeals by certificate arise out of a
common judgment of the Calcutta High Court in two Income tax
References.
The assessee is a private limited company. It carried on
the business of banking and financing as also of managing
agency. Starch Products Ltd. was one of the various
companies which was being managed by the assessee. Starch
Products had appointed the U.P. Sales Corporation Ltd. as
its selling agent. The assessee claimed to have stood
guarantee for a loan of Rs. 6 lakhs which was advanced to
the U.P. Sales Corporation Ltd. by the Gwalior Industrial
Bank Ltd. The borrower failed to pay the loan which on
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August 2, 1948 stood at Rs. 5,60,199. This amount was paid
by the assessee pursuant to the guarantee. Thereafter the
assessee treated the U.P. Sales Corporation Ltd. as its
debtor for the aforesaid amount. That company went into
liquidation and as the assessee could not recover anything
from it a sum of Rs. 5,60,199 was written off in the books
of the assessee company. The claim was not entertained
either by the Income tax Officer or the Appellate Assistant
Commissioner. Before the Income tax Officer the
359
said amount Was claimed as bad debt vide assessee’s letter
dated September 12, 1957. The Income tax Officer rejected
the explanation furnished by the assessee for advancing such
a large amount to a company whose financial position was far
from satisfactory. According to him the advance was not a
bona fide money lending investment. Subsequently it was
sought to be established before the Income tax Officer, that
an indemnity had been given to the Gwalior Industrial Bank
Ltd. in the matter of the loan account of the U.P. Sales
Corporation Ltd. and the payment had been made on its
failure to clear the debt of the Bank. According to the In-
come tax Officer the assessee was asked to produce evidence
about the guarantee having been furnished but he was not
satisfied that there was any directors’ resolution
authorising the furnishing of a guarantee or that the
document purporting to be a guarantee had been properly
stamped or that there was other sufficient evidence to
establish the transaction. Before the Appellate Assistant
Commissioner the only substantial ground taken was that the
Income tax Officer had wrongly disallowed the claim &or bad
debt amounting to Rs. 5,60,199. The Appellate Assistant
Commissioner considered the question of the aforesaid amount
being an admissible deduction or allowance under S. 10(2)
(xi) of the Income tax Act 1922. In his opinion the
guaranteeing of a loan though made in the interest of the
assessee’s business and is a matter of commercial expediency
did not represent an advance made in the normal course of
the assessee’s business. Such an advance could have been
made only if it had been made to the company managed by the
assessee under a contractual obligation to guarantee the
finances of the managed company. According to him the claim
for irrecoverable loan would have been also admissible if
the assessee could establish that the loan represented an
interest bearing advance made in the course of the
assessee’s money lending business but that was not the case
of the assessee. And since the loan had been advanced to
assist a concern having trade relations with one of the
managed companies it could not be allowed as a permissible
deduction.
The appellate tribunal did not agree with the finding of the
Appellate Assistant Commissioner that the loss was not
directly incidental to the assessee’s business. This is
what the tribunal stated in its order :
"The Appellate Assistant Commissioner, in our
opinion, failed to appreciate the special
nature of the business carried on by the
assessee. This is not a case where any money
was advanced by the assessee for the purpose
of earning interest. All that the assesses
did was to stand surety for the money advanced
by a Bank to the selling agent of one of its
managed companies,. If such a
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guarantee was not given Messrs. Starch
Products Ltd., one of the managed companies,
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would have had to give extended credit to the
selling agent and this could be possible if
the managed company in its turn was financed
either by the managing agents or a third
party. It was to obviate the necessity of
such borrowing by the managed company that the
assessee company stood guarantee for the loan
given by Gwalior Industrial Bank Ltd. to U.P.
Sales Corporation Ltd. It was only on the
failure on the part of the borrower, i.e. U.P.
Sales Corporation Ltd., to fulfill its
committment that the assessee as a guarantor
came into the picture.’ There was, therefore,
no question of earning of any interest on any
money advanced. It was in the larger interest
of the assessee’s business that the guarantee
was given. The standing of surety for the
sales Organisation of the managed company and
the consequent loss arising therefrom was in
our opinion germane to the assessee’s
’business. It is now well-established
that a
sum of money extended not of necessity and
with a view to give a direct and immediate
benefit to the trade but voluntarily and on
the ground of commercial expediency and in
order to indirectly facilitate the carrying on
of the business, may yet be an allowable
deduction in computing the profits and gains
of the business."
The Tribunal held that the assessee’s claim for the loss of
Rs. 5,60,199 was an admissible deduction. At the instance
of the Commissioner of Income tax, the Tribunal referred the
following question of law to the High Court:-
"Whether on the facts and in the
circumstances of the case, the sum of Rs.
5,60,199 was an admissible deduction in
computing the business profits of the assessee
?"
Three other questions were referred to the High Court on an
application made under s. 66(2) of the Act. It is
unnecessary to refer to them as the real controversy has
centred on the above question alone.
The High Court addressed itself to the question whether the
amount in dispute fell within S. 10(2) (xi) of the Act. The
finding of the Appellate Assistant Commissioner that the
guarantee had in fact been furnished to the Bank was not
disputed. This is what the High Court said after referring
to certain decided cases and the relevant portion of the
Tribunal’s judgment :-
"We agree that it was in the larger interest
of the assessee’s business that the guarantee
was given and we
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are of the opinion that the debt was
incidental to the business of the assessee
within the meaning of s. 10(2)(xi) of the Act
and such a debt was found to be irrecoverable
in the relevant accounting year commencing on
the 31st October 1951 and ending on the 18th
October 1.952."
While computing profits or gains of business under s. 10
certain allowances have to be made under sub-s. (2). The
allowance covered by clause (xi) thereof has to be made when
the assessee’s accounts in respect of any part of his
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business, profession or vocation are not kept 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 loans 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 books of the assessee. Now a
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 assessee’s
’business. The deduction claimed should not be too remote
from the business carried on by the assessee. In Madan
Gopal Bagla v. Commissioner of Income tax West Bengal(1) the
principle which was accepted was that the debt in order to
fall within s. 10(2) (xi) must be one which can properly be
called a trading debt i.e. debt of the trade the profits of
which are being computed. It was observed that the
assessee in that ease 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 reason 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 s. 10(2)(xi); see
Commissioner of Income tax Bombay v.
(1) 30 I.T.R. 174.
362
Abdullabhai Abdulkadar(1). In Essen Private Ltd. v. Commis-
sioner of Income tax(2) Madras, 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. 2 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 sum
in its books as bad debts and it claimed that allowance
under s. 10(1) (xi). The Tribunal found that the advances
to the managed company and the agreement guaranteeing the
loan to the managed company were in pursuance 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 cause in the memorandum of
association by which the assessee was entitled to land
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
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the managing agency to provide funds to the managed company.
In the present case none of those facts have 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.
In our judgment the facts relied upon by the appellate
tribunal and the High Court are barely sufficient for
bringing the allowance claimed under S. 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
customer 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 assessee’s
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 assessee’s
business. It is equally difficult to appreciate the
observations of the High Court that it was in the larger
interest of
(1) 31 I.T.R. 72.
(2) 65 I.T.R 625.
363
the assessee’s 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 fall within s. 10(2) (xi). No
attempt was made nor indeed it could be usefully made to
claim any allowance under s. 10(2:) (xv)of the Act.
For the reasons given above the correct answer to the
question referred should be in the negative and against the,
assessee. The appeals are thus allowed with costs and the
judgment of the High Court is set aside. One hearing fee.
G.C. Appeals allowed.
364