Judgement

BHAGWATI, J. : This is an appeal with certificate under S. 66-A(2), India Income-tax Act, 1922 from the judgment and order passed by the High Court of Judicature at Calcutta on a reference under S. 66(1) of the Act, whereby the High Court answered the referred question in the negative.

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 24-3-1930.

3. Mamraj Rambhagat failed in his business and his estate went into the hands of the receivers on 25-4-1930. The appellant opened a ladger account in the name of Mamraj Rambhagat and the total amount of Rs. 1,00,626, was debited to this account. The appellant received the dividents from the receivers : Rs. 31,446 on 30-10-1930, Rs. 9,434 on 25-4-1934 and Rs. 4,716 on 17-5-1938, aggregating to Rs. 45,596, leaving a balance of Rs. 55,030 unpaid, which sum he wrote off as bad debt in the assessment year 1941-42 (the account year being 1997 Ramnavmi) and claimed as an allowable deduction under S. 10 of the Act.

4. 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 Commissioner.

Reference was made to the case of Commissioner of Income-tax, Madras v. S. A. S. Ramswamy Chettiar, 1946 Mad. 508, Where it was held that it was a custom amongst Nattukottai Chettiars to stand surety for one another for borrowing from Banks for the purpose of lending out at higher rates of interest and that the loss incurred under the agreement of guarantee by the Chettiar firm should be allowed as a deduction. The Appellate Assistant Commissioner, however, distinguished the case on facts and held that even though the appellant stood surety for Mamraj Rambhagat in course of securing finance for his business of timber, it was the loss of a sum borrowed by another, the sum borrowed was capital in its nature and the loss suffered by the appellant on account of Mamraj Rambhagat s failure to pay was a capital loss.

5. 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 Department.

The 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, and came to the conclusion that the loss suffered by standing surety was an allowable loss and upheld the contention of the appellant.

6. 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 deci