A loss incurred by an assessee in paying off a joint and several liability may be allowable as a deduction under S. 10(2) (xv) of the Income-tax Act if it is incurred in the course of the assessee's business and is not a capital loss.

Headnote:
INCOME TAX - Deduction - Loss incurred by assessee in paying off joint and several liability - Whether allowable as deduction under S. 10(2) (xv) of the Income-tax Act - Commercial practice of borrowing money on joint and several liability - Mutuality - Whether loss is a business loss.
Fact of the Case:

The assessee, a registered firm carrying on business as commission agents in Bombay, borrowed money from a bank on a joint and several promissory note executed by it and another person. The assessee used a portion of the borrowed amount for its business purposes, while the other person used the remaining amount. The other person became bankrupt and the assessee had to pay the entire amount borrowed to the bank. The assessee claimed the amount paid as a deduction under S. 10(2) (xv) of the Income-tax Act, arguing that it was a loss incurred in the course of its business.
Finding of the Court:

The High Court held that the loss incurred by the assessee was allowable as a deduction under S. 10(2) (xv) of the Income-tax Act. The court found that there was a well-recognized commercial practice in Bombay of carrying on business by borrowing money from banks on joint and several liability. The court also found that the assessee had borrowed the money in accordance with this commercial practice and that the loss incurred was a result of the other person's bankruptcy.
Issues: 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?
Ratio Decidendi: The court held that the loss incurred by the assessee was a business loss and was therefore allowable as a deduction under S. 10(2) (xv) of the Income-tax Act. The court relied on the finding that there was a well-recognized commercial practice in Bombay of carrying on business by borrowing money from banks on joint and several liability. The court also found that the assessee had borrowed the money in accordance with this commercial practice and that the loss incurred was a result of the other person's bankruptcy.
Final Decision: The court dismissed the appeal and upheld the decision of the High Court.

Judgment

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.

2. 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.

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 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.

(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

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1960 Supreme(SC) 303

A loss incurred by an assessee in paying off a joint and several liability may be allowable as a deduction under S. 10(2) (xv) of the Income-tax Act if it is incurred in the course of the assessee's business and is not a capital loss.

Cases Referred (1)