A guarantee given by a taxpayer is not deductible as a bad debt unless it is given in the course of the taxpayer's business.

RAMANUJAM J.

The following two question have been referred to this court by the Income-tax Appellate Tribunal at the instance of the Revenue;

"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 52, 083 being the amount due to him from Shri H. V. Gandhi as a bad debt for the assessment year 1973-74 ?

2. Whether, on the facts and in the circumstances of the case, loss has to be computed for the assessment year 1973-74 and such loss has to be set off against the income of the assessment year 1974-75 ?" *

The assessee, in this case, carries on business of money-lending and the profession of financial adviser. On the recommendations of the assessee, M/s. Annamalai Timber Trust (P.) Ltd., hereinafter referred to as "the company", lent to one Shri Gandhi a sum of Rs. 50, 000 on January 31, 1972, on a promissory note executed by Shri Gandhi for a sum of Rs. 50, 000 agreeing to repay the same with interest thereon at 15% per annum. The assessee had given a letter of guarantee to the company on January 27, 1972, guaranteeing due repayment of the aforesaid sum of Rs. 50, 000 together with interest thereon by Shri Gandhi. Sri Gandhi paid interest on the sum borrowed up to the end of April. 1972. However, he defaulted to pay interest thereafter. In view of the said default, the company called upon Shri Gandhi to repay the loan. Shri Gandhi did not repay the loan and pleaded his inability to repay by his letter dated August 9, 1972. The company, however, called upon him to pay the amount immediately the a letter dated September 11, 1972. The assessee also wrote to Shri Gandhi on September 26, 1972, calling upon him to pay the amount and informing him that otherwise the guarantee letter executed by the assessee would be enforced by the company. Shri Gandhi by his letter dated September 30, 1972, informed the assessee that he is not in a position to repay any part of the principal or interest due to the company. The company thereupon recovered the said loan of Rs. 50, 000 form the assessee along with interest of Rs. 2, 083.30. Thereafter the company returned the promissory note executed by Shri Gandhi with the endorsement of discharge. The assessee thereafter called upon Shri Gandhi to pay the amount of Rs. 52, 083 which he paid to the company on account of Shri Gandhi to pay the amount of Rs. 52, 083 which he paid to the company on account of Shri Gandhi. But Shri Gandhi had left India for taking up an employment in Thailand. Some of the creditors have also filed suits against Shri Gandhi for recovery of the various amounts due to them. One of the creditors has moved the court to declare Shri Gandhi an insolvent and the petition was pending. The assessee at that stage wrote off the sum of Rs. 52, 083 as irrecoverable in his books of account.For the year 1973-74, the assessee filed a return disclosing a loss of Rs. 10, 268 which, inter alia, included loss of Rs. 22, 782 under the head "Business". In doing so, he had deducted a sum of Rs. 52, 083 claimed to have been written off as bad debt. The ITO found that the assessee had not lent any money to Shri Gandhi but had only guaranteed the due repayment of the loan by the said Shri Gandhi to the company and that the guaranteeing of repayment of the loan is not part of the assessee's business of money-lending. Hence, he held that the assessee's claim for bad debt could not be allowed. The assessee put forward an alternative contention before the ITO that the said loan should be treated as short-term capital loss and set off against the income under the other heads under s. 71(3) of the I T Act, 1961, hereinafter referred to as "the Act". But this contention was not, however, considered by the ITO. For the assessment year 1974-75, practically the same contentions were advanced before the ITO but he had taken a view consistently with the view taken by him in the previous year.

Aggrieved by the assessment, the assessee preferred two ap