Bad and doubtful debts in respect of business.

The assessee was a partnership firm doing business as freight brokers for various shipping lines including Ashoka Lines, Ltd. Later, it became the proprietary concern of the assessee. It would appear that a firm known as ‘Inden Biselers’ was in need of a vessel for the carriage of tiles from the ports on the West Coast to ports in Ceylon. A charter party was entered into by this firm with Ashoka Lines, Ltd., the latter agreeing to provide a vessel called “Menaka”, later re-named “Manek Prasad”. The Ashoka Lines, Ltd. (hereinafter referred to as the owners) had to purchase the vessel and make it available to the charterers Inden Biselers. They were however in somewhat straitened circumstances and had need of funds to enable the purchase. The charterers agreed to advance a sum of Rs. 25,000 which was to be adjusted against the freight payable. The charterers were however unwilling to rely solely on the owners with regard to the repayment of this sum. They accordingly required the assessee, the freight broker, to stand guarantee for the repayment of the amount. Such a guarantee was given by the assessee in a letter to the charterers.

The advance was in due course paid by the charterers to the owners, who utilised the amount in the acquisition of the vessel ‘Manek Prasad’ and fitted it out for the voyages in question. The understanding was that the freight payable to the owners on account of the first seven voyages was to be adjusted against the advance. In so far as the guarantee furnished by the assessee is concerned, it provides thus:

" In consideration of your having agreed to advance the sum of Rs. 25,000 (rupees twenty-five thousand) to our principals, Messrs. Ashoka Line, Limited......I, K. S. Janakiraman, Managing Partner..........on my behalf and on behalf of the firm, guarantee the repayment of the sum of Rs. 25,000 (rupees twenty-five thousand) to you within two days of your sending me a written demand for the payment.

I further state that if our principals named above do not perform the charter party entered into between you and them on 23rd September, 1952, I shall indemnify against all loss or damage you may incur by such breach of agreement."

It appears that there was some delay in making the vessel available to the charterers. It was finally so made available during the first week of December, 1952. Unfortunately, the vessel became unfit for further use after the first voyage and in consequence, the owners failed to carry out their part of the contract under the terms of the charter party. It is not clear from the statement of the case or from the other records made available to this Court why the owners took no steps to refund the sum of Rs. 25,000 which they had received as advance from the charterers. But the assessee, by reason of the guarantee which he had given, made payments of a total sum of Rs. 27,500 to the charterers in discharge of his obligation. This amount the assessee wrote off in his profit and loss account for the calender year 1953, the relevant year for the assessment year 1954-55, and claimed it as a deduction under section 10 (2) (xi) of the Act. The Income-tax Officer held that the loss of Rs. 27,500 did not arise to the assessee in the normal course of his trade and disallowed the claim. The Appellate Assistant Commissioner thought that the making of advances, as the one in the present case, was not required in the course of the assessee’s business; there was also no custom of the trade established to show that it was usual for freight brokers to make such advances. He came to the conclusion that the loss was a capital loss and declined to grant the relief prayed for. The Tribunal took almost the same view of the matter and upheld the rejection of the claim.

In addition to this transaction, it would appear that in order to meet the contingency of the delay occasioned in making ‘Manek Prasad’ available to the charterers on the stipulated date, another vessel called ‘M. V. Jehangir