{"id":106147,"date":"1956-05-08T00:00:00","date_gmt":"1956-05-07T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/madan-gopal-bagla-vs-the-commissioner-of-on-8-may-1956"},"modified":"2015-12-14T06:58:49","modified_gmt":"2015-12-14T01:28:49","slug":"madan-gopal-bagla-vs-the-commissioner-of-on-8-may-1956","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/madan-gopal-bagla-vs-the-commissioner-of-on-8-may-1956","title":{"rendered":"Madan Gopal Bagla vs The Commissioner Of … on 8 May, 1956"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Madan Gopal Bagla vs The Commissioner Of … on 8 May, 1956<\/div>\n
Equivalent citations: 1956 AIR 571, \t\t 1956 SCR 551<\/div>\n
Author: N H Bhagwati<\/div>\n
Bench: Bhagwati, Natwarlal H.<\/div>\n
           PETITIONER:\nMADAN GOPAL BAGLA\n\n\tVs.\n\nRESPONDENT:\nTHE COMMISSIONER OF INCOME-TAX,WEST BENGAL.\n\nDATE OF JUDGMENT:\n08\/05\/1956\n\nBENCH:\nBHAGWATI, NATWARLAL H.\nBENCH:\nBHAGWATI, NATWARLAL H.\nDAS, SUDHI RANJAN (CJ)\nAIYYAR, T.L. VENKATARAMA\n\nCITATION:\n 1956 AIR  571\t\t  1956 SCR  551\n\n\nACT:\n       Income-tax-Allowable  deduction-Timber  business-Surety\t to\n       third  party-Bad debt-Capital loss or  business\tloss-Indian\n       Income -tax Act, 1922 (XI of 1922), s. 10 (2) (xi).'\n\n\n\nHEADNOTE:\n       The appellant who was a timber merchant obtained a loan from\n       the  Bank  of India on the joint security of himself  and  a\n       third  party, M. On the same day M obtained a loan from\tthe\n       Imperial Bank of India on the joint security of himself\tand\n       the  appellant.\tM failed in his business and  the  Imperial\n       Bank  of\t India\trealised the amount of the  loan  from\tthe\n       appellant   who\tafter  getting\tsome  dividends\t from\tthe\n       receivers,  wrote  off  the  balance  as\t bad  debt  in\tthe\n       assessment  year in question and claimed it as an  allowable\n       deduction under s. 10 of the Indian Income-tax Act, 1922\t on\n       the  footing that it was in the course of securing  finances\n       for  the business of timber that he stood surety with M\tand\n       that  it was the usual custom to secure loans on\t the  joint\n       security from Banks by persons carrying on business.  It was\n       not  established\t that  the appellant was in  the  habit\t of\n       standing\t surety for other persons along with them  for\tthe\n       purpose of securing loans for their use and benefit.\n       Held,  that the debt in question could not be  considered  a\n       debt in respect of the. business of the assesses who was not\n       a person carrying on a business of standing surety for other\n       persons and that, in any event, -the loss suffered by reason\n       of having to pay a debt borrowed for the benefit of  another\n       would be a capital loss and not a business loss and was\tnot\n       an allowable deduction under s. 10(2)\n       (xi) of the Indian Income-tax Act.\n       Commissioner  of\t Income-tax, Madras v. S. A.  S.  Bamaswamy\n       Chettiar<\/a> ([1946] 14 I.T.R. 236), distinguished.\n       Commissioner  of\t Income-tax,  Madras v.\t S,  B.\t Subramanya\n       Pillai<\/a> ([1950] 18 I.T.R. 85), approved.\n\n\n\nJUDGMENT:\n<\/pre>\n
       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6 of 1954.
\n       Appeal  from  the judgment -and order dated the 8th  day\t of
\n       June 1951 of Calcutta High Court in Income-tax Reference No.
\n       1 of 1951.\n<\/p>\n
       R.   J. Kolah and P.  K. Ghosh, for the appellant.\n<\/p>\n
       552<\/span><\/p>\n
       G.   N.\tJoshi,\tPorus A. Mehta and R. H.  Dhebar,  for\tthe
\n       respondent.\n<\/p>\n
       1956.  May 8. The Judgment of the Court was delivered by
\n       BHAGWATI J.-This is an appeal with certificate under section
\n       66-A(2) of the Indian Income-tax Act, 1922 from the judgment
\n       and order passed by the High Court of Judicature at Calcutta
\n       on  a reference under section 66(1) of the Act, whereby\tthe
\n       High Court answered the referred question in the negative.
\n       The  appellant is a timber merchant.  On 5th February  1930.
\n       he obtained a loan of Rs. 1 lakh\t from the Bank of India\t on
\n       the joint security of himself and one Mamraj Rambhagat.\t On
\n       the same day Mamrai Rambhagat obtained -a loan of Rs. 1 lakh
\n       from  the  Imperial  Bank of India.,  Bombay  on\t the  joint
\n       security\t of himself and the appellant.\tThe appellant  paid
\n       off his loan of Rs.  I lakh to the Bank of India but  Mamraj
\n       Rambhagat failed to make good the amount of his loan to\tthe
\n       Imperial Bank of India, Bombay.\tThis sum of Rs. 1 lakh\twas
\n       realised\t by the Imperial Bank of India from  the  appellant
\n       with interest thereon of Rs. 626 on 24th March 1930.
\n       Mamraj Rambhagat failed in his business and his estate  went
\n       into  the  hands of the receivers on 25th April\t1930.\tThe
\n       appellant  opened  a ledger account in the  name\t of  Mamraj
\n       Rambhagat and the total amount of Rs. 1,00,626, was  debited
\n       to this account.\t The appellant received the dividends  from
\n       the receivers: Rs.31,446 on 30th October 1930, Rs. 9,434\t on
\n       25th April 1934 and Rs. 4,716 on 17th May 1938,\taggregating
\n       to Rs. 45 596 leaving a balance of Rs. 55,030 unpaid,  which
\n       sum he wrote off as bad debt in the assessment year  1941-42
\n       (the  account  year being 1997 Ramnavmi) and claimed  as\t an
\n       allowable deduction under section 10 of the Act.
\n       The Income-tax Officer disallowed the claim holding that the
\n       said  loss  was\ta capital loss, and so\tdid  the  Appellate
\n       Assistant  Commissioner.\t  It was argued on  behalf  of\tthe
\n       appellant before the Appellate Assis-\n<\/p>\n
       553<\/span><\/p>\n
       tant Commissioner that it was the usual custom in Bombay\t to
\n       secure  loans  on  joint\t security  from\t Banks\tby  persons
\n       carrying\t on  business.\tIt was stated that this\t manner\t of
\n       securing loans on joint security was preferred by the  Banks
\n       and it was also in the interest of the traders as lower rate
\n       of interest was charged, if the loan was on joint  security.
\n       It  was also stated that the appellant used to borrow  money
\n       on  joint  security  frequently and  certain  old  pro-notes
\n       jointly executed were submitted before the Appellate  Assis-
\n       tant  Commissioner.   Reference\twas made  to  the  case\t of
\n       Commissioner  of\t Income-tax, Madras v. S. A.  S.  Ramaswamy
\n       Chettiar<\/a>(1), where it was held that it was a custom  amongst
\n       Nattukottai  Chettiars to stand surety-for one  another\tfor
\n       borrowing  from’\t Banks for the purpose of  lending  out\t at
\n       higher  rates of interest and that the loss  incurred  under
\n       the  agreement of guarantee by the Chettiar firm\t should\t be
\n       allowed\t as   a\t  deduction.\tThe   Appellate\t  Assistant
\n       Commissioner,  however, distinguished the case on facts\tand
\n       held that even though the appellant stood surety for  Mamraj
\n       Rambhagat in course of securing finance for his business\t of
\n       timber,\tit was the loss of a sum borrowed by  another,\tthe
\n       sum borrowed was capital in its nature and the loss suffered
\n       by the appellant on account of Mamraj Rambhagat’s failure to
\n       pay was a capital loss.\n<\/p>\n
       On  appeal  taken  by the appellant before  the\tIncome\tTax
\n       Appellate Tribunal, the Tribunal was of the opinion that the
\n       Appellate  Assistant  Commissioner  had\tnot  expressed\tany
\n       opinion in his order as to whether there was such custom\t or
\n       not nor had he asked the appellant to establish the  custom.
\n       The  Tribunal in these circumstances held that  -the  custom
\n       was  accepted by the Department.\t The Tribunal did  not\tsee
\n       any  distinction\t between  the money  lending  business\tand
\n       timber  business\t which were both financed by this  type\t of
\n       borrowing   and\tdiffering  from\t the  Appellate\t  Assistant
\n       Commissioner  followed  the  decision  in  Commissioner\t of
\n       Income-tax, Madras V. S. A. S. Ramaswamy Chettiar<\/a>  (supra).,
\n       and came to
\n       (1) [1946] 14 I.T.R. 236.\n<\/p>\n
       554<\/span><\/p>\n
       the conclusion that the loss suffered by standing surety was
\n       an   allowable  loss  and  upheld  the  contention  of\tthe
\n       appellant.\n<\/p>\n
       At the instance of the respondent the Tribunal stated a case
\n       to  the\tHigh  Court  under section 66(1)  of  the  Act\tand
\n       referred the following question for its decision:-
\n       “Whether\t on  the  facts\t found the sum\tof  Rs.\t 55,030\t is
\n       allowable  as  a bad debt under the  provisions\tof  section
\n       10(2)(xi) of the Indian Income-tax Act”.\n<\/p>\n
       The  said reference was heard by the High Court and  in\tits
\n       judgment the High Court held that the Tribunal had proceeded
\n       on  an erroneous assumption as to the facts of the case\tand
\n       the  application of the money.’ Since’ no part of the  loan,
\n       which  had  been taken from the Imperial Bank  of  India\t by
\n       Mamraj  Rambhagat on the joint security of himself  and\tthe
\n       appellant,  was\tapplied to the\tappellant’s  own  business,
\n       there was no question of an allowable deduction in  relation
\n       to the business of the appellant.  The High Court held  that
\n       the  Tribunal  was in error even in law\tinasmuch  as  under
\n       section 10(2) (xi) it is only a trading. or business debt of
\n       the  trade  or  business of the appellant,  which  could\t be
\n       claimed as a loss and as the debt claimed was not in respect
\n       of the business of the appellant, which -was the business of
\n       trading\tin  timber  and not of a  person  carrying  on\tthe
\n       business\t of  standing surety for other\tpersons,  the  loss
\n       suffered\t by  the  appellant was a capital loss\tand  not  a
\n       business loss at all.  Regarding the decision relied upon by
\n       the Tribunal, the High Court referred to a later decision in
\n       Commissioner  of\t Income-tax,  Madras v.\t S.  R.\t Subramanya
\n       Pillai<\/a>(1), which held that the earlier decision must be read
\n       as  confined  to its peculiar facts and\tnot  applicable\t to
\n       business\t other than money lending business  of\tNattukottai
\n       Chettiars.  The High Court, therefore, answered the referred
\n       question in the negative. Hence this appeal.
\n       The  sole question for our determination in this\t appeal\t is
\n       whether the loss of Rs. 55,030 suffered by the appellant\t in
\n       this transaction was a capital loss or
\n       (1)  [1950] 18 I.T R. 85.\n<\/p>\n
\t\t\t   555<\/span><\/p>\n
       was  a trading loss or a bad debt incurred by the  appellant
\n       in the course of carrying on his business of timber.  It\t is
\n       clear  that  no\tpart of the monies borrowed  on\t the  joint
\n       security\t of  the appellant and Mamraj  Rambhagat  from\tthe
\n       Imperial\t Bank of India, Bombay went to finance\tthe  timber
\n       business\t of  the appellant, but they were all  utilised\t by
\n       Mamraj Rambhagat in his own business.  These monies were not
\n       required\t to finance the timber business of  the\t appellant,
\n       nor  was the debt due by Mamraj Rambhagat and in respect\t of
\n       which the account was opened by the appellant in his  ledger
\n       in  the\tname  of Mamraj Rambhagat a  debt  due\tby  Mamraj.
\n       Rambhagat  to the timber business of the appellant.  If\tany
\n       monies  had  been borrowed by the appellant  in\this  timber
\n       business,  they\twould certainly have been his  capital\tand
\n       whatever\t loss  he  incurred therein  would  have  been\this
\n       capital loss.  The manner in which these monies were  sought
\n       to  be connected with the timber business and treated  as  a
\n       trading\tloss  or  bad debt of the timber  business  was\t by
\n       showing that it was the custom amongst the persons  carrying
\n       business\t in  Bombay to borrow monies from  Banks  on  joint
\n       security and if A wanted monies for financing his  business,
\n       he  could  do so by asking B to join him as surety,  but\t he
\n       could  not ask B to join him as such unless he stood  surety
\n       for  B  in the loans which B borrowed in his turn  from\tthe
\n       Bank.  A s joining B as surety was thus a consideration\tfor
\n       B’s  joining  A as surety in his transaction with  the  Bank
\n       and, therefore, although no part of the monies borrowed by B
\n       came  into the business of A, A joined B as surety  for\tthe
\n       purpose of financing his own business, which he could not do
\n       without B joining him as surety in the loan which he himself
\n       obtained from the Bank for the purpose of financing his\town
\n       business.  The transaction of A’s joining B as surety in the
\n       matter  of  B’s procuring a loan for the\t financing  of\this
\n       business was thus an essential operation of the financing of
\n       A’s business and was, therefore, an incident of A’s business
\n       and any loss incurred by A in the transaction could thus\t be
\n       treated as a trading loss in the – course of carrying on\t of
\n       A’s
\n       72<\/span>
\n       556<\/span>
\n       business.   The\tloss  incurred\tby  the\t appellant  in\tthe
\n       transaction of his joining Mamraj Rambhagat as surety in the
\n       loan which Mamraj Rambhagat procured from the Imperial  Bank
\n       of  India could, it was urged, thus be treated as a  trading
\n       loss or bad debt of the appellant’s timber business.
\n       It is necessary, therefore, to see what is the exact  nature
\n       and  scope of the custom said to have been accepted  by\tthe
\n       Department.    The  custom  stated’  before  the\t  Appellate
\n       Assistant Commissioner was that persons carrying on business
\n       in  Bombay used to borrow monies on joint security from\tthe
\n       Banks  in order to facilitate getting  financial\t assistance
\n       from  the Banks and that too at lower rates of interest.\t  A
\n       businessman  could  procure financial  assistance  from\tthe
\n       Banks  on his own, but he would in that case have to  pay  a
\n       higher rate of interest.\t He would have to pay a lower  rate
\n       of   interest  if  he  could  procure  as   surety   another
\n       businessman,  who  would\t be approved by\t the  Bank.  -This,
\n       however,\t  did  not  mean  that\tmutual\t accommodation\t by
\n       businessmen  was\t necessarily  an ingredient  part  of  that
\n       custom.\tA could procure B, C or D to join him as surety\t in
\n       order to achieve this objective, but it did not\tnecessarily
\n       follow  that if A wanted to procure B, C or D to\t thus  join
\n       him  as\tsurety, he could only do so if he in his  own  turn
\n       joined  B,  C or D as surety in the loans, which B, C  of  D
\n       procured\t in their turns from the Banks for financing  their
\n       respective businesses.  Unless that factor was  established,
\n       the  mere procurement by A of B, C or D as surety would\tnot
\n       be  sufficient to establish the custom sought to\t be  relied
\n       upon  by the appellant so as to make the transaction of\this
\n       having  joined  Mamraj  Rambhagat  as  surety  in  the  loan
\n       procured by Mamraj Rambhagat from Imperial Bank of India,  a
\n       transaction  in\tthe course of carrying on  his\town  timber
\n       business\t and to make the loss in the transaction a  trading
\n       loss or a bad debt of the timber business of the\t appellant.
\n       The  old\t pronotes  jointly executed by\tthe  appellant\tand
\n       others, which were submitted before the Appellate  Assistant
\n       Commissioner  did  not carry the case of the  appellant\tfar
\n       enough and stopped
\n       557<\/span>
\n       short of proving the custom alleged by the appellant in, its
\n       entirety.    The\t  transaction  in   question   could   not,
\n       ‘therefore,  be.\t deemed\t to  be one  entered  into  by\tthe
\n       appellant  in  the course of or in carrying  on\this  timber
\n       business.  Procuring finances for his timber business  would
\n       no  doubt  be an essential operation in the  course  of\this
\n       carrying. on -his business, but the same thing could not\t be
\n       predicated  of  this  transaction  of  his  joining   Mamraj
\n       Rambhagat  as  surety  for procuring Rs.\t 1  lakh  from\tthe
\n       Imperia\tBank of India, which was wholly to  finance  Mamraj
\n       Rambhagat’s  business  and not the timber  business  of\tthe
\n       appellant.\n<\/p>\n
       Learned\tcounsel for the appellant laid particular  emphasis
\n       on the finding by the Appellate Assistant Commissioner  that
\n       “it  was in the course of securing finance for the  business
\n       of timber that he stood surety with Mamraj Rambhagat”.  This
\n       finding\tmerely records the statement of fact, but does\tnot
\n       go  so  far as to establish the custom sought to\t be  relied
\n       upon  by the appellant.\tThe old pronotes submitted  by\tthe
\n       appellant  before  the,\tAppellate  Assistant   Commissioner
\n       merely  related to his own transactions, where he  had  been
\n       joined  by others as surety and did not -establish that\tthe
\n       others had been similarly accommodated by him in the matters
\n       of  loans  which they had in their turn\tprocured  from\tthe
\n       Banks.\tThe  solitary instance of  the\tappellant’s  having
\n       joined Mamraj Rambhagat in the transaction in question could
\n       not  be\tsufficient  to establish the custom  sought  to\t be
\n       relied  upon by him and we do not see any reason to  enlarge
\n       the  scope of the so-called custom beyond what is  warranted
\n       by the facts as set out in the order passed by the Appellate
\n       Assistant Commissioner.\n<\/p>\n
       The  custom among the Nattukottai Chettiars held\t proved\t in
\n       Commissioner  of\t Income-tax, Madras v. S. A.  S.  Ramaswamy
\n       Chettiar<\/a> (supra) was that they stood surety for one another,
\n       when they borrowed from Banks for the purpose of lending out
\n       at higher rates of interest.  It was, moreover, an essential
\n       element in the carrying on of a money lender’s business that
\n       558<\/span>
\n       money,  which Was thus lent out should be procured and  that
\n       could  not  be  done unless it was  borrowed  on\t the  joint
\n       security of Nattukottai Chettiars, who stood surety for\tone
\n       another.\t Unless that type of suretyship was resorted to,  a
\n       Nattukottai  Chettiar  by himself could\tnever  procure\tany
\n       monies which he could invest in his money lending  business.
\n       The following passage from the judgment at page 238 is every
\n       apposite:—————\n<\/p>\n
       “It is their custom to borrow from banks for the purpose\t of
\n       lending\tout  the  sums\tso  obtained  at  higher  rates\t of
\n       interest.    The\t banks\trequire\t such  overdrafts   to\t be
\n       guaranteed  by other Chettiars.\tThe Chettiars stand  surety
\n       for one another in these borrowings.  If a Chettiar  refused
\n       to accommodate another moneylender in this way, he would not
\n       be  able\t to  obtain  a\tguarantor  for\this  own  essential
\n       borrowings.  The assessee in this case borrowed money on the
\n       guarantee  of  others  and in turn stood\t surety\t for  other
\n       Chettiars”.\n<\/p>\n
       There  were  thus elements of mutuality\tand  the  essential
\n       ingredient in the carrying on of the money lending business,
\n       which were elements of the custom proved in that case,  both
\n       of which are wanting in the present case before us.
\n       It  is significant to note that this case was  distinguished
\n       by   the\t learned  Judges  of  the  Madras  High\t Court\t in
\n       Commissioner  of\t Income-tax,  Madras V.\t S.  B.\t Subramanya
\n       Pillai<\/a> (supra), where it was held that that decision must be
\n       confined\t to  its own peculiar facts and does not  apply\t to
\n       businesses  other  than\tNattukottai  Chetty  money  lending
\n       business.   In that case the assessee was a bookseller,\twho
\n       borrowed\t from time to time jointly with one L a sum of\tRs.
\n       16,200  out of which the assessee took a sum of\tRs.  10,450
\n       for  his business needs and L took the balance.\t The  joint
\n       borrowing was necessitated by the business needs of both the
\n       borrowers  and  by  the insistence  of  money  lenders,\twho
\n       required the joint security of the two persons.\tL failed in
\n       his business and the assessee had to repay the creditors the
\n       whole of the joint borrowing.  The assessee had also to
\n       559<\/span>
\n       spend a sum of Rs. 658 in an unsuccessful attempt to recover
\n       the  amount due from L. The assessee ‘Claimed to deduct\tthe
\n       sum  of Rs. 658 and also the sum of Rs. 520495 which he\thad
\n       to  pay the creditors on account of L’s share of\t the  joint
\n       loan;  in the computation of his business profits.   It\twas
\n       held that the assessee was not entitled to deduct these sums
\n       in the computation of his business profit either under  sec-
\n       tion 10 (2) (xi) or section 10 (2) (xv) or as business loss.
\n       This  case furnishes the proper analogy to the present  case
\n       and points to the right conclusion in regard to the claim of
\n       the appellant.\n<\/p>\n
       The following passage from the judgment of the learned C. J.
\n       under  appeal correctly sums up, in our opinion,\t the  whole
\n       position:-\n<\/p>\n
       “The debt must therefore be one which can properly be called
\n       a trading debt and a debt of the trade, the profits of which
\n       are being computed.  Judged by that test, it is difficult to
\n       see  how\t The debt in the present case can be said to  be  a
\n       debt  in\t respect  of the business  of  the  assessee.\tThe
\n       assessee is not a person carrying on a business of  standing
\n       surety for other persons.  Nor is he a money-lender.  He\t is
\n       simply  a  timber-merchant.  There seems to have\t been  some
\n       evidence before the Appellate Assistant Commissioner that he
\n       had from time to time obtained finances for his business\t by
\n       procuring  loans on the joint security of himself  and  some
\n       other  person.  But it is not established, nor does it  seem
\n       to  have been alleged, that he in his turn was in the  habit
\n       of standing surety for other persons along with them for the
\n       purpose\tof securing loans for their use and benefit.   Even
\n       if  such, had been the case, any loss suffered by reason\t of
\n       having  to pay a debt borrowed for the benefit  of  another,
\n       would  have  been a capital loss to him and not\ta  business
\n       loss at all.\n<\/p>\n
       The  result,  therefore, is that the appeal fails  and  must
\n       stand dismissed with costs.\n<\/p>\n
       Appeal dismissed.\n<\/p>\n
       560<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Madan Gopal Bagla vs The Commissioner Of … on 8 May, 1956 Equivalent citations: 1956 AIR 571, 1956 SCR 551 Author: N H Bhagwati Bench: Bhagwati, Natwarlal H. PETITIONER: MADAN GOPAL BAGLA Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL. DATE OF JUDGMENT: 08\/05\/1956 BENCH: BHAGWATI, NATWARLAL H. BENCH: BHAGWATI, NATWARLAL H. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-106147","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nMadan Gopal Bagla vs The Commissioner Of ... on 8 May, 1956 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/madan-gopal-bagla-vs-the-commissioner-of-on-8-may-1956\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Madan Gopal Bagla vs The Commissioner Of ... on 8 May, 1956 - 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