THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY I vs. M/S. JAGANNATH KISSONLAL, BOMBAY

CIVIL APPEAL No. 358/1958Supreme Court[1961] 2 S.C.R. 64424 November 1960Bench: 3 JudgesAuthor: J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH8 pages
AI SummaryDismissed

What were the facts?

The respondent, a registered firm, borrowed Rs. 1,00,000 from the Bank of India on a joint and several promissory note with one Kishorilal for business purposes. The respondent took Rs. 50,000 and Kishorilal took the remaining Rs. 50,000. Kishorilal became bankrupt, and the respondent had to pay the entire Rs. 1,00,000 plus interest to the bank. In the accounting year (August 26, 1949, to July 17, 1950, for assessment year 1951-52), the respondent received Rs. 18,805 from Kishorilal's Official Assignee, leaving a balance of Rs. 31,740 unpaid by Kishorilal. The respondent claimed this unpaid balance as a deduction. The Income-tax Officer and Appellate Assistant Commissioner disallowed the claim, but the Income-tax Appellate Tribunal allowed it as a business loss under Section 10(2)(xv). The High Court upheld the Tribunal's decision on a reference.

What did the Supreme Court hold?

The Supreme Court held that the High Court's view was correct. The Court affirmed the Tribunal's findings that there was a well-established commercial practice of financing businesses by borrowing money on joint and several liability, which allowed the respondent to obtain loans at a lower interest rate. It was also found that there was mutuality between the borrowers for standing surety for each other for business loans. Consequently, the respondent was entitled to deduct the loss suffered in paying the sum not paid by his co-borrower. The Court distinguished the facts from Madan Gopal Bagla and S. R. Subramanya Pillai, emphasizing that in this case, the loss was directly connected to the business's financing method, which was a recognized commercial practice. The Privy Council case of Montreal Coke and Manufacturing Co. was also deemed inapplicable. The appeal was dismissed.

What were the issues?

1. Whether the assessee's claim for deduction is sustainable under Section 10(2)(xv) of the Indian Income-tax Act, 1922? 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? Assessee's Arguments: The respondent argued that borrowing money on joint and several liability was a well-established commercial practice, allowing them to secure loans at a lower interest rate. They contended that the loss incurred due to the co-borrower's bankruptcy was incidental to their business and therefore deductible as a business loss under Section 10(2)(xv). They relied on the finding of mutuality between the borrowers and the established commercial practice. Revenue's Arguments: The appellant (Commissioner of Income-tax) challenged the finding regarding the existence of a commercial practice. They also relied on the Supreme Court's decision in Madan Gopal Bagla v. Commissioner of Income-tax, West Bengal, and a Madras High Court judgment in Commissioner of Income-tax v. S. R. Subramanya Pillai, arguing that such losses were not deductible as they were either capital losses or too remote from the business.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv)

AI-generated summary — verify with the full judgment below

November a4. 644 SUPREME COURT REPORTS (1961] THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY I v. M/S. JAGANNATH KISSONLAL, BOMBAY (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Income Tax-Money borrowed by two persons for business pur- poses on joint and several lidbility-One failing to pay his share- Whole paid by another-Unpaid sum by Co-borrower-If deductible as business loss-Commercial custom of joint borrowing-Mutuality -Indian Income Tax Act, z922 (II of z922), s. I0(2)(xv).

For the purposes of its business the respondent borrowed a certain sum of money from the Bank of India on a pronote executed jointly by him and one Kishorilal in accordance with a commercial practice of carrying on business by borrowing money from Banks on joint and several liability. The money was divid- ed half and half between the respondent and Kishorilal but Kishorilal failed to pay off his liability as he became a bankrupt and th~ respondent had to pay the whole amount to the Bank.

The respondent, however, received from the Official Assignee a part of the sum taken by the Kishorilal leaving a balance still unpaid. The respondent's claim to deduct this unpaid balance under s. r

The order continues below.

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