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

- **Citation:** [1961] 2 S.C.R. 644
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Bench:** J. L. Kapur, M. HrnAYATULLAH, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-bombay-city-i-v-m-s-jagannath-kissonlal-bombay-2014
- **Pages:** 8

## Headnote

Income Tax-Money borrowed by two persons for business purposes on joint and several lidbility-One failing to pay his shareWhole 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 divided 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. ro(2)(xv) of the Income-tax Act was refused by the Income-tax Officer and the Appellate Assistant C6mmissioner but
was allowed by the Income-tax Appellate Tribunal on appeal. On
a reference ma(le at the instance of the appellant the High Court
decided the question in favour of the respondent assessee. On
appeal by the appellant by special leave,
Held, that the view taken by the High Court was correct.
On the finding that there was a well establised Commercial practice of financing business by borrowing money on joint and
several liability and by so doing the respondent could borrow
at a lower rate of interest, and that there was mutuality between the borrowers for standing surety for each other for loans
taken for business purposes, the respondent assessee in computing his business profits was entitled to deduct the loss suffered
by him in paying the sum not paid by his co-borrower.
Commissioner of Income-tax v. Ramaswami Chettiar, [1946] 14
I.T.R. 236, applied.
Madan Gopal Bag/a v. Commissioner of Income-lax, West
Bengal, [1956] S. C.R. 551, Commissioner or Income-tax v. S. R.
Subramanya Pillai, [1950] 18 I. T. R. 85 distinguished.
Montreal Coke and Manufacturing Co. v. Minister of National
Revenue, [1945] 13 I.T.R. Supp. 1, not applicable.
Civn. APPELLATE JURISDICTION:
Civil Appeal No.
358of1958.
2 S.C.R. SUPREME COURT REPORTS
645
Appeal by special l.;iave from the judgment and
x96o
order dated 8th March, 1956, of the former Bombay Th c
. .
H•
.
f 9
e
01nmsssioner
1gh Court Ill l.T.R. No. 55 0 1 55.
of Income-tax,
A. N. Kripal an\l D. Gupta, for the appellant.
Bombay City I
N. A. Palkkivala and B. P. Maheshwari, for the Mi 1
v.
d
s.
agannalh
respon ents.
Kissonlal, Bombay
1960. November 24. The Judgment of the Court
was delivered by
Kapur J.
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 ~tated for opinion
and both were answered-in favour of the assessee and
against the Commissioner of Income-tax ~ho is the
appellant before us and the assessee is the respondent.
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,

## Text

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 purposes on joint and several lidbility-One failing to pay his shareWhole 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 divided 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. ro(2)(xv) of the Income-tax Act was refused by the Income-tax Officer and the Appellate Assistant C6mmissioner but
was allowed by the Income-tax Appellate Tribunal on appeal. On
a reference ma(le at the instance of the appellant the High Court
decided the question in favour of the respondent assessee. On
appeal by the appellant by special leave,
Held, that the view taken by the High Court was correct.
On the finding that there was a well establised Commercial practice of financing business by borrowing money on joint and
several liability and by so doing the respondent could borrow
at a lower rate of interest, and that there was mutuality between the borrowers for standing surety for each other for loans
taken for business purposes, the respondent assessee in computing his business profits was entitled to deduct the loss suffered
by him in paying the sum not paid by his co-borrower.
Commissioner of Income-tax v. Ramaswami Chettiar, [1946] 14
I.T.R. 236, applied.
Madan Gopal Bag/a v. Commissioner of Income-lax, West
Bengal, [1956] S. C.R. 551, Commissioner or Income-tax v. S. R.
Subramanya Pillai, [1950] 18 I. T. R. 85 distinguished.
Montreal Coke and Manufacturing Co. v. Minister of National
Revenue, [1945] 13 I.T.R. Supp. 1, not applicable.
Civn. APPELLATE JURISDICTION:
Civil Appeal No.
358of1958.
2 S.C.R. SUPREME COURT REPORTS
645
Appeal by special l.;iave from the judgment and
x96o
order dated 8th March, 1956, of the former Bombay Th c
. .
H•
.
f 9
e
01nmsssioner
1gh Court Ill l.T.R. No. 55 0 1 55.
of Income-tax,
A. N. Kripal an\l D. Gupta, for the appellant.
Bombay City I
N. A. Palkkivala and B. P. Maheshwari, for the Mi 1
v.
d
s.
agannalh
respon ents.
Kissonlal, Bombay
1960. November 24. The Judgment of the Court
was delivered by
Kapur J.
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 ~tated for opinion
and both were answered-in favour of the assessee and
against the Commissioner of Income-tax ~ho is the
appellant before us and the assessee is the respondent.
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.t.o the
Income-tax Appellate Tribunal this sum was . allowed
as an allowable de~uction under s, lO(~)(:~v) of the In,
come-tax Act a:t;id as business loss.
8:z
646
SUPREME COURT REPORTS
[1961)
z96o
At the instance of the Commissioner a case was staTh
C --. .
ted to the High Court of Bombay by the Income-tax
'
ommission" A
11
"b
1
I
h
of Jn,ome-ta•
ppe ate Tri una .
n t e statement of the case
Bombay City i which was agreed to by both parties the Tribunal said:
v.
"E'or the purpose of his business, he borrows from
M/s. Jagannath time to time money on joint and several liability from
Kissonlal, Bombay banks. The Commercial practice is to borrow money
Kapur].
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 tqe commercial practice of Bombay.
On these facts the following two questions of law
were referred to the High Court:-
"(l) 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.
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 a.greed
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:
•
...
• •
J
i • '
'
I ..
'
2 S.C.R. SUPREME COURT REPORTS
647
"The finding of the Tribunal is clear and explicit
r96o
that what the assessee was doing was not something Th c ---: .
f h
d.
b
. b
.
h"
B
ommissionar
out o t e or mary, ut m orrowmg t IS money on of Income-tax •
joint and several liability he was following a practice Bombay City r
which was eetablished as a commercial practice. Therev.
fore, the transaction was clearly in the course of the M/s. Jagannath
business and incidental to the business and it is this Kissonlal, Bomba}
transaction which resulted in a loss to the assessee, he
I<apur J.
having to pay the liability of the surety."
·
Therefore this appeal has to be decided on the basis
that a commercial practice of financing business by
borrowing money on joint and several liability was
established.
It was argued on behalf of the appellant that this
cou.rt in Ma.dan Gopal Bagl,a v. Oommissianer of
Income Tax, West Bengal (1) had decided against the
allowability of such losses.
But the facts of that case
when carefully scrutinised are distinguishable and the
decision does not support the contentions of the appellant. No doubt certain features of that case and the
present one are similar but they differ in essential features. In that case the assessee was a timber merchant
who obtained a loan of Rs. I lac from the Bank of
India on the joint security of himself and· one Mamraj,
which the ass~ssee paid off. Mamra.j also obtained a
loan of Rs. I lac on the· joint securipy of himself and
the assessee. Mamraj became lin insolvent and the
assessee had to pay the whole of the amount borrowed
with interest thereon. The assessee there received a
certain amount of money by way of dividends from
the Receiver and the balance he wrote off as bad debt
in the assessment year and claimed it as an allowable
deduction under .s. 10. The High Court there held
that the debt could not be said to be a debt in respect
qf the business of the assessee as he was not· carrying
on the business of standing surety for other persons
nor was he a money-lender, he being simply a timber
merchant; that it had not been established nor was it
alleged that he was in the habit of standing surety for
other persons "along with them for purposes of securing loans for their use and benefit" and even if money
(1) [1956] S.C;R. 551.
648
SUPREME COURT REPORTS
[19tH]
1960
had been so borrowed and there had been a loss the
Th
C -. .
loss would have been a capital loss and not a business
e
ommissioner l
.
of Income-ta~.
oss to the as~essee. This statement of_thelaw was apBombay City I proved by this Court but there:mutuahty, as an essenv.
tial ingredient of the custom established, was found to
M/s. Jagannath be lacking as is shown by the following passage from
Ifosonlal, Bombay the judgment of the court.
Kapur;.
"The custom stated before the Appellate Assistant Commissioner was that persons carrying on business in Bombay used to borrow monies on joint security from the Banks in order to facilitate getting
financial assistance from the Banks and that too at
lower rates of interest. A businessman could procure
financial assistance from the Banks on his own, but
he would in that case have to pay a higher rate of
interest. He would have to pay a lower rate of interest if he could procure as surety another businessman, who would be approved by the Bank. This,
however, did not mean that mutual accommodation
by businessmen was necessarily an ingredient part of
that custom. A could procure B, C or D to join him
as surety in order to achieve this objective, but it did
not necessarily follow that if A wanted to procure B,
C or D to thus join him as surety he could only do so
if he in his own turn joined B, C or D as surety in
the loans which B, C or D procured in their turns
from the Banks for financing their respective businesses. Unless that factor was established, the mere
procurement by A of B, C or D as surety would
not be sufficient to establish the custom sought to be
relied upon by the appellant so as to make the transaction of his having joined Mumraj Rambhagat as
surety in the loan procured by Mumraj Rambhagat
from Imperial B!i-nk of India, a transaction in the
course of carrying on his own timber ·business and to
mak!' the loss in the transaction a trading loss or 8.
bad debt of the timber business of the appellant."
Continuing at page 558 it was observed :
"There were thus elements of mutuality and the
essential ingredient in the carrying on of the money
lending business, which were elements of the custom
1
2 S.C.R. SUPREME COURT REPORTS
649
proved in that case, both of which are wanting in the
1960
present case before us."
Mr. Palkhivala for the respondent rightly argued that The1 1Commiss
1ioner
M d
G
l B la'
(1)
d 'd d
.
h
o
ncome- ax,
a an opa
ag " case
was eci e
agamst t e Bombay City 1
assessee because the <mstom of persons standing
v.
surety for each other for borrowing money and the M/s. Jagannath
element of mutuality which was an essential ingre- Kissonlal, Bombay
dient in the case of Commissioner of Income Tax,
Madras v. S. A. S. Ramaswamy Chettiar (2) was not
Kapur f.
proved. In the -latter case it was established that
there was a well recognised custom amongst Chettiars
of raising funds for their business of money lenders
by the execution of joint pronotes and that if a loss
was sustained by one of the executants having to pay
the whole on account of inability of the other it was
a deductible loss.
The appellant also relied on a judgment of the
Madras High Court in Commissioner of Income Tax v.
S. R. Subramanya Pillai (3). In that case the asses.
see was a book-seller who from time to time jointly
with another person borrowed money out of which
he employed a portion in his business. One of such
amounts borrowed was Rs. 16,200 out of which the
assessee took Rs. 10,450 for his business needs and
the other debtor took the balance. The latter became
insolvent and the assessee had to pay the whole of
the money borrowed and claimed it as allowable
deduction under s. 10(2)(xi) or s. 10(2)(xv) of the Act
or as business loss and it was .held that he was not
entitled, because the loss sustained by the assessee
was too remote from the business of book-selling carried on by him and was not sufficiently connected with
the trade and therefore fell outside the range of those
amounts which could properly be b:rought into profit
and loss account of the business. The decision in
Commissioner of Income Tax v. S. A. S. Ramaswamy
Chettiar (9) was there distinguished on the ground that
the decision must be confined to its own peculiar facts
and did not apply to business as the one in 'Subramanya. Pillai's Gase (3). The following passage froni
(1) (1956) s.c.R. 551.
(2) (1946) 14 I.T.R. 236.
(3) [1950) 18 LT.R. 85.
650
SUPREME COURT REPORTS
[1961]
r96o
the judgment of Viswanatha Sastri, J., in that case is
relevant:-
The Commissioner
"B
h
h b .
f
of Income-tax.
.
ut t ere t e usmess was one o money lend.
Bombay City 1 mg and the Court found that according to the wellv.
known and well-recognised mercantile custom of
M/s. Jaga"nath Nattukottai bankers, they were in the habit of raising
Kissonlal. Bombay funds which formed the stock-in-trade of their money
-
lending business by the execution of joint promissory
Kapur J.
notes in favour of banl.ters. That was apparently the
usual technique of obtaining credit adopted by the
Nattukottai Chetti community money-lenders. In
the context this Court held that where a Nattukottai
Chetti money-lender paid off in their entirety the
debts jointly due by him and another as a result of
the latter's inability to pay, the loss sustained as a
result of this transaction was a loss of the money.
lending business itself and therefore a deductible item
in computing profits."
In the instant case it has been found that there was
a well recognised .commercial practice in Bombay of
carrying on business by borrowing money from Banks
on joint and several liability. It was also found that
by so doing the borrower could borrow money at a
lower rate of interest than he otherwise would have
paid; that the respondent had, in accordance with the
commercial practice, borrowed the money, the whole
of which he had to return because the joint promisor
Kishori Lal had become bankrupt; mutuality was
also held proved. It cannot be said that the essential
feature of the case now before us is in principle different from that of the Commissioner of Income-tax v.
Ramaswamy Ohettiar (' ).
In both cases the finding is
that there is mutuality and custom of borrowing
money on joint pronotes for the carrying on of business. In our opinion in the circumstances proved in
the present case, and on the facts established and on
the findings given, the respondent was rightly held to
be entitled to deduct the loss which wa,s suffered by
him in the transaction in dispute.
Counsel for the assessee drew our attention to a
(1) (1946) 14 I.T.R. 236.
2 S.C.R. SUPREME COURT REPORTS
651
Privy Council judgment Montreal Coke and Manufac1960
turing Co. v. Minister o1 National Revenue (1) but that Th c
..
'J
•
e
omnnssioner
case can nave no applicat10n to the facts of the preof Income-tax,
sent case because it was found there as· a fact that the Bombay Oity I
assessees's financial arrangements were quite distinct
v.
from the activities by which they earned their ~ncome "'.fs. Jagannath
and expenditure incurred in relation to the financing Kissonlal, Bombay
of their business was not expenditure in the earnii1g
Kapur J.
of their income within the statute.
It was then contended that the loss of the respondent was a capital loss and for this again reliance was
placed on the judgment of this Court in Madan Gopal
Bagla's case (2) and particularly on the observation
at page 559 where Bhagwati, J., quoted with approval the observations of the High Court in the judg- ·
ment but as we have pointed out the facts of that
case are distinguishable and what was said there has
no application to the facts and circumstances proved
in the present case.
·
In our view the judgment of the High Court is
right and we therefore dismiss this appeal with costs.
Appeal dismissed.
M/S. HAJI AZIZ AND ABDUL SHAKOOR
BROS.
'
v.
THE COMMISSIONER OF INCOME-TAX,
BOMBAY CITY II
(J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.)
Income-tax-Business deduction-Import of goods by steamerGovernment notification prohibiting import by steamer-Payment of
penalty in lieu of confiscation-Allowable expenditure-Commercial
expense-Sea Customs Act, I878 (8 of r878), s. I67(8)-Indian
Income-tax Act, I922 (II of I9~2), s. ro(a)(xv).
The appellant firm imported dates from abroad partly by
steamer and partly by country craft. At the relevant time import of dates by steamers had been prohibited by Government
(1) [1945] 13 I.T.R. Supp. l.
(:z) [1956] S.C.R. 551.