K.S. Janakiram vs The Commissioner of Income Tax

Srinivasan, J.—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 u/s 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'' was procured and placed at the disposal of the charterers,

but the charterers found the vessel to be unseaworthy. It appears also, that the charterers made a further advance of Rs. 6,000 to the owners to

help them in procuring this vessel. There was, however, no guarantee offered by the assessee in respect of this advance, but nevertheless, this,

amount of Rs. 6,000 was paid to the charterers by the assessee in precisely the same manner as the other sum of Rs. 27,500 referred to. The

assessee wrote off this amount as a loss and claimed to be entitled to deduct this sum u/s 10(2)(xi) of the Act. The Department and the Tribunal

rejected this claim for the same reasons as set out earlier.

On the application of the assessee, the Tribunal was directed to state a case, and the question it has submitted runs:

Whether on the facts and in the circumstances of the case, the sum of Rs. 27,500 and Rs. 6,000-or any part thereof are allowable as deductions in

computing the profits of the assessee to income tax?

The short question that we are called upon to determine is whether in undertaking to foot the loss which was properly that of the owners, the

Ashoka Lines, Ltd., in respect of a transaction which was principally between the owners, the Ashoka Lines, Ltd., and the charterers, Inden

Biselers, the assessee was engaging in a transaction which can be said to be in the course of his own regular business which was merely that of a

freight broker.

The earliest letter on record proceeding from the assessee to the owners reads:

I attach hereto a copy of the charter party that Mr. Kasi wants signed in respect of the bank, also a copy of the guarantee he requires from me. If

you telephone me before 12 noon tomorrow whether it would be in order for me to sign the same, I shall do so for drawing the advances and

remitting the same to you in time

It is also seen from a letter written by the owners to the assessee, Annexure D, dated ist October, 1952, that as a special consideration for the

assessee in furnishing the guarantee on behalf of the owners, the assessee was to get

aside from the agency fees and brokerage, etc., for International Clearing and Shipping Agency, you would also get 1/3 of the net profits she

earned, the same to apply on any other country craft which we were to place on this same trade.

That is to say, the assessee was promised a third share in the profits earned by the owners over and above what the assessee''s brokerage firm

would get on account of the freight, agency, etc.

The short contention of the learned Counsel for the assessee is that this was a transaction put through by the assessee in the interests of his own

business as a freight broker, that the expenditure was incurred in the anticipation of profits and gains, which would accrue to his freight brokerage

business if he, the assessee, could ensure that the charter party arrangement went through without a hitch. He claims that in enganging in this

transaction, he was doing nothing more than an act in the promotion of his own business and that therefore, if the expenditure turned out to be

unfruitful, it must nevertheless be regarded as incurred in the normal course of his business, eligible for deduction u/s 10(2)(xi) of the Act.

But what in effect the transaction amounted to is claimed to be nothing more than that the assessee himself advanced a loan to the owners in

order to enable them to acquire the vessel in question. The effect of the guarantee resulted in his offering to make a payment to Inden Biselers of a

sum of money which Ashoka Lines, Ltd., owed to Inden Biselers. By reason of his discharge of the obligation of the owners to Inden Biselers, the

owners became debtors of the assessee to a like amount. According to the assessee, the owners were unable to pay this amount and he therefore

wrote it off as a loss. Since he incurred this expenditure only for the purpose of the promotion of his business, so it is argued, this expenditure must

be regarded as one incidental to his business.

After giving careful consideration to the arguments advanced, we are unable to accept the contention that this can be regarded as a bad debt

arising in the course of the normal business of the assessee. The assessee was a freight broker to various shipping lines including the Ashoka Lines,

Ltd. His business as a freight broker did not involve his engaging in transactions leading to lending monies for the purchase of vessels by or on

behalf of the shipping lines. It is not contended before us that it was customary in the case of freight brokerage business for freight brokers to meet

or undertake to meet such obligations of the shipping lines as in the present case. It is no doubt true that advancing money to the shipping lines to

acquire a vessel for the purpose of the charter party would enable the assessee to earn brokerage and agency commission as a freight broker in

respect of the voyages on which the vessel might be engaged in pursuance of the terms of the charter party. But what we have to consider is

whether the transaction whereby the assessee discharged the obligations of the owner was a necessary part of the normal course of his business

and was so closely interlinked with his line of business, as to make it incidental to the carrying �on of his business. In examining this aspect of the

matter, we cannot ignore the significant circumstance that in addition to the normal brokerage and commission, the assessee stipulated for and

obtained a third of the profits to be earned by the owners in voyaging this vessel. Viewed in that light, it seems difficult to conceive of the

transaction as one that was entered into and was necessary to be entered into in the course of the business of a freight broker.

Learned Counsel for the assessee purported to rely upon Morley v. Lawford and Co.14 T.C. 229 . This was a case where the company in

question were guarantors for �500 to the British Empire Exhibition and claimed to deduct from their assessable profits a sum of �375 paid

under the guarantee. The company steablished to the satisfaction of the General Commissioners that they had been informed by a representative of

the exhibition authorities that the guarantors would be given preference in the allotment of contracts for work at the exhibition and that they gave

the guarantee with the sole object of obtaining a contract. But they were in fact given no opportunity of tendering and did no work for the

exhibition. The General Commissioners decided that the amounts paid under the guarantee was money expended wholly and exclusively for the

company''s trade and was an admissible deduction. The High Court held that the matter was primarily a question of fact and that the of the

Commissioners was not erroneous in a point of law. Lord Hanworth, M.R., decision observed:

... it appears to me that as matter of business it is impossible on the facts of this present case to say that this contribution lies so far outside the

scope and purpose of the business they carried on as to make it impossible for the Commissioners to come to the conclusion they did. Many

illustrations can be given and suggested. Some are suggested by the learned Judge in his judgment. The question of a contribution to a hospital on

the one side, the cost of advertising on the other. But all those illustrations bring into purview the consideration that this must be a matter of degree.

What is allowed in one business could not be allowed to another; what is wholly extraneous in one business may be germane to another. It appears

to me...there is evidence upon which the Commissioner s could reach the conclusion which they have reached. They could decide upon the facts

that both the tests required by Lord Cave are answered, and therefore it appears to me that the learned Judge was not justified in overruling a

decision on a question of fact, more especially as the duty of assenting to what are questions of fact and not disturbing them has been re-affirmed

by the House of Lords in the Lysaght case 13 T.C. 511 : L.R. (1928) A.C. 234.

For these reasons, I find it impossible to agree with the learned Judge that this expenditure is so remote from the business of Messrs. Lawford that

it could not be dealt with by the Commissioners in the way it has....

We are not satisfied that the above observations support the assessee''s contention. As has been pointed out, considerations must necessarily differ

from business to business and what is allowable as deduction in respect of one business may not be allowable in another business.

In Commissioner of Income Tax, Madras v. Subramanya Pillai (1950) 1 M.L.J. 215 : ILR (1950) Mad. the assessee, a bookseller, borrowed

jointly with another person a sum of money, part of which he took for his business needs and the other person took the balance. The joint security

of the two persons was insisted upon by the money-lenders and the joint borrowing was also necessitated by the business needs of both the

borrowers. The assessee had to pay the amount in full as the co-borrower failed in his business. He claimed to deduct the sum that he so paid on

the co-borrowers account from the computation of his own profits. A Bench of this Court held that this deduction was not available either u/s

10(2)(xi) or u/s 10(2)(xv) or as business loss. In dealing with this point, the learned Judge observed:

Let it be assumed that the original loans contracted by the assessee and Lakshmana Ayyar were capital borrowing for the purpose of the book-

selling business. Lakshmana Ayyar became a debtor to the assessee as soon as the latter discharged the entire joint debt due to the creditors. But

then Lakshmana Ayyar became a debtor not as a customer of the business or as a purchaser of goods in the course of the assessee''s business but

by operation of law as a person for whom the assessee stood as surety. The debt was not connected with and did not arise out of the trading

operations of the assessee. When Section 10(2)(xi) speaks of a bad debt, it means a debt which would have come into the balance-sheet as a

trading debt in the business or trade that is in question in this case - the book-seller''s trade - and which has become a bad debt. It does not refef

to any debt due to the trader which, when it was good, would not have come to swell the profits of the book-selling trade. Debts or losses not

connected with a trade or business and not arising out of the operations of the trade or business are really losses of capital and are not admissible

deductions u/s 10(2)(xi) of the Act.

The learned Judge also refers to the observation of the Lord Chancellor in Strong and Co. Ltd. v. Wood field L.R. (1936) A.C. 448 which runs

thus:

In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it

may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I

think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be

deducted if they are mainly incidental to some other vocation, or fall on the trader in some character than that of trader. The nature of the trade is

to be considered.

A decision which forms a closer parallel to the facts of the present case is referred in Madan Gopal Bagla Vs. The Commissioner of Income

Tax, West Bengal, . In that case, the assessee carried on a business in timber. He borrowed Rs. one lakh from a bank on the joint security of

himself and B and B simultaneously borrowed Rs. One lakh from another bank on the joint security of himself and the appellant assessee. The

assessee repaid the amount but B became insolvent. The assessee had to pay the amount B had borrowed with interest to the Bank and wrote off

the amount of Rs. 55,000 and odd as a bad debt and claimed it as an allowable deduction. It was contended that it was the usual custom in

Bombay for merchants to borrow from banks on the joint security of each other and that the loss incurred by the appellant was a loss incurred in

the business. Their Lordships of the Supreme Court held that the custom set up did not mean that mutual accommodation by businessmen was

necessarily an ingredient part of that custom. The transaction in question could not be deemed to be one entered into by the appellant in the course

of carrying on his timber business but was one entered into for the purpose of financing the business of another person and in any event the loss

being one suffered by reason of having to pay a debt borrowed for the business of another person, was a capital loss and not a trading loss. In this

decision, the principle laid down in the Madras case cited earlier, The Commissioner of Income Tax Vs. S.R. Subramanya Pillai, was approved.

Another case where a loss incurred in somewhat similar circumstances was held allowable is decided in The Commissioner of Income Tax,

Bombay City I Vs. Jagannath Kissonlal, Bombay, In that case, the respondent carrying on a business as commission agent borrowed jointly with

another person a sum of Rs. one lakh from a bank. Half of this amount the respondent took for his business. The joint executant became bankrupt

and the assessee had to pay the bank the whole of the amount. It was found by the Tribunal as a fact that there was a well-recognised commercial

practice in Bombay of carrying on business by borrowing moneys from banks on joint and several liability and that the borrowing had been made

in accordance with that practice. The High Court upheld the contention that the loss incurred in the transaction was a. permissible deduction either

as a business expenditure u/s 10(2)(xv) or, in any event, as a trading loss. This was confirmed by the Supreme Court. Their Lordships

distinguished the earlier decision in T. Velu Servai Vs. Srinivasa Iyengar and Another, and pointed out that as an essential feature of the custom

pleaded, there should be an element of mutuality in the absence of which a loss sustained on the basis of such a transaction could not be held to be

in the course of the Business.

Examining the facts of the case now before us, we can find no feature therein which could lead us to hold that the furnishing of guarantee to the

owners as in the present case was a normal incident in the course of a business of freight brokerage. The connection between a business of freight

brokerage and the business involved in securing advances to the shipping lines for the purpose of purchase of vessels is far too tenuous to support

the claim that it was incidental to the business of freight brokerage. No custom as such has been set up. In the light of the decisions which we have

referred to, we have to hold that the Tribunal rightly came to the conclusion on the materials before it that no part of the sum advanced which was

guaranteed: by the assessee could be treated as a bad debt.

The second part of the question relates to the loan of Rs. 6,000 which was incurred in precisely similar circumstances. In this case, however,

there was no written guarantee of any description. The learned Counsel for the assessee apparently relied upon the second paragraph of the

guarantee extracted earlier, which reads:

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 you against all loss or damage you may incur by such breach of the agreement.

Learned Counsel argues that as the vessel ''Manek Prasad'' could not be made available to the charterers on the due date, he had to undertake the

responsibility of furnishing an alternative vessel. ''M.V. Jehangir'' was accordingly acquired for the purpose, and for such acquisition, again the

charterers advanced the sum of Rs. 6,000. It was this sum which was later repaid by the assessee to the charterers and claimed as a business loss.

The reasons which we have given above in relation to the sum of Rs. 27,500 apply with equal force to this amount as well. We agree with the

Tribunal that the deduction is not allowable u/s 10(2)(xi) of the Act.

We accordingly answer the question in the negative and against the assessee. The assessee will pay the costs of the Department. Counsel''s fee

Rs. 250.