1988 PLP (Trib (PTD)

FARHAT ALI KHAN (JUDICIAL MEMBER).--These three departmental appeals are directed against two separate orders of learned Commissioner of Income-Tax (Appeals) recorded by him on 23rd December, 1981 and 29th August, 1981. The first two appeals are directed against the former whereas the third is arising from the latter. Since common questions of law and facts are involved in all these three appeals, we propose to dispose them of by this single order.

2. The brief facts giving rise to these appeals are that Messrs English Biscuits Manufacturing Limited, hereinafter referred to as EBM was incorporated sometimes in 1965 with paid-up capital of Rs.20,00,

000. However, it went on showing loss from the very outset of its business activities; for example, in assessment year 1978-79 and 1979-80 it showed a loss of Rs.2,14,849 and Rs.20,80,993, respectively. In April 1969, a public limited company carrying on a business under the name and style of ARAG Industries Limited, hereinafter referred to as ARAG bought 74.75% shares of EBM and thus obtained the controlling interest. Let us mention here that 1,49,500 shares which were having face value of Rs.14,95,500 were purchased by ARAG only for Rs.2,15,

106. However, after gaining the controlling interest ARAG started financing EBM and as on 30th June, 1972 EBM was indebted to ARAG to the extent of Rs.37,00,

000. Not only that the ARAG, also managed to get credit facilities from M/s. City Bank, Karachi to the extent of Rs.300,000 on its own guarantee. However, after sometime the ARAG itself needed money for its own business activity although it had Rs.26,00,000 in reserve in October 1972. It, therefore, obtained credit facility to the extent of Rs.58,00,000 from M/s. City Bank on guarantee of EBM. From perusal of the Balance Sheet of EBM as on 30-6-1975 it appears that it was indebted to ARAG to the tune of Rs.49,66,

492. If compared with the indebtedness as on 30th June 1972 it appears that after obtaining credit facilities from City Bank, ARAG had provided loans to EBM to the extent of more than Rs.12,00,

000. Unfortunately sometimes in 1976 ARAG faced insurmountable economic difficulties and failed to pay back the loan to City Bank. The Bank, therefore, firstly called upon EBM on 23rd August, 1976 to discharge the ARAG s liability of Rs.47,26,144 in view of the guarantee given by it for its re-payment. Subsequently, on 25th April, 1978, City Bank again called upon EBM to discharge ARAG's liability amounting to Rs.51,13,717 under the same guarantee. This time EBM carried on negotiations with City Bank and finally in full and final settlement of ARAG's loan EBM paid Rs.39,00,000 to City Bank sometimes in June 1978. In its accounts book it credited the same amount of Rs.39,00,000 to City Bank and debited it to the account of ARAG. It further appears that sometimes later on 'PICIC initiated liquidation proceedings in High Court against ARAG and on 22nd November, 1980 its assests and Bank Accounts stood frozen. Meanwhile in its Balance Sheets for assessment years 1978-79, 1979-80 and 1980-81 EBM had shown Rs,39,00,000 as long term advanced given to ARAG. When EBM filed its returns for assessment years 1978-79, 1979-80 and 1980-81 the Income-Tax Officer called upon EBM to explain as to why interest should not be charged under Explanation 8 of section 4 (1) of the Repealed Income-tax Act, in assessment year 1978-79 and under section 12 (7) of the Income-tax Ordinance for the assessment year 1979-80. He, Therefore, added Rs.39,000 and Rs.4,68,000 under Explanation 8 of section 4 (1) of the Repealed Act, and section 12 (7) of the Income-tax Ordinance, for assessment years 1978-79 and 1979-80. Regarding assessment year 1980-81 the Income-Tax Officer served a notice upon EBM to show cause as to why bad debts of Rs.39,02,600 should also be not added to the total income. After hearing EBM the Income-Tax Officer ordered addition of Rs.39,02,600 with the following observation:- "The claim of bad--debts at Rs.39,00,000 is not an admissible deduction. A debt can be claimed as a bad debt only if it is incidental to business. The loss suffered by reason of having to pay a debt for the business of another person is a capital loss and not a trading loss. The claim of bad-debt of Rs.39,00,000 is therefore inadmissible and hence disallowed." Taking up the issue of Rs.2,600 the Income-Tax Officer observed; that since the amount was due from Government of Pakistan hence could not be treated irrecoverable. The EBM felt aggrieved and went up in appeal in all the assessment years. The learned Commissioner of Income-tax (Appeals) by his impugned order dated 23rd December, 1981 relying upon the written argument of Income-Tax Officer held that Rs.39,00,000 were not debt, hence no interest could be levied either in assessment year 1978-79 or in 1979-80. The argument of the Income-Tax Officer, which the learned Commissioner of Income-Tax; (Appeals) relied upon to fortify his conclusion, is as follows:-, "A bad debt presupposes the existence of a debt, and in a case in which there never was any debt owing to the assessee, no question can arise of making claim for bad debt. One of the most important conditions for allowance of bad debt is that the debt should have been taken into account in computing he income of the assessee of the accounting year or of an earlier accounting year, in other words the debt should have been brought in as a trading receipt to swell the profits or reduce the loss of any year. Thus, the claim of Rs.39 lacs is not a debt." By his second order dated 29th August, 1981, the learned Commissioner of Income-Tax (Appeals) after discussing the relevant case law on the point in dispute and after analysing the attending circumstances and facts, came to the conclusion that Rs.39,00,000 were not a debt but a trading loss. He summed up his view in the following words. "From the foregoing discussion it follows that the appellant could borrow Rs.30 lacs from City Bank only after agreeing for advance of loan of Rs.58,00,000 to ARAG Industries Ltd., on joint and several security. In view of these facts, it is impossible to distinguish the two loans as separate transaction and attribute the loss with regard to one transaction to one business and with regard to the other transaction to other business. Besides the foregoing discussion further goes to prove that as held in various decided cases as discussed (supra) that the appellant suffered loss of Rs.39,00,000 in the course of their business and that the loss of Rs,39,00,000 was incidental to the business of the appellant. The necessary corollary to the findings as arrived at above, i.e. that the, loss of Rs.39,00,000 suffered by the appellant was incurred in the course of their business and was incidental to their business that the loss was not of the capital nature." Thus, he did not allow Rs.39,00,000 as bad debt, but treating them as revenue loss incurred in normal course of business and incidental to business ordered its deletion. Regarding Rs.2,600 the learned Commissioner of Income-Tax (Appeals) was of the view that it was not a matter of commercial expediency to file suit against Government for recovery of Rs.2,

600. He, therefore, ordered deletion of this amount as well. Having been aggrieved and dissatisfied the Department has come up in appeal in all the three assessment years.

3. Mr. Mohammad Farid, the learned Departmental Representative firstly submitted before us that the learned Commissioner of Income-Tax (Appeals) erred in ordering deletion of Rs.39,00,000 on the ground that it was a business loss though this plea was never set up before the Income-Tax Officer. According to him, under the facts and circumstances it was not a business loss. Alternatively, the learned Departmental Representative argued that since EBM paid Rs.39,00,000 to City Bank on 1st June, 1978 and debited it to the account of ARAG the alleged business loss should have been claimed in assessment year 1978-79. To fortify the first submission he relied upon two Indian Supreme Court's decision reported as (1971) 24-Tax-12, Commissioner of Income-tax v. Birla Brothers (Private) Limited and (1956) 30-ITR-174 Madan Gopal Bagla v. C.I.T. West Bengal and in support of his alternative submission he relied upon (1966) 61-ITR-693 (Bombay H.C.) Jokhiram Ramchander v. C.I.T., Bombay City, (1963) 40 ITR-7V, (Madras H.C.), C.I.T. v. Indian Overseas Bank Ltd. (1945) 13-TTR-336 (Bombay H.C.) National Petroleum Co. Ltd. v. C.I.T. Bombay.

4. Mr. I.N. Pasha, the learned counsel for EBM supported both the impugned orders on the strength of (1956) 30-ITR-654 (Bombay H. C.) C.I.T. v. Jagannath Kisonlal, which was subsequently confirmed by Supreme Court and is reported as (1961) 41-ITR-360 S.C., (1966) 61-ITR-693 (Bombay H. C.), Jokhi Ram Chandra v. C.I.T. Bombay and (1965) 55-ITR-736 S.C., Indore Malva United Mills Ltd. v. State of Madhya Pradesh and others.

5. We have heard both the learned Departmental Representative as well as learned counsel for EBM and have also gone through the case-law cited at Bar. Starting with the impugned order for assessment years 1978-79 and 1979-80 we feel no hesitation in confirming it. In our judgment the learned Commissioner of Income-Tax (Appeals) has rightly pointed out that the Department could not be allowed to blow hot and cold in the same breath. When the Income-Tax Officer did not accept Rs.39,00,000 as a debt, how can he treat it as a loan or advance falling under the mischief of Explanation 8 to section 4 (1) of the repealed Income-Tax Act or 12 (7) of the Income-Tax Ordinance. Mr. Mohammad Farid, the learned Departmental Representative, however, feebly argued that the Income-Tax Officer was correct in charging interest in both the assessment years because, in his view, the loan should not have been necessarily a business loan. With due respect to him the learned Commissioner of Income-Tax (Appeals) has not decided the point raised by him. On the contrary, he has disposed of the appeals because of certain position adopted by the Department, which has already been reproduced above. We are also of the view that the Department should not be allowed to blow hot and cold in the same breath. We, therefore, find no force in both the departmental appeals filed for assessment years 1978-79 and 1979-80. This now takes us to the next appeal.

6. Now turning to the first leg of argument of Mr. Mohammad Farid, with due respect to him, we do not find any substance in it. He contended before us that guaranteeing of the loan by EBM could not be said to have directly facilitated the carrying on the EBM's business. According to him, it could also be not said that it was in the larger interest of the EBM's business that the guarantee was given. He relied upon BIRLA BROTHERS' case. In this case the assessee, a private limited company, carried on business of banking and finance so also of managing agency. Starch Product Limited was one of the various companies, which were being managed by the assessee. Starch Products had appointed the U.P. Sales Corporation Limited as its selling agent. The assessee claimed to have stood guarantee for a loan of Rs.6,00,000 which was advanced to the U.P. Sales Corporation Limited by the Gwalior Industrial Bank Limited. The borrower failed to pay the loan and ultimately the assessee had to discharge his obligation under the guarantee. Thereafter, the assessee treated the U.P. Sales Corporation Ltd., as its debtor for aforesaid amount. That company, however, went into liquidation and since the assessee could not recover anything from it, the entire sum of Rs.5,60,199 was written off. The Income-Tax Officer, however, was of the view that the advance was not a bona fide money lending investment particularly knowing fully well that the financial position of the company was far from satisfactory. He was also not satisfied about the guarantee because neither the document purporting to be guarantee was properly stamped nor was supported by Directors' Resolution. On appeal, however, the learned Commissioner of Income-Tax (Appeals) was of the opinion that carrying of the loan though made in the interest of assessee's business as a matter of commercial expediency, did not represent the advance made in the normal course of the assessee's business. He, therefore, confirmed the order of Income-Tax Officer. On further appeal, the Income-Tax Appellate Tribunal came to the conclusion that if such guarantee was not given M/s. Starch Products Ltd. one of the managed-companies, would have had to give extended credit to the selling agent and this could be possible if the managing company in its turn was financed either by the managing agents or a third party. According to the Tribunal, it was in the larger interest of the assessee's business that guarantee was given. The Tribunal observed:- "It is now well established that a sum of money extended not of necessity but with a view to give direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business, may yet be an allowable deduction in computing the profits and gains of the business." On reference the High Court affirmed the order of the Tribunal but on further appeal to Supreme Court the orders of the Tribunal as well as High Court were reversed.' Their Lordships of Supreme Court made the following observation:- "It is incomprehensible in what manner the guarantee of the loan advanced to the selling agent indirectly facilitated carrying on of the assessee's business. It is equally difficult to appreciate the observation of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion, the view of the Appellate Tribunal was based on complete misapprehension of the true legal position. The High Court fell into the same error." We also find quite pertinent the observation made by their Lordships in the following words:- "A businessman may have to stand surety for some one in order to get money for his own business. There may be a custom of the business by which that may be the only method whereby he could get money for the purposes of his own business. If he is to discharge a surety debt and if any such custom is established it would be a business debt. If the assessee has made a payment not voluntarily but to discharge a legal objection, which arises from his business he would be entitled to have the amount deducted as a debt under section 10 (2) (xi). If we examine the facts of ails case in the light of the above quoted observation, we find that in this case the EBM had obtained financial assistance from ARAG after standing surety for the loan. We have already mentioned that the Balance Sheet as on 30th June, 1972 would show indebtedness of the EBM to ARAG to the extent o Rs.38,18,676 but the Balance Sheet as on 30th June, 1975 stood at Rs.49,66,

492. Thus, it is fully established that ARAG gave about Rs.12,00,000 out of its loans to EBM. Thus, the case relied upon by learned Departmental Representative rather appears to be supporting the case of EBM. Similarly, reliance of learned D.R. on BAGLA's case (supra) also appears to be misconceived, which is the other case from the Indian Supreme Court. In this case, the assessee, who carried on business in timber, borrowed Rs.1,00,000 from bank on joint security of himself and another person and the other person at the same time borrowed Rs.1,00.000 from another bank on joint security of himself and the assessee. The assessee paid back the loan but the other person became insolvent and the assessee had to pay the amount borrowed by the other person. He subsequently wrote it off as a bad debt. It was ultimately held by Supreme Court that the custom set up did not mean that mutual accommodation for business was necessarily an ingredient of the 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 of the business of another person and, in any event, the loss being one suffered by reason of having to pay a debt borrowed from business of another person, was a capital loss and not a trading loss of the appellant. However, in the instant case, as pointed out earlier the money borrowed by ARAG on surety of EBM was utilized by latter for its business also. This case has very peculiar feature inasmuch as ARAG had the controlling interest in EBM and has been advancing finances to the latter to take it out c of its financial troubles. The other peculiar feature of this case is that even after loan was obtained by ARAG it spent more than Rs.12,00,000 still on finances of EBM. Thus, even BAGLA's case does not come to the rescue of the learned Departmental Representative.

7. Let us at this stage also refer to the case relied upon by learned counsel for the EBM. In JAGAN NATH's case (supra) and assessee, who was a commission agent required Rs.50,000 for his business, and as the bank would not advance the money except on the joint and several liabilities of the two persons, the assessee and another person jointly borrowed Rs.1,00,000 from the bank on their joint and several liability and out of this sum the assessee took Rs.50,000 and the other Rs.50,000 were used by the other person. As the luck could have it the other person became insolvent and the assessee had to pay whole amount to the bank. He received Rs.18,800 in the insolvency proceedings and claimed Rs.31,740 as business loss. The Bomaby High Court held that the transaction in question was clearly in the course of the business and incidental to the business and the loss incurred thereby was permissible deduction either as a business expenditure under section 10 (2) (xv) or in any event as a trading loss. This case was subsequently affirmed by Supreme Court of India and the case is reported as (1961) 40-ITR-360. In this case, the Bombay High Court considered: (1) (1950) 18-ITR-85, CIT v. S.R. Pillai (2) (1952) 21-ITR-142, CIT v. M.G. BAGLA (3) (1946) 14-ITR-236, CIT v. CHETTIA. In Pillai case a book-seller and another person needed money for business on surety of each other but the other person failed in his business and the assessee had to pay to the creditors the whole joint borrowing. As neither the guarantee was given in the course of, or as a result of his business as a book-seller nor any proof of usage was given the High Court of Madras disallowed the expenditure. Similarly, in Chettiar's case (supra) Chettiar community's custom of a money-lender standing surety for another money-lender was established hence the amount paid by the assessee on account of guarantee was allowed as a business loss. We have already discussed Bagla's case and it should not detain us any more. Next case relied upon by Mr. Pasha, the learned counsel for the respondent, is again from Bombay High Court. In this case the assessee and a firm borrowed Rs.1,00,000 from a bank on their joint response by way of mutual accommodation. The assessee took Rs.50,000 and the firm took the remaining balance of Rs .50,

000. Subsequently the firm failed to discharge its liability the assessee had to pay it and then sued the partners of the firm and obtained decree against them. It was held that the loss which the assessee had incurred was a trading loss.'

8. After review of all these authorities we feel no hesitation in holding that as far as finding of the learned Commissioner of Income-Tax (Appeals) regarding business loss is concerned, it is well-fortified by various authorities. However, this is not the end of the matter and we have to examine the alternative argument of Mr. Mohammad Farid, the learned Departmental Representative.

9. As pointed out earlier Mr. Mohammad Farid alternatively argued] that since the guarantee was discharged by the EBM in June 1978, therefore, the business loss, if any, should have been claimed from the profits of assessment year 1978-79. In this connection he relied upon cases of Indian Overseas Bank and National Petroleum (supra), which substantially supported his contention. It is true that where accounts are kept on receipt basis allowance must be granted in the year of disbursement irrespective of the question when the liabilities arose. Similarly where the accounts are kept on mercantile basis, allowance must be granted in the year in which the liability is incurred, irrespective of the question whether a disbursement had been made or not. However, the question as to when a liability should be deemed to have been incurred is a question not free from difficulty. However in (1965) 56-ITR-1, Associated Banking Corporation of India Limited v. C.I.T. the Indian Supreme Court pointed out that so long as reasonable chance of restitution exists, the loss in a commercial sense might not be said to have resulted. According to their Lordships, it occurs when a reasonable prospect of recovery no more exists. As such, before EBM claimed the business loss of June 1978 in assessment year 1980-81, it was incumbent on it to prove that it was in assessment year 1980-81 that reasonable prospect of recovery ceased to exist. However, we do not find any material on record, which proves it. Moreover, since this plea was not taken before Income-Tax Officer therefore he also could not thrash out its pros and cons. Unfortunately the learned Commissioner of Income-Tax (Appeals) also did not consider this aspect of the matter. As such, though we agree with the learned Commissioner of Income-Tax (Appeals) that EBM suffered business loss of Rs.39,00,000, the question as to whether it was rightly claimed in assessment year 1980-81 remains unanswered. It was for the EBM to prove that the prospects of recovery ceased to exist in assessment year 1980-81 in order to claim it in this assessment year. Under these circumstances we feel, though reluctantly, that in the interest of justice the respondent should be given a chance to prove its claim of business loss in assessment year 1980-81. Let us point out here that it was necessary for EBM to prove as to when the liquidation proceedings started against ARAG and when the recovery of Rs.39,00,000 became impossible. Similarly, it should have also produced resolution of the Board authorising EBM to write off the business loss.

10. In view of discussion made above, we hereby set aside the order of learned Commissioner of Income-tax (Appeals) to the extent as discussed above and send the matter back to Income-tax Officer with the direction that he should call upon the EBM to prove its claim of trading loss of Rs.39,00,000 in assessment year 1980-81. Needless to say that he would call upon the EBM to give such additional and further evidence as is required by him. Similarly, EBM would also have a right to lead such evidence, which it may deem fit to support its claim.

11. In view of the discussion made above, all the three appeals stand disposed of in the manner and to the extent as indicated above. GHULAM SADIQ (ACCOUNTANT MEMBER).--I have gone through carefully the proposed elaborate order of my learned brother, the Judicial Member. In spite of making efforts to concur with his view I was unable to subscribe to his view regarding admission of Rs.39,00,000 as business loss and admissible to the assessee. With great respect to my learned brother the reasons for giving this dissenting judgment for the disallowance of Rs.39,00,000 as a capital loss and not admissible under section 23(1) or section 22(a) are given below. For the purpose of admission of a business expenditure, the Supreme Court of India in the case of C.I.T. v. Malayalam Plantations Ltd. (1964) 53 I T R 140 (SC) explained that the expression for purpose of business 'is wider in scope than the expression' for the purpose of earning profits', in the following words:- "The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include mens rea for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title: it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred will be for the carrying on of the business and the assessee shall incur it in his capacity of a person carrying or the business. It cannot include sums spent by the assessee as, agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business." The totality of circumstances has to be examined in all cases. Undoubtedly, the I.T.O. has no authority to judge whether the assessee could have avoided the incurring of a particular expenditure by being more diligent or careful but nonetheless a colossal. unreasonable and excessive expenditure would normally and genuinely caution the I.T.O. to examine it more carefully and coupled with other prevailing circumstances if it leads to the conclusion, not necessarily an inescapable one, that the object or motto behind the, expenditure is to unduly benefit some one, then the I.T.O. is certainly authorised to come to a finding that expenditure is not exclusively for the purpose of business. (Sidhomal and Sons v. C. I. T. (1980) 122 I T R 839, Wishvanath Seth v. C.I.T. (1980) 123 I T R 29 (Allahabad). Undoubtedly, neither necessity nor reasonableness are decisive factors but the liabilities or expenses incurred or payments made have to be decided on objective considerations. The I.T.O. could see whether there is any extra commercial reason for doing a particular act. There is a long line of cases which do lay down that it is enough to show that the money is expended not of necessity and with a view to direct and immediate benefit but- voluntarily on grounds of commercial expediency or in order to indirectly facilitate the carrying on of the business. Keeping these principles in view for purposes of admission of expenditure the applicability of the cases referred to and relied upon by the learned representatives is considered infra. First we consider the case which is cited as Madan Gopal Bagla v. C.I.T. (1956) 30 I T R 174 (SC). In this case their Lordships of Supreme Court while appreciating the judgment of the High Court observed that the Chief Justice whose order was under appeal before them had correctly summed up the whole position and incorporated it in their order which is quoted below in extenso: "The debt must, therefore, be one which can properly be called a trading debt and a debt of the trade the profits of which are being computed. Judged by that test it is difficult to see how the debt in the present case can be said to be debt in respect of the business of the assessee. The a9sessee is not a person carrying on a business of standing surety for other persons. Nor is he a money-lender. He is simply a timber merchant. There sets to have been some evidence before the Appellate Assistant Commissioner that he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person. But it is not established nor does it seem to have been alleged, that he in his turn was in the habit of standing surety for other persons alongwith them for the purpose of securing loans for their use and benefit. Even if such had been the case any loss suffered by reason of having to pay a debt borrowed for the benefit of another would have been a capital loss to him and not a-business loss at all." Next we considered the case kited as C.I.T. v. Birla Bros. (Pvt.) Ltd. 77 I T R 751 the Supreme Court of India reversed the judgment of the High Court reported as C.I.T. v. Birla Bros. Private Ltd. (1965) 72 1 T R 44 holding that in the opinion of their Lordships the view u. the Appellate Tribunal was based on a complete misapprehension of the legal position and that the High Court fell into the same error and the allowance claimed did not fall within section 10(2)(xi) as bad debts. The Supreme Court also observed that no attempt was made nor indeed could it be usually made to claim any allowance under section 10(2)(xi) of the Act. The brief fact of M/s. Birla Brothers' case which is relied upon by the learned D.R. are that a private company carried on business of banking as well as managing agency. One of the managed companies by the assessee was Starch Products Ltd., who had appointed a selling agent and Birla Bros. stood guarantee for a loan of Rs.6,00,000 which was advanced by the bank to the selling agent of the managed-company M/s. Starch Products Ltd. The selling agent committed default in payment of the loan and this amount was paid by M/s. Birla Bros. pursuant to the guarantee and thereafter the selling agent was treated as its debtor for the paid amount to the bank. Subsequently the selling agent went into liquidation and Birla Bros. were not able to recover any part of the amount and write it off and claimed as bad debt under section 10(2)(xi) of the Indian Income-tax Act. The facts were that neither the memorandum of association nor the managing agency agreement with Starch Products Ltd. contained any provision whereby it could be construed that standing surety or guaranteeing the loan to the selling agents was done in the course of carrying on the managing agency business. There was no material even to the effect that the managed company was under any obligation to finance the selling agent or to guarantee or stand surety for any loans to the selling agent. The A.A.C. had given the finding that the guarantee of a loan though made in the interest of the assessee's business and as a matter of commercial expediency, did not represent an advance made in the normal course of the assessee's business. He also had given further finding that such an advance could have been made only if it had been made to the company managed by the assessee under a contractual obligation to guarantee the finances of the managed company. Further, elaborating that the claim for irrecoverable loans would have been admissible if the assessee could have established that the loan represented an interest bearing advance made in the course of the assessee's money lending business which was not the case of the assessee and' it being just advance to assist a concern having trade relations with one of the managed companies, it could not be allowed as a permissible deduction. The Tribunal after analysing the facts reversed the judgment of the Appellate Assistant Commissioner. The Tribunal observed that it was to obviate the necessity of such borrowing by the managed company that the assessee-company stood guarantee for the loan and on failure to fulfil the commitment the assessee as a guarantor came into picture. The Tribunal then gave the finding that, therefore, there was no question of earning any interest on any money advanced and it was in the larger interest to the assessee's business that the guarantee was given. The Tribunal also held that the standing of surety for the sales organization of the managed-company and the consequent loss arising therefrom was in their opinion germane to the assessee's business. They also observed as under:- "It is now well-established that a sum of money expended not of necessity and with a view to give a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business may yet be an allowable deduction in computing profits and gains of the business."- The Tribunal after allowing the claim subsequently referred the question to the High Court who after agreeing with the Tribunal's verdict held that 'it was in the larger interest of the assessee's business that the guarantee was given and we are of the opinion that the debt was incidental to the business of the assessee within the meaning of section 10(2)(xi) of the Act and as such debt was found to be irrecoverable in the relevant accounting year

"

3. The Supreme Court of India after considering several judgments and analysing section 10(2)(xi), observed that:- "Now debt means a debt which would have gone into balance-sheet as a trading debt in the business or trade. It must arise in the course of and as a result of the assessee's business. The deduction claim should not be too remote from the business carried on by the assessee." Their Lordships also explained the decision of the Supreme Court in Madan Gopal Bagla v. C.I.T. (1965) 30 I T R 174 (SC) and observed that the principle accepted was that the debt in order to fall within section 10(2)(xi) must be one which can properly be called a trading debt, i.e., a debt of the trade the profits of which are being computed The Supreme Court referred to the following passage of the order:- "But it was not established that he was in the habit of standing surety

any loss suffered by reason of having to pay a debt borrowed for the benefit of another would have been capital loss to him and not a business loss at all." The Supreme Court of India in Birla Brothers' case had also discussed the case of Essan Private Ltd. v. C.I.T. (1967) 65 I T R 625 (SCI and then had held that the Tribunal had found that the advances to the managed-company and the agreement guaranteeing the loan to the managed-company were in pursuance of its objects and were made in the course of the business and the claim was allowed and the decision was finally affirmed by the Supreme Court and their Lordships gave the reasons as under:- "In this case there was a clause in a memorandum of association by which the assessee was entitled to lend monies and to guarantee the performance of contracts. Similarly the managing agency agreement contained a clause about lending and advancing of money to the managed-company: It was found by the Appellate Tribunal that it was a part of the managing agency business to provide funds to the managed-company." Thereafter, the Supreme Court with regard to the facts of Birla Bros., case observed that:- "In the present case none of those facts have been found. Neither the memorandum of association nor the managing agency agreement contained any such provision by which it could be said that the guaranteeing of the loan made by the bank to the selling agents was done in the course of the managing agency business. In our judgment the facts relied upon by the Appellate Tribunal and the High Court are hereby sufficient for bringing .the allowance claimed under section 10(2)(xi). It may be mentioned that the case of the assessee was confined to that provision and no reliance was placed on any other provision under which such an allowance could be claimed. There was no provity of contract or any legal relationship between the assessee and the selling agent. Neither under custom nor under any contractual obligation was the assessee bound to guarantee the loan advance by the bank to the selling agent. It is difficult to see how it was in the interest of the assessee's business that the guarantee was given. There was even no material to establish that the managed-company was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on of the assessee's business. It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion the view of the Appellate Tribunal was based on a complete misapprehension of the true legal position. The High Court fell into the same error. The allowance, which was claimed did not fall within section 10(2)(xi). No attempt was made nor indeed could it be usually made to claim any allowance under section 10(2)(xv) of the Act."

5. Now we take up the case of C.I.T. v. Abdullahbhai Abdul Kadar (1957) 31 1 T R

72. The facts in this case were that the assessee firm was carrying on business as commission agent and had business connection with a non-resident. The Income-tax Authorities under section 4(2)(1) treated the assessee as agent of the non-resident in respect of the income of the non-resident and recovered the tax payable thereon from the assessee, which the assessee was unable to recover from the non-resident and claimed it as bad debt or a trading loss. The High Court held that it was a debt due to the assessee in respect of his business within the meaning of section 10(2)(xi) inasmuch as the assessee had not paid the tax voluntarily but had discharged a legal obligation arising from the business and was entitled to get the deduction under section 10(2)(xi). It was further held that in the strict sense of the term the amount claimed as a deduction if it was not a bad debt, that could be claimed as a trading loss and in arriving at the true profits should it be deducted? While giving the judgment the learned Chief Justice Chagla made the observation that:- "Now, in the first place, the Legislature has not used the expression with a wider connotation and the expression is 'in respect of the business'. Therefore, what the Legislature required was that there must be a connection between the debt and the business, and it is difficult to understand how in this particular case it could possibly be urged that there is no connection between the business of the assessee and the debt which has become a bad debt." "The question is whether a particular debt had any relation to the business which was carried on by the assessee. It is perfectly true that, even giving to the expression 'in respect of the widest connotation, the debt must be incidental to the business. If a liability is discharged which gives rise to a debt, the business must require the discharging of that liability if the businessman voluntarily undertakes to discharge the liability of someone, then clearly he cannot claim that if that person fails to discharge that liability, the debt becomes a debt which can be claimed as a deduction under section 10(2)(xi)." The learned Chief Justice then proceeded further as under: "Now, on the facts of this case, can it be said that the liability which the assessee discharged was not required by his business to be discharged? Could it be said that the tax which he paid on behalf of his principal, the non-resident, was paid voluntarily without there being any obligation upon him? An obligation to discharge a liability may arise out of business custom or it may arise out of a legal obligation. In our opinion, both stand on the same footing. A businessman may have to stand surety for someone in order that he should get monies for his own business. The custom of the business may require that that is only method whereby he could get monies in order to finance his own business, and the question might arise, if he has to discharge the surety debt, whether that debt is a business debt or not. If the custom is established and the requirement of the business is provided, then it would be a business debt. Similarly, law may cast an obligation upon the assessee to discharge a liability, and it is difficult to understand why that case would stand on a different footing from the one we have just considered. In this case the Income-tax Act imposed a liability upon the assessee by reason of his business connection with the non-resident to discharge the tax liability of his principal. The discharging of the liability was incidental to the business. The liability arose because of the business and there would have been no liability if he had not carried on this business. Therefore, it would not be true to say that this particular liability had no connection whatever with the business of the assessee." The learned Chief Justice also observed that even though all powerful, the taxing department cannot dictate to an assessee what type of business he should carry on and with whom he should deal; the Taxing Department must accept the business such as it is which the assessee carries on, because it is the profits of that business that the taxing department seeks to tax. He after referring to the arguments of the Advocate-General observed: "But what the Advocate-General forgets is that the statute casts an obligation upon him because he is carrying on that particular business, because he has the business connection with the non-resident. If he had not been carrying on the business, the statute would not have cast an obligation upon him. Therefore, it is not in any other capacity that the liability arose and the liability was discharged, but strictly in his capacity as a businessman doing business with a non-resident. Even assuming that, in the strict sense of the term, the amount claimed by the assessee as deduction is not a debt, even so, in their opinion, the amount could be claimed by the assessee as a business or trading loss. It is because he is carrying on this particular business that he had to incur this loss and in arriving at the true profits of his business, this loss must be deducted". However, the Supreme Court of India reversed this order of the Bombay High Court and this order of the Supreme Court is reported as (1961) 41 I T R

545. The Supreme Court of India referred to the judgment of Gresham Life Assurance Society v. Styles (1892) 3 Tax Case 185, 188 and quoted Lord Halsbury, L.C., as under:- "The thing to be taxed is the amount of profits and gains. The word profit I think is to be understood in its natural and proper sense in a sense which no commercial man would misunderstand." The Supreme Court of India observed that even if a deduction is not specifically enumerated in subsection (2) of section 10 it would still be a deductible item to reflect the taxable profits. They referred to another old judgment of the Privy Council cited as C.I.T. v. Sir S. M. Chitnavis (1932) 59 IA 290, 296 wherein it was held that:- "Although the Act nowhere authorises the deduction of bad debts of a business, such a deduction is necessarily allowable because what is chargeable to income-tax in respect of a business are the profits and gains of a year and in assessing the amount of profits and gains of that year account must necessarily be taken of all losses incurred, otherwise the true profits and gains cannot be ascertained." The Supreme Court then further observed as under:- "In order that a loss may be deductible it must be a loss it the business of the assessee and not payment relating to the business of somebody else which under the provisions of the Act is deemed to be and becomes the liability of the assessee. The loss becomes allowable if it 'springs directly from and is incidental' to the business of the assessee. The decision, therefore, mainly depends upon whether the loss claimed is a business loss of that nature. In our opinion the amount which became payable by the respondent firm' cannot be called its business loss. In order to be deductible the loss must be in the nature of a commercial loss and as has been said above, must spring directly out of it and must really be incidental to the business itself. It is not sufficient that it falls on the trader in some other capacity or is merely connected with his business. " The Supreme Court also referred to the judgment cited as Badridas Daga v. C.I.T. (1958) 34 I T R 10, 15,

16. The observation of the learned Venkatarama Ayyar, Judge at page 15 were quoted by them which are as under:- "The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend, on whether having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it." This passage was explained by the Supreme Court as under:- "That passage has to be read in the circumstances of that case where the employment of agents' was incidental to the carrying on of the business and it was observed that it logically followed that the losses which were incidental to such employment were also incidental to the carrying on of the business. At page 16, it was observed:-- At the same time it should be emphasized that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business." The Supreme Court also referred to the case of Curtis, J. & G. Oilfield Ltd. (1925) 9 Tax Case

319. In that case the Managing Director embezzled monies of the company and claimed as a bad debt but it was held that it was not. a trading loss and the contention of the revenue was accepted that the sum was not an ordinary trading debt and could not be a bad debt and the loss was not connected with and did not arise out of the trade. The remarks of Rowlatt. J., at p. 330 are quote as under:- "When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance-sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell profits." The Supreme Court also explained the case of Calcutta Co. Ltd. v. C.I.T. (1959) 37 I T R 1 and stated that it was held in that case that the expression 'profits and gains' had to be understood in its commercial sense and that there could be no computation of profits and gains until the expenditure necessary for earning those profits and gains is deducted therefrom and that when there is no specific provision in section 10(2) in regard to the claim made; its allowability would depend on accepted commercial practice and trading principles and it would be allowed if it could be said to arise out of the carrying on of the business and incidental to it. They also referred to the case of Commissioner of Inland Revenue v. Hagart & Burn Murdoch 14 Tax Cas. 433 where a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal advisor, was held not to be deductible on its becoming irrecoverable as the debt was not a part of the profession of a solicitor. The ratio laid down was if the debt is not incidental to business it is a capital loss. The facts undoubtedly in the case under reference are very peculiar. The parent company M/s, ARAG Industries Ltd. purchased the shares of the respondent-Company of the face value of 14, 95, 000 for Rs.2,15,106 and right from the beginning they had fully well the knowledge that the respondent-Company had suffered huge losses as is reflected by the balance-sheet (ignoring the earlier balance-sheets) that as at 30th June. 1972 the accumulated loss reflected was Rs.47,49,

172. The parent company uptil 30th June, 1971 had advanced unsecured loans to the tune of 30.3 lakhs and had also given guarantee for obtaining loan from the bank by the respondent-Company in spite of hypothecation of inventories and receivables as the bank wanted so. Such loan advanced by the bank to the appellant Company was Rs.30,00,000 as on 30th June. 1972. The bank loan remained the same but the parents company's loan swelled to 31.18 lakhs. At the same time not only this company was getting such financial help from the parent public Ltd. company but two other companies were also getting such financial help which as at 50-6-1972 was over Rs.65,00,

000. At the same time, there was charging of interest by the parent company also which is reflected in the accounts as well. Ignoring the balance-sheets for the subsequent years we consider the balance-sheet as at 30th June, 1976 which reflected unsecured loans due to parent company at Rs.49,66,429 nearly the same of the earlier year i.e. as at 30th June, 1975 and the loan had gone down to 4.5 lakhs from Rs.20.5 lakhs. However, as at 30th June, 1977 the loan from parent company was nil as against 49.66 lakhs and there is a note as well against No.13 in the balance-sheet of the parent company to the effect that the respondent-Company had paid back the advance taken by them. As pointed out interest at the rate of 9$ per annum had been charged upto 14-8-1973 and at 11% per annum from 15-8-1973 to E.B.M. whereas no interest was being charged against outstanding amounts from M/s. Albert David Pakistan Ltd. for an amount of Rs.61.48 lakhs after the fall of East Pakistan. There is no balance-sheet before us for the subsequent two years but a note in the balance-sheet of parent company as at 30-9-1976 reflects that up to 31-12-1974 13% interest was being charged and 14% was charged from 1-1-1975 whereas no interest had beer, charged from M/s. Albert David Pakistan Ltd. Dacca this year also (the amounts due from Dantogene Laboratories being very nominal, i.e. only Rs.1,400 is ignored) which the respondent was paying as well. In the balance-sheet for the year as at 30-9-1977 it is reflected that no amount was due to the parent company by the respondent-Company and till the date of such return of loan 14% interest had been paid. Thus actually the interest which was paid it) these years was much more than the difference of these two amounts. What is actually establishment is that the parent company embarked on an adventure by purchasing the shares on a very low price of a company who accumulated loss was much more than its paid-up capital and naturally it required working capital and as is reflected by the balance-sheet of the parent company which is a public limited company that they had not only, to give guarantee to the bank for obtaining loan by the respondent-Company from the bank but having the full knowledge of the infirm financial position of the respondent-Company, they knew very well that financial help of a colossal amount was a prerequisite and they did so. Thus, what is crystal clear is that the parent company was financially in a position not only to purchase running concern but to help it on a gigantic scale. There is a letter which has been filed before us which is reproduced below:- "With reference to your letter, dated May 21, 1981, and the discussions you had with us, we confirm that ARAG Group Companies have been enjoying credit facilities from us since 1969. The position of accounts and credit facilities were reviewed and re-negotiated from time to time. In 2972 it was mutually agreed that Arag Industries Limited be allowed a facility of Rs.58 lacs and English Biscuits Manufacturers Limited be allowed a credit facility of Rs.30 lacs, on the conditions, inter alia, that both the Companies shall provide the security in the shape of Stocks, Receivables, Fixed Assets etc., and each company will guarantee the due payment and discharge of all liabilities of the other Company. We also confirm that generally we ask for, inter alia, a cross company guarantee while granting credit facilities to a Group of Companies, irrespective of the fact that the financial position of a Company guaranteeing the liability of the other may not warrant such a guarantee at the time of its issue, and accordingly we may not .have allowed the credit facilities in 1972 to your Group of Companies, inter alia, without the cross company guarantees. It is also confirmed that you had guaranteed the due discharge of liabilities of ARAG Industries Limited upto a maximum amount of Rs.58,00,000 on October 2, 1972. Similarly ARAG Industries Limited had guaranteed the due discharged of your liability upto a maximum amount of Rs.30,00,

000. We further confirm that in pursuance of our agreement and on receipt of the negotiated amount of Rs.3.9 million, your aforesaid guarantee dated October 2, 1972, was released and discharged by us." Whatever are the contents of this letter this was never mentioned in the balance-sheet as at 30-9-1973 on the contrary what has been written in this printed balance-sheet of the public Ltd. Co. is as under:- 30-9-73 Rupees "

5. Short Term Loans from Banks:- Rs. 94,88,638 secured against hypothecation of inventories, supplies, and receivables and Rs.21,04,733 against pledge of inventories. Loan of Rs.38,37,348 is also secured by a Pari-passu charge on Fixed Assets of the Company alongwith Debenture holders and personal guarantee of the Directors of the Company. 1,15,93,371 There is a lengthy note No.4 as well given against long terms loans and deferred liabilities but nowhere here also it is written that the subsidiary company had also given a guarantee. This note is not being reproduced being very lengthy. It is on page 15 of the balance-sheet of the parent Company I have been unable to find anywhere that the respondent-company has given any guarantee whereas in note No.12 it has been very clearly mentioned that the subsidiary company were short of working capital and being very small units could not arrange further finance for them. And below that note there are two other notes reflecting the rate of interest charged to the respondent-company and no charging on a much bigger advance from Albert David Co. Ltd. In these circumstances and in absence of any original documents of 1972 the real position which is established is that huge amounts in this year which are referred to when the guarantee was given to the extent of Rs.1,32,00,000 were blocked by investment in two companies and there is hardly any necessity of deliberation on the question of why the bank obtained the guarantee from the respondent-Company for advancing the loan to the parent company. Anyhow, this issue should not detain us any long in view of the fact that the loan which had been obtained earlier by the parent company were really against the hypothecation of inventories, supplies and receivables and pledge of inventories as well as pari passu charge on fixed assets of the company alongwith debenture-holders and personal guarantee' of the directors of the company. Had there been anything else the same should have been reflected in the balance-sheet. Beyond any shadow of doubt it is a very fragile and weak foundation to constitute a trade liability of the respondent-Company resulting from giving an alleged guarantee not proved from the balance-sheet of the public Ltd. when its own financial condition was most infirm. The parent company studied well the prospects of the respondent-Company and was of the view that by improving the saleability etc. of the newly-purchased company through financing it on a very big scale it would run successfully and it is not before us to decide whether such payments and such loans advances in case of the failure of the respondent-Company would have been capital or revenue in the hands of the parent company but what we are concerned with is whether there was any obligation on the part of the respondent to stand guarantee in their broken financial position to the parent company irrespective of the factual position that the bank agreed to accept the guarantee from a company which itself was in a hopelessly bad shape and without huge flow of financial help from the parent company would have been unable to carry on activities successfully. The relationship of the subsidiary company with the parent company neither necessarily nor incidentally was to either give guarantee or lend money, which undoubtedly was an act of impossibility for the respondent. In order to have the proper appreciation about the real character of this payment by the respondent, it is necessary to find out whether the expenditure by way of payment of this amount of Rs.39,00,000 at any time was brought into profit and loss account or trading account. The true and real state of affairs is that this loss had arisen not on account of the company's expenses or as part of the process of profit earning. On the contrary it can be safely said that the parent company embarked on an adventure and made a capital outlay and for the acquisition of property or all the shares of the respondent-Company at a nominal price of Rs.2,14,000 helped the subsidiary company financially and beyond and shadow of doubt, relating to the structure or framework of the subsidiary company to the extent of more than six millions it the beginning by way of advancing money and standing guarantee, and putting it on a sound and stable foundation rendering the machinery and the profit apparatus to become effective and profitable. Thus, in the case under reference the assessee incurred this loss on account of the parent Company, the principal debtors' failure and consequently the respondent has to pay to the bank the sum in question. Having done so by virtue of the provisions of the Indian Contract Act the payer of the debt gets the right to recover from the principal debtor the monies that had to be paid to the principal creditor. The rights of the surety are further conditioned with reference to arising and accrual as well as extent of the debt by other provisions of Chapter 8 of the Contract Act. The debt due by the principal debtor to the surety is thus one arising on account of the operation of law. It is not as if the surety originally had advanced any sum to the principal debtor and there thus arises a debt to him in the ordinary course of dealings. As a natural corollary any debt due by the principal debtor to the surety, could ordinarily have no relation with any business, which the surety may be carrying on. Here also in our case the factual position is this that the respondent- assessee was carrying on the business of manufacturing biscuits whereas the principal debtor was carrying on manufacturing of cloth and had absolutely no relation with the business of the respondent and could not be admissible under the Act. The ratio of the case decided by the Supreme Court of India cited as Madan Gopal Bagla v. C. I. T. (1956) 30 I T R 174 (SC) is very helpful in this respect. The assessee was a timber merchant who obtained loan of Rs.1,00,000 from bank on the joint security of himself and another person. On the same day the other person also obtained loan of Rs.1,00,000 from another bank on the joint security of himself and the assessee. However, the assessee returned the loan but the other person failed to make good the payment of the loan which was realized from the assessee with interest thereon. The assessee opened a ledger account of the defaulter and the total amount of Rs.1,00,626 was debited to his account. The assessee when received dividends from the receivers amounting to Rs.45,595, then after crediting it wrote off the balance amount of Rs.55,

030. The Supreme Court of India held that it was not admissible and quoted with approval from the judgment of the High Court which was under appeal, the following passage:- "The debt must, therefore, be one which can properly be called a trading debt and a debt of the trade, the profits of which are being computed. Judged by that test it is difficult to see that the debt in the present case can be said to be a debt in respect of the business of the assessee. The assessee is not person carrying on a business of standing surety for other persons. Nor is he a money-lender. He is simply a timber merchant. There seems to have been some evidence before the Appellate Assistant Commissioner that he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person. But it is not established nor does it seem to have been alleged that he in his turn was in the habit of standing surety for other persons alongwith them for the purpose of securing loans for their use and benefit. Even if such had been the case any loss suffered by reason of having to pay a debt borrowed for the benefit of another, would have been a capital loss to him and not a business loss at all." If a suretyship debt arises in the course of a guarantee business carried on by any assessee then the answer is very simple and easy as the business does consist of offering guarantees to all constituents with the incidental risk of non-recovery of the guaranteed payments from the principal debtors and any loss resulting from such guarantees on account of non-recovery would be a business loss and also deductible. The Supreme Court of India in the case of C.I.T. v. Jagannath Kissonlal (1961) 41 I T R 360 (SC) had held that where it is found that in a particular business there is a custom of mutual accommodation of guaranteeing one another's payment so that each businessman is able to obtain finances for running his own business only on his joining as a surety to his co-businessman's borrowing and also at lower rate of interest, then, any loss accruing an account of the co- businessman's failure or insolvency would be a deductible loss and incidental to trade. However, it will be interesting to refer to certain observations of the Supreme Court on page 363:- "The High Court also has proceeded on the basis of this commercial practice. In the judgment under appeal the learned Chief Justice said:- 'The finding of the Tribunal is clear and explicit that what the assessee was doing was not something out of the ordinary, but in borrowing this money on joint 'and several liability he was following a practice which was established as a commercial practice. Therefore, the transaction was clearly in the course of the business and incidental to the business and it is this transaction... which resulted in a loss to the assessee, he 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 Court in Madan Gopal Bagla v. Commissioner of Income-tax 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.1 lakh from the Bank of India on the joint security of himself and one Mamraj, which the assessee paid off. Mamraj also obtained a loan of Rs.1 lakh on the joint security of himself and the assessee. Mamraj became an 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 section

10. The High Court there held that the debt could not be a debt in respect of 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 'alongwith them for purposes of securing loans for their use and benefit' and even if money had been so borrowed and there had been a loss, the loss would have been a capital loss and not a business loss to the assessee. This statement of the law was approved by this Court but there mutuality, as an essential ingredient of the custom established, was found to be lacking as is shown by the following passage from the judgment of the Court:- '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 businessmen, 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 Mamraj Rambhagat as surety in the loan procured by Mamraj Rambhagat from the Imperial Bank of India, a transaction in the course of carrying on his own timber business and to make the loss in the transaction trading loss or a bad debt of the timber business of the appellant. Further at page 180 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 proved in that case, both of which are wanting in the present case before us." The facts of this case being distinguishable the ratio of this case is not applicable. Hence in absence of any recognized commercial practice here in Karachi of carrying on business by borrowing money from banks on joint and several liability and by doing so could borrow money at a lower rate of interest than otherwise would have been payable as well as guarantee not being in the course of the business of the assessee even under any contractual business obligation or in pursuance of any statutory provision or custom or established commercial practice had rightly been disallowed by the I.T.O. and the learned C.I.I'. (A) was not justified in treating it as a trading loss in the nature of revenue. Monies provided by a principal company' to a subsidiary company by way of the former subscribing for the shares of the latter and in order to stabilize the latter if it gives advances by way of loan or guarantees and losses are incurred thereby' then losses would not be permissible deductions and vice versa here the losses incurred by the subsidiary company by standing surety (which of course is not reflected by the balance-sheet of the public limited company) in case of the principal company and on its becoming a defaulter the losses are incurred thereby through payment on account of the default of the parent company then it would not be a permissible deduction being neither in the course of trade nor in accordance, with trade customs under section 22(a) and it is accordingly held not to be admissible under section 22(a) or 23(1) at all. The order of the C.I.T. (A) is vacated and order of the I.T.O, is restored. Since there is a difference of opinion about the admissibility of expenditure, we, therefore, propose that the following question be referred to the third Member for resolving the difference of opinion. The question is as under:- "Whether on the facts and circumstances of the case the loss claimed at Rs.39,00,000 was admissible either as revenue loss incidental to business or as a bad debt under section 22(a) or 23(1) of the Income Tax Ordinance, 1979. M.B.A./467/T Order accordingly.