LexCOMMISSIONER OF INCOME-TAX, CALCUTTA versus BIRLA BROS. (P) LTD.
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357 A COMi\USSIONER OF INCOME-TAX, CALCUTTA B c D E F v. BIRLA BROS. (P) LTD. April 23, 1970 [J. C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.] Jiulian lnmmNux Acr. 1922, s. 10(2)(xi)-A.r.\'C.Vste company ct Mannginf.f Age1H-Selling agent of conJpany 11u1nagecl by as.\·essee taki11/.f /oc11t' fron1 ti ht111k e1nd tlSSt!l'St!e .\·tc111ding guarantee for tlrt loan-Loan not. re~paid hy ,seJ/i11f.f agent hut hy ll.\·:,.essee ar ft(Uc11·antor-Asse.\·see failing /(} recorer loan fro111 selling agent-loan aniount c/airned as a ht1d th'ht- Ad111i.l',\'ihilily of clai111. The asses.cc was a Private Limited Company. It carried on the busi- nc;s of banking and financing as also of managing agency. Starch Pro· ducts Lt<l., was one of various companies. which was being managed by the assessce. Starch Products had appointed the U.P. Sales Corporation Ltd., as its selling agent. The assessee claimed to ·have stood guarantee for a loan of Rs. 6 lacs which was advanced to U.P. Sales Corporation Ltd., by the Gwalior Industrial Bank. The borrower failed to pay the loan which on August 2, 1948 stood at Rs. 5,60,199. This amount was ipaid by the asscssec pursuant to the guarantee. Thereafter the assessec treated the U .P. Sales Corporfttion as ils debtor for the aforesaid amount. That company \vent into liquidation and as the assessee could not recover anything from it. a sum of Rs. 5,60.199 was written off in the books of the assessee company. Before the Income-tax Office·r the said amount was claimed as a bad debt under s. 10(2) (xi) o·f the Income-tax Act, 1922. The Income-tax Officer rejected the claim. The assessee's appeal; before the Assistant Commissioner failed. The Appellate Tribunal, nowever, held that the guarantee given by the assessee was of indirect oenefit to the assessee's husincss because if it had not guaranteed the h1an fri ques .. lion the company managed by it would have had to give extended credit to its selling agent which it could not have done without borrowing money either from the assessee or some third party. In reference, the High Court also held that the guarantee was in tho larger interest of the ~1ssessee's business. The Commissioner of Income-tax appealed to this Court by special leave. HELD: (i) While computing profits or· gains of business under s. W certain allowances have to be made under sub-s. (2). The allowance covered by cl. (xi) thereof has to be made, when the assessce's accounts <; in respect of any part o'f his business, profession or vocation are not" kept on a cash basis, of such sum, in respect of the bad and doubtful debts, due to the assessce in respect of that part of his business profession and voca- tion. and in the case of an assessee c.arrying on a banking or money lending busmess o'f such sum in respect loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written •off as irrecoverable in the books H of the asseS!jee. A bad d_ebt mea~s a debt ~hich would have gone in :o the llalance-shcet as. a tradmg debt m the busmess or trade. It must arise in the course of .and as a result of the assessee's business. The deduction• claimed should not be too remote frpm the business carried on by the ru;~cssee. [361 B-E] · - Ll2 Sup. C 1/70-9 358 Sl,JPREME CO\JRT .REPORTS [ 197 I] I S.C.R. In the present case, neither the memorandum· of ~sociarion nor the managing ·agency agreement. contained any such provisions hy which it could be said that he guarantee of the loan made by the ba.nk to the sell- ing agents was. done in the course of the managing agency business. There Was no privity of contract or any Jegal relationship between the assessee and the selling agent. Neither under custom nor under any · statutory provision. or any contractual obligation \vas the assessee bo•1nd to guarantee the loan advanced by the bank to the selling agent. The gua-rantee could not . be said to he indirectly in the interest of the assessee's bu$iness, or as held by the High Court, in its larger interest. The Tribunal and the High Court were, therefore, in error in holding that the .sum in question was allowable as a. deduction under s. 10(2)(xi). [362 D-E, F-H] Ma_dan G_opa/ Bag/a v. Commissioner of Income-tax, Wesl Bengal, 30 I.T.R. 174 and Commissioner of· Income-tax, Bombay v. A bd11/labhai . Abdulkadar, 31 l
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