COMMISSIONER OF INCOME TAX Vs. T N KRISHNASWAMI

JUDGEMENT

(1.) THE following two question have been referred to this court by the Income-tax Appellate Tribunal at the instance of the Revenue"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 52, 083 being the amount due to him from Shri H. V. Gandhi as a bad debt for the assessment year 1973-74 ?.2. Whether, on the facts and in the circumstances of the case, loss has to be computed for the assessment year 1973-74 and such loss has to be set off against the income of the assessment year 1974-75 ?"

(2.) THE assessee, in this case, carries on business of money-lending and the profession of financial adviser. On the recommendations of the assessee, M/s. Annamalai Timber Trust (P.) Ltd., hereinafter referred to as "the company", lent to one Shri Gandhi a sum of Rs. 50, 000 on January 31, 1972, on a promissory note executed by Shri Gandhi for a sum of Rs. 50, 000 agreeing to repay the same with interest thereon at 15% per annum. THE assessee had given a letter of guarantee to the company on January 27, 1972, guaranteeing due repayment of the aforesaid sum of Rs. 50, 000 together with interest thereon by Shri Gandhi. Sri Gandhi paid interest on the sum borrowed up to the end of April. 1972. However, he defaulted to pay interest thereafter. In view of the said default, the company called upon Shri Gandhi to repay the loan. Shri Gandhi did not repay the loan and pleaded his inability to repay by his letter dated August 9, 1972.

(3.) THAT cannot be taken to arise in the course of the assessee's business as a financier. It may be that the assessee had treated his personal liability as the liability arising out of the business. But that cannot be taken to be decisive or conclusive on the question whether the debt has been incurred in the course of the business. The character of the debt or the liability due by Shri Gandhi cannot be different from the character and nature of the guarantee transaction. If the guarantee transaction is not in the course of the assessee's business, the liability arising out of the transaction cannot be taken to arise in the course of the assessee's business. It is no doubt true that as a result of discharging the liability arising out of the guarantee, the assessee has become a creditor of Shri Gandhi. But that credit also should be taken to be of the same character and nature as the original transaction of guarantee which had been held by the Tribunal itself to be not in the course of the assessee's money-lending business.