JAI KISHAN NARANG Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under sub -section (1) of section 66 of the Indian Income -tax Act. We are here concerned with the assessment years 1956 -57 and 1957 -58, the relevant previous years being those ended on March 31, 1956, and March 31, 1957, respectively. In the relevant assessment years the assessee has been taxed in his status as an individual. Facts giving rise to this reference in brief are : The assessee was the karta of a Hindu undivided family consisting of his wife, Champavati, and his son, Khanchand. The Hindu undivided family was a partner in the firm of Naraindas Chellaram in which the family had a half share. In addition the family had also immovable properties and certain movable assets, such as shares and securities. The family was also carrying on business as guarantee brokers with one Mr. Mehra. This guarantee brokers business with Mr. Mehra was, however, carried on between April 1, 1944, to March 27, 1947. An agreement took place on May 1, 1944, between Bharat Bank on the one hand and the assessee in his capacity as karta of the joint family and Mr. Mehra on the other, whereunder the family and Mehra agreed to become guarantee brokers of the bank upon certain terms and conditions mentioned in the said agreement. The guarantee brokers were to use all reasonable efforts to procure for the bank the greatest possible amount of business and in case the bank suffered any loss in any transaction, which had been guaranteed by the guarantee brokers either on account of non -payment by the customer or on account of any shortfall in the realisation of its dues, the guarantee brokers agreed to make good the loss. The guarantee brokers further agreed to deposit with the bank a sum of Rs. 40,000 as security deposit for advances to the extent of Rs. 10 lakhs. They further agreed to deposit Rs. 2,500 for every additional advance of Rs. one lakh or part thereof. The bank on their part agreed to give to the guarantee brokers guarantee commission at the rate of 1/12th of the interest charged on all advances under their guarantee and 20% of the commission covered on all bills guaranteed by the guarantee brokers. In the course of the guarantee brokers business the assessee as the karta of the Hindu undivided family had guaranteed the loan advanced by the Bharat Bank Limited to a person named Ramsaran Somdev. The guarantee given on May 1, 1944, was a joint one with Bhagwandas Mehra. As already stated, under the terms of the guarantee, the guarantee brokers were liable to make good the loss, if any, suffered by the bank in case the borrowers made any default in the payment of the loan borrowed by them. On May 27, 1947, the assessee in his capacity as karta of the joint family informed the bank that from April 30, 1947, no fresh clients thereafter would be introduced by him to the bank. It is an admitted position that no clientele was introduced after April 30, 1947, either by the Hindu undivided family or by its karta to the bank. The Hindu undivided family, however, along with Mr. Mehra still remained responsible to make good any loss suffered by the bank on account of the failure on the part of the debtors, who had borrowed money from the bank before April 30, 1947, to repay their debts. As already stated, the Bharat Bank had advanced money to one Ramsaran Somdev and the Hindu joint family with Mr. Mehra had guaranteed the repayment of the said loan in the course of their guaranteed broking business. The said Ramsaran Somdev failed to make repayment of the loan to the bank and ultimately the bank obtained a decree on February 1, 1952, against Somdev for Rs. 21,459. The bank, however, could recover only a sum of Rs. 356 from the debtor, Somdev. The bank, therefore, filed a suit on November 9, 1954, against the guarantors for the recovery of the remaining amount of Rs. 21,103. Ultimately, a decree was passed on November 28, 1955, against the guarantors for Rs. 22,624 inclusive of costs. In respect of this litigation the assessee claims to have expended in his personal capacity an amount of Rs. 1,227 and Rs. 510 in the respective assessment years. It may be stated that before the decree was passed on March 31, 1959, there was a partial partition of the Hindu undivided family and as a result thereof the capital account of the Hindu undivided family was divided between the various members of the family, and a copy of the journal entry effecting the partial partition has been attached as annexure 'B' to the statement of the case which shows that Rs. 79,070 -13 -3 had been credited to each of the three members of the joint family, and since that date, i.e., March 31, 1955, the Hindu undivided family ceased to have any connection with the money -lending business, which it had formerly carried on in partnership with Naraindas Chellaram, as well as the guarantee brokers business, which the Hindu undivided family had formerly carried on with Mr. Mehra. The assessee, however, after March 31, 1955, continued to carry on money -lending business in partnership with Naraindas Chellaram in his individual capacity. The assessee in his assessment claimed to deduct under section 10(2)(xv) the aforesaid legal expenses of Rs. 1,227 in the assessment year 1956 -57 and in the assessment year 1957 -58, Rs. 11,314 being half of the decretal amount of the aforesaid decree passed on November 28, 1955, against him and Mehra jointly on account of the failure of Ramsaran Somdev to pay the debt borrowed by him from the Bharat Bank. The assessee also, in addition, claimed a deduction of Rs. 510 being the legal expenses incurred during the assessment year 1957 -58. The Income -tax Officer took the view that the assessee was doing the guarantee brokers business some years back. He was not doing the business of guarantee broker in the relevant assessment years. He, therefore, was not entitled to claim any allowance for the losses suffered by him or the legal expenses incurred by him in respect of his past business. In appeal the Appellate Assistant Commissioner disallowed the claim of the assessee on the same ground. When the matter first went to the Tribunal, the Tribunal remanded the case to the Appellate Assistant Commissioner with the direction that the Appellate Assistant Commissioner should ascertain and verify the full facts and determine whether the guarantee brokers business was part and parcel of the assessee's money -lending business; whether the assessee was keeping accounts on cash basis and the full effect of the partition under which the business of the Hindu undivided family had fallen to the share of the assessee and then to dispose of the claim of the assessee in accordance with law.

(2.) WHEN the appeal was reheard on remand by the Appellate Assistant Commissioner, it was contended on behalf of the assessee that the business of guarantee brokers formed part and parcel of the firm of Messrs. Naraindas Chellaram; both these business were carried on by the same person and that the nature of the activities of both the businesses were also identical. These contentions were not accepted. The Appellate Assistant Commissioner held that the business of money -lending and the business of guarantee brokers was a distinct and separate business. He also held that these two businesses were not carried on by the same person, and were owned by two different entities. It was next contended before the Appellate Assistant Commissioner that even if the two businesses were separate businesses, the assessee was entitled to claim the legal expenses and loss because the said business was not discontinued. The Appellate Assistant Commissioner held that the business of guarantee brokers was discontinued and no business of guarantee brokers was carried on in the relevant assessment years. According to the Appellate Assistant Commissioner, the activities of the guarantee brokers business was discontinued in April, 1947. In this view of the matter, the Appellate Assistant Commissioner again reaffirmed the order of the Income -tax Officer. Besides the aforesaid two grounds, the assessee further contended before the Tribunal that as the assessee had taken over as a going concern all the assets and liabilities of the guarantee brokers business of the Hindu undivided family, the sum of Rs. 27,000 which the Hindu undivided family had deposited with the Bharat Bank as a security deposit constituted the assessee's stock -in -trade and, therefore, he was entitled to the deductions claimed by him. The Tribunal affirmed the findings of the Appellate Assistant Commissioner and held that in the hands of the assessee the assets and liabilities of the Hindu undivided family, which were received by him as a result of the partition, constituted capital assets and not stock -in -trade, because there was no material on record to show that the assessee carried on any guarantee brokers business after the said partition. The guarantee brokers business not having been carried on by the assessee, the loss incurred in respect of that business was capital in nature and on this ground it disallowed the claim of the assessee. On an application made by the assessee under sub -section (1) of section 66 the Tribunal has now stated the case and referred the following three questions to this court : '1. Whether, on the facts and in the circumstances of the case, the guarantee broking business ceased to exist after 1947 ? 2. Whether, on the facts and in the circumstances of the case, the legal expenses of Rs. 1,227 and Rs. 510 in the assessment years 1956 -57 and 1957 -58 respectively were allowable under the Act ?

(3.) IT is next contended by Mr. Khanna that, even assuming that the said two businesses were separate businesses, the guarantee broking business has not been discontinued but is still a continuing business. In support of his contention Mr. Khanna placed reliance on two circumstances : firstly, that even after April 30, 1947, the assessee was receiving commission in respect of the amount which had been already advanced by the Bharat Bank prior to March 31, 1947, and, secondly, the assessee was also receiving interest on the amount of security deposit of Rs. 27,000 which the Hindu undivided family had made in pursuance of the guarantee contract.