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. Whether, on the facts and in the circumstances of the case, the decreed amount of Rs. 11,314 paid by the assessee in the assessment year 1957-58 was allowable ?'
3. Mr. Khanna in the first instance contends that the money-lending business, which was carried on in partnership with Naraindas Chellaram, and the business of guarantee brokers carried on jointly with Mehra are two branches of the same business. It is the argument of Mr. Khanna that both these businesses are identical in nature. It is not possible for us to accept this contention. The business that was carried on in partnership with Naraindas Chellaram is a hundi business. The nature of the business as stated by the Appellate Assistant Commissioner is that the partnership firm was lending money to its clients and the clients in their turn used to pass hundis in favour of the partnership firm. Naraindas Chellaram firm then discounted these hundis with the bank and the bank then used to cash them on the due dates. If any particular hundi was not honoured, the firm had to make good the loss. The nature of the business of guarantee brokers carried on was that the Hindu undivided family jointly with Mehra used to introduce clients to the Bharat Bank. The Bharat Bank then used to advance money to these clients. The Hindu undivided family jointly with Mehra stood guarantee for the repayment of the loan under the aforesaid contract entered into with the bank and, in consideration of the guarantee given by them, they used to receive guarantee commission as stated above. In the even the clients failed to repay the loans borrowed by them from the bank under the contract of guarantee, the loan was recoverable from the joint family jointly with Mehra. This being the nature of the aforesaid business, it is difficult to accept the contention of Mr. Khanna that both are identical businesses. The money that is lent was the stock-in-trade of the firm, Naraindas Chellaram, and there was a direct relationship of creditor and debtor between the person borrowing and the firm, Naraindas Chellaram. The liability of the firm arose under the provisions of the Negotiable Instruments Act. In the other business, i.e., the guarantee brokers business, there was no relationship of creditor and debtor between the family and Mehra on the one hand and the debtor borrowing the money on the other; the relationship of debtor and creditor was between the Bharat Bank and the person borrowing. The liability of the assessee arose out of the contract between him and the bank, viz., the guarantee brokers contract, Mr. Khanna drew our attention to a decision in Commissioner of Income-tax v. S. A. S. Ramaswamy Chettiar, in support of his contention that the guarantee broking business is a money-lending business. That decisions, in our view, has hardly any application to the facts of the present case. The facts in that case were that the assessee, a Nattukottai Chetti, was carrying on a business of money-lending. He guaranteed a loan granted by a bank to another Chettiar firm. The loan was not repaid by the borrower. The bank called upon the assessee to make good the same. The assessee paid the sum and sought to deduct this amount as a business loss when estimating his profits. This claim was allowed because the assessee was successful in establishing that there was a custom among Nattukottai Chettiars to stand surety for one another when they borrowed money from banks for the purpose of lending it out at higher rates of interest. In view of the assessee's succeeding in establishing the custom, it was held that the loss incurred by the assessee was incurred by him in the course of his business and the claim of the assessee was accordingly allowed. It is difficult to see how, in the instant case, where no such custom has been established, this statement has any relevance. On the other hand, it is clear that in the absence of proof of any custom, the loss suffered in the guarantee broking business cannot be said to be loss suffered in the money-lending business. In our opinion, therefore, it is not possible to accept the first contention raised by Mr. Khanna that both the aforesaid businesses are identical in nature. It is also not possible to accept Mr. Khanna's contention that these two businesses were branches of one and the same business. As already stated, the business of money-lending was carried on by the Hindu undivided family in partnership with Naraindas Chellaram. The ownership of that business thus vested in that partnership. The business of guarantee broking was carried on by the Hindu undivided family jointly with one Mr. Mehra. The ownership of that business thus vested in another partnership. The owners of these two businesses thus were not one and the same entity but different entities. That being the position, it also cannot be said that both the business were branches of one and the same business. There was no identity of ownership of both these businesses.
4. 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.
5. It may be true that the assessee is receiving interest as well as commission as claimed by him, but that cannot by itself be taken as a piece of evidence, on which it could be said that the business of guarantee broking continued after April 30, 1947. Now that business consists of some real, substantive and systematic organised course activity or conduct with a set purpose. As already stated, the nature of activity of the assessee in the guarantee broking business was taking customers desirous of borrowing money to the Bharat Bank and getting them loans from the Bharat Bank and thereby earn commission and interest, which the bank had agreed to pay to the assessee under the agreement made on May 1, 1944. There is no evidence that this activity continued after April 30, 1947. On the other hand, there is evidence that in the notice given by the assessee to the bank on March 27, 1947, whereunder he informed the bank that as from April 30, 1947, no fresh clients would be introduced by him to the bank. That being the evidence, it cannot be said that the business of guarantee broking continued after April 30, 1947. The commission and interest which the assessee received after that date was in respect of the activity or business carried on by him jointly with Mehra prior to April 30, 1947. In our opinion, therefore, the contention of Mr. Khanna that the guarantee broking business continued after April 30, 1947, should fail.
6. It is next contended by Mr. Khanna that even if the guarantee broking business had been discontinued from April 30, 1947, the loss sustained by him in respect of that discontinued business is liable to be set off against his income in the money-lending business. In support of his contention Mr. Khanna has placed reliance on decisions in Pohoomal Bros. v. Commissioner of Income-tax, Commissioners of Inland Revenue v. Falkirk Iron Company, Hyatt (H. M. Inspector of Taxes) v. Lennard and Commissioner of Income-tax v. Jagannath Kissonlal. In our opinion, this contention also is without any merit. It is a well settled principle that loss must be confirmed to the appropriate business when the assessee carried on more than one business. The loss of a dead, separate and distinct business cannot be claimed as a set-off against the income of another business which the assessee is carrying on in the accounting year. The decisions, on which reliance has been placed by Mr. Khanna, are distinguishable on facts and are of no assistance to the assessee.
7. Facts in Pohoomal Bros. v. Commissioner of Income-tax were that the head office of the business of the assessee was in Bombay and there were also various other branches of this business in various parts of the world including those at Manila, Saigon and Kuala Lumpur. The stock-in-trade in these branches was destroyed by enemy action during the Japanese invasion. In computing profits and gains of the business, the assessee claimed to deduct the losses suffered by him on account of the Japanese invasion at these branches. The claim was allowed. It would be noticed that the losses suffered in the year of account were the losses suffered in certain branches of the assessee's business. The loss was not in respect of any discontinued, distinct and separate business.
8. In Commissioner of Inland Revenue v. Falkirk Iron Company Ltd., the assessee company leased certain premises at an annual rent for a period of ten years and occupied them for the purposes of its business. After a certain time but before the expiry of the said ten years, the assessee ceased to carry on any part of its business in those premises. Portions of the premises were then sublet by the assessee company for the remaining period of the lease. The difference between the amount agreed by the assessee to pay as rent and the amount which it got by subletting the premises was claimed as deduction in computing its profits assessable to income-tax. The claim was allowed. Again, it would be seen that the business of the assessee had not been discontinued. The assessee continued to carry on the business that was carried on by the assessee in the premises taken on lease was not any separate or distinct business as such, but was part of its business which it was carrying on.
9. Facts in Hyatt (H. M. Inspector of Taxes) v. Lennard also are similar to the preceding case. There the assessee carried on business at several shops in London. One more branch was opened by the assessee in Oxford Street and for that purpose obtained certain premises on lease for 35 years. There was no option to the assessee to terminate the lease at any earlier date. The business run by the assessee at this branch ceased to be profitable after certain years. The assessee, however, closed this branch and sublet the premises. The difference between the sum agreed by the assessee to pay as rent and the sum it obtained by subletting it was claimed as a deduction. The claim was allowed. Again, the business of the assessee had not been discontinued. The business carried on in the premises taken on lease was part and parcel of the business of the assessee and was not a separate and distinct business.
10. In Commissioner of Income-tax v. Jagannath Kissonlal, the assessee, a partnership firm, was carrying on business as commission agents in Bombay. The assessee borrowed Rs. 1 lakh from a bank jointly with another person on a promissory note executed by the assessee and that other person. Out of the aforesaid amount of Rs. 1 lakh, the assessee took Rs. 50,000 for the purpose of its business and the other person took the remaining Rs. 50,000. That another person became bankrupt and the assessee had to pay the entire amount of Rs. 1 lakh to the bank. From the official assignee the assessee received a certain sum as dividend in the insolvency proceedings and the balance he claimed as an allowable deduction. The claim was allowed on the ground that there was a well recongnised commercial practice in Bombay of carrying on business by borrowing money from banks on joint and several liability; that by doing so the borrower could borrow money at a lower rate of interest than he otherwise would have to pay and that the assessee had borrowed the money in accordance with the commercial practice. It would be noticed that the business in respect of which the claim was made was a running business and the loss sustained was found to be, in view of the prevailing custom, a loss in the course of that business. We are, therefore, unable to accept the contention raised by Mr. Khanna.
11. Lastly, Mr. Khanna contended that, even assuming that the business of guarantee broking was discontinued, the stock-in-trade of that business became the stock-in-trade of his money-lending business. Rs. 27,000 deposited in the bank as security deposit had thus become the stock-in-trade of his money-lending business. The assessee, therefore, is entitled to claim this loss. We are unable to accept this contention of Mr. Khanna. Firstly, the assessee has never at any earlier stage put forward the case that the stock-in-trade of the guarantee broking business was brought into his money-lending business by him as his stock-in-trade. Apart from it, we fail to see also how the deposit of Rs. 27,000 was the stock-in-trade of the assessee of his guarantee broking business. Money was not the commodity in which the assessee could be said to be dealing in his guarantee broking business. The guarantee broking business was discontinued and the assets and liabilities of that business, therefore, became capital in nature. Even assuming that it was the stock-in-trade of the assessee, that business having been discontinued and there being no evidence that its stock-in-trade was brought in the money-lending business of the assessee, the assets and liabilities became capital in nature on the discontinuance of the guarantee broking business. In this connection Mr. Khanna referred us to certain decisions. In our opinion none of them have any application to the facts of the present case. In Commissioner of Income-tax v. R. S. A. Sankara Ayyar, the assessee, who was the manager of a Hindu undivided family, carried on prior to 1931 a money-lending business in partnership with one K. The business of the partnership was discontinued except for the purpose of realisation of outstandings due to it. In 1940 the partnership obtained a decree against M for the outstanding debt due from him. In execution of the said decree certain properties belonging to M were sold, but the entire decretal amount was not realised. The partners then decided to close the accounts of the partnership and in pursuance of that decision divided the outstandings between them. On the next day the assessee entered the sum representing his half share of the sum due from M under the decree in the books of account of his own separate money-lending business, which he was already separately carrying on. He was able to realise certain sums in subsequent years from M and in October, 1943, the assessee wrote off the balance as irrecoverable. The bad debts were claimed as deductions in computation of the profits and gains of his money-lending business. On these facts it would be noticed that the loss claimed was in the assessee's business of money-lending. The evidence showed that the books of the partnership were closed; that the amount due from M was brought into the books of account of the assessee. M thus became the debtor of the assessee and, therefore, the loss sustained by the assessee became the loss of his business of money-lending. There is no evidence here that the liabilities of the guarantee broking business were accepted by the partnership business carried on by the assessee and Mr. Naraindas Chellaram as part and parcel of their business of money-lending.
12. In Deoki Nandan & Sons v. Commissioner of Income-tax, a joint family had advanced a loan in 1923 to a firm and the firm became insolvent in 1925. In 1933 the family disrupted and its immovable properties were divided between the members. By a deed of partnership of the same date, however, the members agreed to carry on the family money-lending business jointly and took over certain joint debts due to the family in the money-lending business. Now, the firm, to which the money had been lent by the joint family, had become insolvent in 1925. In the insolvency proceedings dividends continued to be paid in the years 1934, 1935 and 1936. In 1936 a final dividend was declared. The assessee firm claimed to write off the balance in the accounting year 1936-37. On these facts, it was held that the joint debts of the Hindu joint family were taken over as such by the new firm as part not of the capital but their stock-in-trade and, therefore, the loss was the loss of the business.
13. In Sitaram Motiram Jain v. Commissioner of Income-tax, it has been held :
'Where an individual incurs loss in a business carried on by him as sole proprietor and a registered firm of which he is a partner takes over his business as a running business together with all its assets and liabilities, he has a right to have the loss carried forward and set off, under section 24(2) of the Indian Income-tax Act, 1922, against his share of the profits of the registered firm.'
14. There is no evidence whatsoever here that the assets and liabilities of the guarantee broking business had been taken over by the partnership business carried on by the assessee with Naraindas Chellaram. This contention of Mr. Khanna also, therefore, should fail.
15. The position is short in the instant case is that the business of guarantee broking carried on by the assessee jointly with Mr. Mehra was not a branch of the assessee's business of money-lending, which he was carrying on in partnership with Naraindas Chellaram. These two businesses were separate and distinct businesses. The business of guarantee broking was discontinued on April 30, 1947. There is no evidence showing that the assets and liabilities of that business were taken over as the stock-in-trade of the money-lending business of the assessee, which he carried on in partnership with Naraindas Chellaram. In these circumstances, in our opinion, the Tribunal was not in error in holding that the loss sustained by the assessee in respect of his discontinued guarantee broking business was not an allowable deduction in the computation of profits against his share of profits in the money-lending business. The view taken by us finds support in Chimanlal Rameshwarlal v. Commissioner of Income-tax.
16. As regards the legal expenses of Rs. 1,227 and Rs. 510, which the assessee has incurred in defending himself in a suit filed by the Bharat Bank against him, Mr. Khanna contends that they are allowable as deductions because in the first instance they were incurred to defend the reputation of the assessee in order to facilitate the carrying on of the money-lending business, and, secondly, on the ground that it was incurred to protect the stock-in-trade of the assessee, viz., the deposit of Rs. 27,000.
17. We fail to see how the reputation of the assessee was involved in the suit filed by the Bharat Bank. We have already held that there was no evidence that the deposit of Rs. 27,000 had at any time become the stock-in-trade of the assessee's money-lending business. It has not been established that the rights and liabilities of the guarantee broking business were taken over as a running concern by the partnership firm carrying on money-lending business. Legal expenses were incurred to get rid of a liability which was capital in nature. This contention of Mr. Khanna also, therefore, fails.
18. For reasons stated above, our answer to the first question is in the affirmative, and answers to the second and third questions are in the negative. Assessee shall pay the costs of the Commissioner.