B.K. Mehta, J.
1. The assessee, M/s. Abdul Razak & Company of Dhoraji, carries on business as commission agents as well as dealers in grocery articles having their head office at Dhoraji and branches at Bombay, Mangalore, Veraval and Chorvad. In the course of assessment for the assessment year 1967-68, the assessee, inter alia, made a claim before the ITO for a bad debt of Rs. 78,824 in respect of the amount due from M/s. Mohmad Peer Mohmad of Nasik. The ITO disallowed the claim on the ground that the impugned debt was neither incurred in the course of money-lending nor in the course of commission agency. The ITO noted that the bad debt was written off from the Bombay books of the assessee-firm. The main source of the income at Bombay arose from the commission agency and dealings in grocery articles. The ITO also referred in that connection to the course of business of commission agency where the assessee-firm had to advance money to the constituents against the goods received from them for sale on commission basis and the advance from time to time were adjusted towards the sale proceeds of such goods. The constituents were required to pay interest to the assessee on such advances. The ITO analysed the interest income and found that out of the total income for the assessment year in question of Rs. 2,39,345,87 per cent. interest was attributable to advance in the course of commission business, 7 per cent. in respect of fees from the Veraval branch and the balance was from traders and bankers. The net amount debited to the profit and loss account of interest was to the tune of Rs. 30,288 after adjusting interest receipt of Rs. 2,39,345 against the interest payment of Rs. 2,69,634 by the assessee-firm . The ITO, therefore, concluded that the interest earned by the assessee-firm was in the course of commission agency business and not from the money-lending business. The ITO thereafter proceeded to examine the two sets of accounts of M/s. Mohmad Peer Mohmad of Nasik in the trading books of the assessee-firm; one set was comprising of trading accounts and another was pertaining to money-lending account of M/s. Mohmad Peer Mohmad of Nasik. It is an admitted position that the trading account of M/s. Mohmad Peer Mohmad of Nasik for assessment years 1963-64 to 1967-68 were settled. The second account which was sarafi account disclosed that at the foot of every accounting year there was a debit balance and especially for the assessment year 1967-68 for which the relevant previous year was the accounting year ending on July 31, 1966, there was a debit balance of only Rs. 76,824 in that account. It should be noted that at the end of the previous year relevant to the assessment year 1965-66, there was a debit balance of only Rs. 2,003 but in the course of the accounting year which was the relevant previous year to assessment year 1966-67, an advance of Rs. 81,135 was made against which an amount of Rs. 10,505 was paid in the said year leaving a debit balance of Rs. 72,633 which was carried forward to the next accounting year which was relevant to assessment year 1967-68. It is said that the assessee had remitted a sum of Rs. 62,000 in the accounting year relevant to the assessment year 1966-67 to M/s. Gokaldas Virjibhai of Sangli at the behest of M/s. Mohmad Peer Mohmad of Nasik in order to save the said firm from the consequences arising as a result of their inability to pay to the said M/s. Gokaldas Virjibhai of Sangli. The ITO, therefore, held that the debt was not a bad debt which could be allowed in computing the assessee's total income.
2. The assessee, therefore, carried the matter in appeal before the AAC who upheld the view of the ITO that the debt could not be said to be one arising in the course of the assessee's business, but granted a partial relief by reducing it by Rs. 4,396, being the amount of interest charged in this account which the assessee had not received.
3. The assessee, therefore, carried the matter in further appeal before the Appellate Tribunal. The Tribunal addressed itself to two question : firstly, whether the impugned debt could be said to be a bad debt and allowable under s. 36(2) of the I.T. Act, 1961, and, secondly, in the alternative, whether the impugned loss could be said to be incidental to the business of the assessee. The Tribunal was of the opinion that having regard to the fact that the assessee had been advancing various amounts to various parties on sarafi accounts and earning interest on such advances, the said activity could not be said to be a part of the commission agency business carried on by the assessee. The Tribunal also examined that particular advances made by the assessee-firm to M/s. Mohmad Peer Mohmad of Nasik and concluded that these advances could not be said to be made in the ordinary course of business of money-lending and, therefore, the assessee's claim for writing off the bad debt arising out of the money-lending business was not sustainable. The Tribunal, therefore, addressed itself to the alternative question whether the amount of loss could be allowed as incidental to the business under s. 28 of the I.T. Act, 1961. The Tribunal having regard to the fact that the assessee had admittedly dealings with M/s. Mohmad Peer Mohmad of Nasik had approached the assessee-firm to pay the amount to M/s. Gokaldas Virjibhai of Sangli. At the instance of the revenue, therefore, the following question is referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the impugned loss of Rs. 76,824 should be allowed as a deduction under section 28 of the Income-tax Act, 1961, as loss incidental to the assessee's business ?'
4. The assessee also requested the Tribunal in the course of its opposition for making a reference as prayed for by the revenue that in case the Tribunal decides to refer the question as prayed for by the revenue, the following question should be referred to this court for its opinion. The Tribunal granted that prayer of the assessee in view of the decision of this court in Smt. Dhirajben R. Amin v. CIT : 70ITR194(Guj) and has referred the same to this court, which is as unde :
'Whether the Tribunal was right in holding that the advance to Mohmad Peer Mohmad was not in the ordinary course of money-lending business ?'
5. It appears to us that the Tribunal has approached the problem posed before it as if the business of money-lending and the business of commission agency were two separate and distinct compartments which could necessarily be exclusive of each other. Commission agents 'appear to resemble independent parties rather than agents'. As regards the principal, a commission agent seems to be a seller of good : as regards the third party, a buyer of goods. The relationship between a principal and a commission agent is, therefore, a mixture of that involved in agency and that involved in sale of goods'. (vide Friedman's Law of Agency, 4th Edn., p.31). The contracts with commission agents do not follow a single pattern and is a always necessary to bear in mind while considering such contracts as to what are the terms of a particular contract under discussion (vide Abdulla Ahmed v. Animendra Kissan Mitter : 1SCR30 . Abbott C.J. in Baring v. Corrie  2 B & Ald 137, has given the classical definition of agent known as factors and it should be referred for appreciating the nature of the commission agency business. The common law idea of a factor as given by Abbot C.J. is, 'a person to whom goods are assigned for sale by a merchant residing abroad or at a distance away from the place of sale and he normally sells in his own name, without disclosing that of his principal'. The Factors Act, 1889, which was placed on the statute book in the U.K. without referring to factor of a commission agent, introduced and defined the term 'mercantile agent' which is said to mean 'having in the customary course of his business as such agent authority to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods'. The same definition of 'mercantile agent' has been incorporated in s.2(9) of the Sale of Goods Act, 1930, which reads as unde :
'2. (9) 'Mercantile agent' means a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of goods.'
6. A person appointed as an agent for the sale or purchase of goods on commission having authority to sell or purchase would be a mercantile agent. (vide Sitaram Co. v. Ratilal : AIR1969Cal472 . According to s. 171 of the Contract Act, bankers, factors, wharfingers, attorneys of a High Court and policy-brokers, subject to a contract to the contrary, have a general lien on all goods bailed to them as security for 'general balance of account'. Thus, general lien of the factors extends to all its lawful claims against the principal as a factor, whether for advances, of remuneration, or for losses or liabilities incurred in the course of his employment in respect of which he is entitled to be indemnified. (vide Pollock & Mulla on Indian Contract and Specific Relief Acts, 9th Edn., p. 683). According to s. 221 of the Indian Contract Act, in the absence of any contract to the contrary, an agent has a lien over goods, papers and other property of his principal received by him until the amount that may be due to the agent are accounted for to him. A commission agent is a general agent who has authority to act for his principal in all matters concerning a particular trade or business or to do some act in the ordinary course of his trade or business. Commission agent employed for a particular job is a special agent. 'Both general and special agents who are authorised to act for the principal have implied authority to do what is incidental to the ordinary conduct of such a trade or business or is within the scope of that class of acts and also whatever is necessary for the proper and effective performance of duties. The general agent has no authority to do anything outside the ordinary scope of this employment and duties. (vide Pollock & Mulla on Indian Contract and Specific Relief Acts, 9th Edn., p. 766). The principal is under a duty to reimburse and indemnify the agent against all liabilities incurred in the execution of his authority, and at any rate where the agency is contractual, the liability is not confined to payments made in discharge of debts legally binding on the principal; the agent may recover indemnity for payments which he is bound to make though the principal is not, liabilities which he has not yet himself discharged, payments which may not have been necessary but which when they were made reasonably appeared to be necessary, and payments of debts which could not be legally enforced but non-payments of which would involve serious consequences. But the act of the agent must have been within the scope of his express or implied authority, as extended by custom, operative in the market in which the agent deals, provided that such custom is reasonable or known to the principal; or else it must have been ratified. (vide Chitty on Contracts, 24th Edn., para. 2119).
'An agent has also implied authority to act in accordance with the customs and usages of the place where, or the business in respect of which, his express authority permits him to act, subject to the condition that such custom and usages must not be unreasonable, nor change the essential nature of the contract of agency.' (vide Halsbury's Laws of England, 4th Edn., Vol. 1, pp. 446, 743).
7. In view of these well accepted legal principles, in our opinion, by necessary implication, either short-term or long-term financing is an integral part of the commission agency business. As a commission agent, one either buys the goods or sells the goods for one's principal. When he acts as a commission agent for sales of goods, he purchases the goods for supply to his principal from his funds and then he is reimbursed by his principal on supply of such goods. A commission agent, therefore, has got to advance amounts from time to time according to the nature of his business. It may be a short-term advance if he is a commission agent for purchase of goods or it may be a long-term advance if it is for sale of goods. We have, therefore, not been able to appreciate as to how the Tribunal approached the problem as if the financial lending which is involved in the business of commission agency is a seperate and exclusive business and not an integral part of the commission agency business. It is an admitted position here before us that the assessee-firm was doing the business as commission agents and dealers in grocery articles. It is also an admitted position that M/s. Mohmad Peer Mohmad of Nasik engaged the assessee-firm as commission agents for purposes of purchase of goods. The one set of account in the trading books of the assessee-firm comprises of this commission agency business for purchase of the goods carried on by the assessee-firm known as 'sarafi account'. It is, however, in out opinion, the interference of the Tribunal from these two sets of accounts of M/s. Mohmad Peer Mohmad of Nasik that these were two different businesses, which is not justified. It is no doubt true that in the present case before us the bad debt which has been claimed by the assessee-firm was in respect of advance made to the principal, M/s. Gokaldas Virjibhai of Sangli with whom the said principal had independent dealings. It is also an admitted position that the trading account of M/s. Mohmad Peer Mohmad of Nasik in the books of the assessee-firm was settled and there was no outstanding which had been carried to the sarafi account of the said party. These facts, however, in our opinion, are not sufficient to necessarily reach the conclusion as has been done by the Tribunal that the lending was not a part of the general commission agency business. The general lien granted, inter alia, to the factors who are the commission agents for sale of goods under s. 171 and of agents under s. 221 of the Indian Contract Act extends to the general balance of account of their principal which would, therefore, necessarily include the advances made apart from strictly in the course of the business as factors or commission agents for purchase and supply of goods. It is a matter of surprise how the Tribunal lost sight of the finding made by the ITO that in the course of the business of commission agency, the assessee-firm had advanced money to the constituents who where required to pay interest on such advances. It is no doubt true that the ITO has found that these advances were made to the constituents against the goods received from them for sale on commission basis, but that observation of the ITO, in our opinion, does not detract from the nature of the business of commission agents, whether for sale or purchase of the goods, which, in our opinion, necessarily requires the advances to be made. We should not be, however, understood to subscribe to the view that if in a given case a trader doing commission agency business makes advances or lends money to an unknown outsider or to a complete stranger, it would be a part of his commission agency business. In the present case, however, the ITO has not only found that the assessee-firm was making such advances in the course of commission agency business but the ITO, Rajkot, has also recorded the statement of one of the partners of the assessee-firm where Shri Ahmed Ibrahim Sahigra stated, inter alia, that the firm was carrying on money-lending business at Bombay and no licence was necessary for such business and the transactions were recorded in the common trading books of account of the firm. In answer to question No. 10 he stated that M/s. Mohmad Peer Mohmad of Nasik approached them for loan and requested them to send money on their behalf to M/s. Gokaldas Virjibhai of Sangli from whom M/s. Mohmad Peer Mohmad of Nasik had purchased the goods were not prepared to wait for their dues and as the latter enjoyed better credit facility with the assessee-firm they approached them for paying off the dues to the Sangli party. In answer to question No. 17 as to when they post entries for interest in the books, the deponent stated that in the accounts of their constituents they make entries at the end of the accounting period while in the case of other advances, the entries are made when the interests amounts are received. Admittedly, M/s. Mohmad Peer Mohmad of Nasik was the constituent of the assessee-firm. The ITO, Nasik, has also recorded the statement of one of the partner of this debtor-firm, where the deponent-partner has stated that their firm of M/s. Mohmad Peer Mohmad of Nasik had trading relations with the assessee-firm for more than 30 years, and they enjoyed greater credit facility with them which was not available from M/s. Gokaldas Virjibhai of Sangli. The Tribunal has overlooked these statements of the assessee and the debtor-firm where it has been clearly stated that these advances were asked for and made in fact having regard to the commercial relations were admittedly of principal and commission agents. In our opinion, therefore, the Tribunal was not justified on the facts and in the circumstances of the case to hold that the advance to M/s. Mohmad Peer Mohmad of Nasik was not in the ordinary course of business of the assessee-firm and merely incidental to it. As held by this court in CIT v. Equitorial Pvt. Ltd.  Taxation 37(3)-82, the debt owed by M/s. Mohmad Peer Mohmad of Nasik was one which sprang directly from the business of the assessee and was allowable as a bad debt, and, consequently, therefore, a trading loss under section 28(1). It is no doubt true that every loss is not so deductible unless it is incurred in carrying out the operation of the business. [vide CIT v. Nainital Bank Ltd. : 55ITR707(SC) . In that view of the matter, therefore, for the reasons stated in this order, we are of the opinion that the said loss being a bad debt is allowable as trading loss under s. 28 of the I.T. Act, 1961, and, therefore, for the reasons stated hereinabove, the answer to the question referred to us is in the affirmative, that is, in favour of the assessee and against the revenue.
8. The question referred to us at the behest of the assessee, therefore, need not to be answered as conceded by the learned advocate for the assessee.
9. The result is that the question referred to us at the instance of the revenue is answered in the affirmative, that is, against the revenue and in favour of the assessee, while the question referred to us at the behest of the assessee does not survive and, therefore, does not require to be answered. The Commissioner shall pay the costs of this reference to the assessee.