Alfred Henry Lionel Leach, O.C.J.
1. The assessee is a Nattukottai Chetti who at all material times was carrying on a money-lending business in Rangoon. He guaranteed a loan granted by a bank in Rangoon to the Chettiar firm of S.A. RM. and as the loan was not repaid by the borrower, he was called upon to make good the amount, Rs. 19,670, under his agreement of guarantee. The assessee sought to deduct this sum as a loss when estimating his profits for the year of account 1939-40.
2. The Income-tax Officer and the Appellate Assistant Commissioner refused to allow the deduction, but on appeal to the Income-tax Appellate Tribunal, the assessee's contention was accepted. The Tribunal's decision was based on a common practice among Nattukottai Ghettiars. It is their custom to borrow from banks for the purpose of lending out the sums so obtained on higher rates of interest. The banks require such overdrafts to be guaranteed by other Chettiars. The Chettiars stand surety for one another in these borrowings. If a Ghettiar refused to accommodate another money-lender in this way, he would not be able to obtain a guarantor for his own essential borrowings. The assessee in this case borrowed money on the guarantee of others and in turn stood surety for other Chettiars. In these circumstances, the Tribunal considered that the sum of Rs. 19,670 which the assessee was called upon to pay fell under Section 10(2)(xii), that is, it was an expenditure (not being in the nature of capital expenditure or personal expenses), laid out or expended wholly and exclusively for the purpose of his business.
3. The Commissioner of Income-tax applied to the Tribunal to state a case to this Court as he considered that this decision was wrong in law. As a result the Tribunal has referred to this Court the following question:
Whether in the circumstances of this case, the respondent is entitled in law to the deduction of Rs. 19,670 in his assessment of 1940-41, under Section 10 (a)(xii)?
We consider that it would be straining the language of Section 10(2)(xii) to hold that the deduction can be made under that provision; but this does not mean that the assessee is not entitled to the deduction. Before the 1939 Amendment Act, there was no provision in the Indian Income-tax Act for the deduction of bad ?debts when calculating the taxable profits of the business, but of course such debts had to be deducted in order to arrive at the true figure of the profits earned. The sum of Rs. 19,670 represented a loss incurred by the assessee in carrying on his money-lending business and therefore he was entitled to the deduction. By reason of the practice among Nattukottai Chettiars to which we have referred this debt can only be regarded as a business loss.
4. We answer the question referred in favour of the respondent. The Commissioner of Income-tax will pay the costs, Rs. 250.