Viswanatha Sastri, J.
1. The question of law that has been referred by the Appellate Tribunal is in these terms :
'Whether in the circumstances of this case as found by the Tribunal, the respondent (assessee) is entitled in law to the deduction of the two sums of Rs. 658 and Rs. 5049 in his assessment for 1943-44.'
2. The assessee, a book-seller, seeks to deduct these two sums of Rs. 658 and Rs. 5049 in the computation of his profits for the assessment year 1943-44 in the following circumstances. During a period of about 37 days ranging from 13th July 1939 to 20th August 1939 the assessee and one Lakshmana Aiyar jointly borrowed from sundry money-lenders and a Co-operative Bank, a sum of Rs. 16,200 out of which a sum of Rs. 10,450 was taken and utilised by the assessee for hi business needs and the balance of Rs. 5750 was taken by Lakshmana Ayyar. The joint borrowing of the assessee and Lakshmana Aiyar was necessitated by the business needs of both the borrowers and by the instance of money-lenders who required the joint security of two persons for simple loans advanced by them. Lakshmana Aiyar failed in his business and the assessee had to repay the creditor the whole of the joint borrowings. He bad also to spend a sum of Rs. 658 in an unsuccessful attempt to recover the amount due from Lakshmana Aiyar in respect of his share of the joint borrowing. He had also to pay Rs. 5049 to the creditors on account of Lakshmana Aiyar's share of the joint loans.
3. The Appellate Tribunal, differing from the Income-tax Officer and the Appellate Assistant Commissioner, allowed the assessee to deduct these two sums in computation of his business profits for the year of account 1942-43.
4. Mr. Rama Rao Sahib, the learned advocate for the Commissioner of Income-tax, contends that this decision of the Tribunal is erroneous in law. The Tribunal does not say whether the deduction was allowed as a bad debt whose deduction is authorised by Section 10(2)(xi), Income-tax Act, or whether it was allowed as a business loss which had to be set off against the receipts in arriving at the true measure of the profits and gains of the book-selling business in the year of account. These are possible grounds on which the claim of the assessee could be sustained and the learned advocate for the assessee has relied on these two grounds here. He also relied upon Section 10(2)(xv), Income-tax Act, as justifying the deduction of the two sums now in question.
5. So far as the last contention is concerned, it cannot be said that there has been in this particular case any expenditure not being in the nature of a capital expenditure laid out or expended wholly and exclusively for the purposes of the business in the year of account. The payment made by the assessee to the original creditors of the assessee and Lakshmana Ayyar was before the year of account. On such payment, Lakshmana Ayyar became liable to pay the assessee that portion of the debt which was payable by Lakshmana Aiyar but which was paid by the assessee. In these circumstances, it could not be said that there was any expenditure in the year of account laid out wholly and exclusively for the purposes of the business of the assessee.
6. Section 10 (2) (xi) of the Act deals with the allowance for bad and doubtful debts. It is contended that when the assessee paid off in full the joint debts of himself and Lakshmana Aiyar he became entitled to recover from Lakshmana Aiyar the amounts paid by him in excess of the amounts utilised by him and therefore there was a debt due from Lakshmana Aiyar to the assesses by reason of such over payment. The contention is that on the discharge of the joint liability by the assessee he became a creditor of Lakshmana Aiyar and the latter became his debtor in respect of the sums paid by him in excess of his own share of the liability. Lakshmana Aiyar having become an insolvent the debt became a bad debt. It has been argued that the debt became a debt due to the assesses in respect of his business and became bad on account of the insolvency of Lakshmana Aiyar and was therefore deductible under Section 10 (2) (xi) of the Act. In our opinion this contention is untenable.
7. Section 10 (2) (xi) was enacted by Section 11, Income-tax Amendment Act, 1939. Before its enactment a deduction in respect of bad and doubtful debts was allowed though the Act nowhere expressly sanctioned it, on the ground that the deductions enumerated in Section 10 were not exhaustive and that the deduction of bad debts was necessarily implicit in the very conception or idea of profits and gains. Except in the case of a banking or money-lending business, there could be no allowance for bad debts where the accounts of the business were kept on a cash basis. Under the mercantile accountancy system referred to in Section 10 (2) (xi) an entry is made on the receipt side of the account when a sale is concluded although the money on account of such sales has not been paid in. In making up the account at the end of the year such entries are treated as receipts and the tax is levied on what has some times been called as 'book profits.' It may later on be found that some of these 'book profits' are in fact irrecoverable. They are then written off as bad debts and since such book profits have been included in the income assessed to tax, the bad debts have been allowed to be written off against the book profits in the year in which they are found to be irrecoverable. This commercial practice has taken a statutory form in the first part of Section 10(2) (xi) of the Act as amended in 1939. In the case of banking or money lending business whether the accounts are maintained on a cash basis or on the mercantile system allowance for bad and doubtful debts was given for the reason that all the moneys embarked in the money-lending business and lent out for interest were in the nature of the stock-in-trade of the banker or money-lender and the bad and doubtful debts represented so much loss of the stock-in-trade. Losses in respect of the stock in trade have always been regarded as trade losses and allowed to be set off against the receipts. That this is the position with reference to a banking or money lending business is recognised by the decision of the Judicial Committee in the Commissioner of Income-tax, B. & O. v. Maharaja of Dharbanga, (1942) 10 I.T.R. 214: A.I.R. 1942 P. C. 11. This principle is embodied now in the second part of Section 10 (2) (xi) of the Act as amended in the year 1939. Except in the case, therefore, of a money-lending or banking business, where the entire money invested or lent out is regarded as stock-in-trade or circulating capital, capital losses cannot be treated as bad debts and deducted from the receipts of a particular year. Where a person carries on money-lending as well as other businesses he cannot treat a capital loss sustained in his other businesses as a bad debt of the money-lending business and claim a deduction. This was ruled by the Judicial Committee in Commissioner of Income-tax, C.P. and U.P. Lucknow v. Motiram Nandram and Arunachalam Chettiar v. Commissioner of Income-tax, Madras .
8. In the present case the amount of Rs. 5707 whose deduction as a bad debt is now claimed really arose by operation of law. The original debts were debts due by the assesses and Lakshmana Aiyar and not debts due to the book selling business of the assessee. Let it be assumed that the original loans contracted by the assesses and Lakshmana Aiyar were capital borrowings for the purposes of the book selling business. Lakshmana Aiyar became a debtor to the assessee as soon as the latter discharged the entire joint debt due to the creditors. But then Lakshmana Aiyar became a debtor not as a customer of the business or as a purchaser of goods in the course of the assessee's business but by operation of law as a person for whom the assessee stood as surety. The debt was not connected with and did not arise out of the trading operations of the assessee. When Section 10 (2) (xi) speaks of a bad debt, it means a debt which would have come into the balance sheet as a trading debt in the business or trade that is in question -- in this case the book setter's trade -- and which has become a bad debt. It does not refer to any debt due to the trader which, when it was good, would not have come to swell the profits of the book selling trade. Debts or losses not connected with a trade or business and not arising out of the operations of the trade or business are really losses of capital and are not admissible deductions under Section 10 (2) (xi) of the Act.
9. Another way in which the matter has been presented in this Court is that the loss is one incurred by the assessee in the carrying on of his business and, therefore, liable to be set off against the receipts of the business. The profits of a trade or business for the purposes of income-tax have always been considered, both in England and here, to be the profits computed by ordinary methods of commercial trading or accountancy, subject, of course, to the specific directions contained in the Income-tax Act. The expenses incurred for the trade or business must be set against the receipts in order to arrive at the taxable profits and any payment, disbursement or expenditure may be deducted which would be a proper item of debit to be charged against incomings of the business concerned when computing profits of it, unless the deduction is expressly of by plain implication prohibited by any provision in the Act, But then the expenses on outgoings must relate to the conduct of the business, the profits of which have to be calculated and taxed. Capital expenditure or capital loss cannot, as already observed, be deducted by reason of the prohibition in s, 10 (2) (xv) of the Act. It is difficult to formulate a precise test to find out whether a particular expenditure claimed as a deduction was one incurred in connexion with the trade or business of the assessee. The general rule, however, has been laid down in Strong & Co., Ltd. v. Woodfield, (1906) A. C. 448 : 75 L. J. K. B. 864 by the Lord Chancellor in these terms :
'In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more with the trade. I think only such losses can be deducted as are connected with in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of a trader. The nature of the trade is to be considered.'
Judged by this test the loss claimed by the assessee in this case did not arise in the course of or as a result of his business as a book-seller. The business of book selling did not require the assessee to guarantee the debts of third personslike Lakshmana Aiyar. It might be that he raised the required capital for the business in that way. The giving of the guarantee or security for the debt of Lakshmana Aiyar and the payment of money as a remit of such guaranteecannot be described as a payment in the course of or for the purpose of the trade or business of the book-seller. The deduction claimed in respect of the loss sustained by the assessee is too remote from the business of book selling carried on by him and is not sufficiently connected with the trade and, therefore, falls outside the range of those items which can properly be brought into a profit and loss account of the business.
10. Though Section 10, Income-tax Act, allows interest paid on borrowed capital as a deduction in computing the profits of a trade or business, it does not allow a deduction in respect of the capital itself, or in respect of the loss of capital either belonging to the assessee or borrowed by him, except in the case of a banking or money-lending business. Indeed, there is no reason why a man who invests his own capital in a business should be in a worse position than a person who is obliged to borrow money in order to find the capital for the business.
11. Reliance has been placed by the learned advocate for the assessee on the decision of this Court in the Commissioner of Income-tax v. Ramaswami Chettiar : 14ITR236(Mad) . Apparently this is the case that is referred to as having been followed by the Appellate Tribunal in another case to which reference is given in the order of the Appellate Tribunal. But there the business was one of money-lending and the Court found that according to the well-known and well recognised mercantile custom of Nattukottai bankers, they were in the habit of raising funds which formed the stock in-trade of their money-lending business by the execution of joint promissory notes in favour of bankers. That was apparently the usual technique of obtaining credit adopted by the Nattukottai Chetti community money-lenders. In that context this Court held that where a Nattukottai Chetti money-lender paid off in their entirety the debts jointly due by him and another as a result of the latter's inability to pay, the loss sustained as a result of this transaction was a loss of the money-lending business itself and, therefore, a deductible item in computing profits. There was a custom among Nattukottai Chetti money-lenders to raise funds by executing joint promissory notes for the purposes of obtaining money for carrying on their money-lending business and, therefore, the loss that arose as a result of such joint borrowing was held to be a loss of the money-lending business. That decision must be confined to its own peculiar facts and does not apply to businesses other than Nattukottai Chetti money-lending business. Here there was no evidence of any usage or custom in the book-selling trade to raise money by the execution of the joint promissory notes with other people and the instances of such a joint borrowing by the assessee in the present case cannot be relied on as evidence of any such commercial practice. Neither in its inception nor subsequently when the assesses discharged the entire debt due from himself and Lakshmana Aiyar, could the loss be said to arise out of or in the course of the trade or business of the assessee as a book-seller. The assessee was not a financier or banker in whose case alone all borrowings of capital for the needs of the business could be considered to form part of the stock-in-trade of the banker. We consider, therefore, that the loss in this case was so far outside the scope and purposes of the business of the assesses as to make it impossible for us to sustain the conclusion of the Tribunal, We, therefore, answer the question propounded to us in the negative and in favour of the Commissioner of Income-tax. The costs of this reference Rs. 250 will be paid by the assessee to Commissioner of Income tax.