Decided on September 01,1937



SUBHEDAR, A.J.C. - This is a reference under Section 66(2) of the Indian Income-tax Act (XI of 1922), by the Commissioner of Income-tax, Central and United Provinces, in the matter of the assessment of the income of Messrs. Motiram Nandram (hereinafter called the assessees) carrying on cloth, yarn and money-lending business at Hinganghat. In the return of the income for the purpose of assessment for the year 1933-34 the assessees claimed a deduction of the sum of Rs. 39,500 from their taxable income as a loss in business under the following circumstances. In consideration of securing the Organising Agency of the White Kerosene and Mineral Oil Company of Bombay (hereinafter called the Company) the assessees had deposited with the Company Rs. 50,000 on terms embodied in an agreement dated the 17th December 1930 (Appendix A). The aforesaid deposit was to be used by the Company in their business, but was repayable to the assessees with interest at 7 per cent per annum out of the deposits which were to be made by the "Selling Agents" with the company to cover the price of oil to be supplied to them by the Company for sale. Besides the return of the aforesaid deposit with interest the Company had further agreed to pay to the assessees all the expenses incidental to the organisation and carrying on of the Agency business and also a commission, on the value of the goods sold by the "Selling Agents", by way of remuneration. The Company however went into liquidation before the assessees could recoup the deposit. They accordingly filed a suit in the High Court of Bombay against the proprietors of the Company and the Official Assignee and obtained a decree for Rs. 42,272-2-0 and costs, but as the decretal amount could not be fully recovered, the irrecoverable balance of Rs. 39,500 was written off by the assessees as a bad debt. - (1.)
(2.) The Income-tax Officer disallowed the claim of the assessees for the following reasons :- The whole transaction is a mere investment of capital by way of security. It is not a money-lending loan advanced. It carried interest at 7 per cent as it was a mere deposit for security, which every oil company agent had to do. Assessees money-lending to debtors carries interest ranging from 15 per cent to 25 per cent. Thus the alleged bad debt is a mere capital loss and is disallowed." This order was upheld by the Assistant Commissioner on appeal, though on somewhat different grounds. The Assistant Commissioner held, "that the deposit was neither a loan nor an advance towards the cost of goods, nor did it represent money laid out for business, but that it was merely a security deposit, the object of which was to finance the Company and to secure and acquire new business or a new source of income".
(3.) ALTHOUGH four definite questions were raised by the assessees in their application for reference, the learned Commissioner, being of the opinion that all the questions were really different arguments for the same point, has referred the following question only for the decision of this court :- "Having regard to the terms of the agreement (Ex. A) and the other circumstances of the case, was the Assistant Commissioner justified in holding that the item of Rs. 89,500 was not a trading loss but a loss of capital".;

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