Sen, J. - (1.) These two references are taken up together for consideration. In Income-tax Reference No. 7 of 1961 the following question was posed for consideration by this court under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called the "Act"): "Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,60,199 was an admissible deduction in computing the business profits of the assessee ?"
(2.) It appears that the Commissioner of Income-tax suggested certain questions for being sent up to this court for consideration in his application under Section 66(1) of the Act before the Tribunal. The Tribunal, however, only sent up the above question to this court. The matter was, therefore, taken up by the Commissioner of Income-tax under Section 66(2) of the Act to this court. This court asked for a further statement of the case on the following questions framed by it. They are as follows : "1. Whether there was any evidence in support of the Tribunal's finding that the assessee-company had stood guarantee for the loan given to Messrs. U. P. Sales Corporation Limited by the Gwalior Industrial Bank Limited ? 2. If the answer to question No. 1 be in the affirmative, then whether there was any evidence to show that the assessee-company stood such guarantee in the ordinary course of its business ? 3. If the answer either to question No. 1 or to question No. 2 be in the negative, then whether the sum of Rs. 5,60,199 was allowable as a deduction in computing the profits of the assessee ? "
(3.) Birla Brothers (Private) Limited, hereinafter called " the assessee ", carried on, inter alia, banking and financing business and acted as the managing agents of various companies, one of which was Messrs. Starch Products Limited. Messrs. U. P. Sales Corporation Limited, a company incorporated on February 4, 1943, were the selling agents of Messrs. Starch Products Limited. The assessee, in the course of its business, stood guarantee for a loan of Rs. 6,00,000 borrowed by Messrs. U. P. Sales Corporation Limited from Gwalior Industrial Bank Limited which was also one of the concerns of the assessee. During the assessment for the year 1953-54 the assessee-company claimed deduction in respect of Rs. 5,60,199 as a bad debt in the account of Messrs. U. P. Sales Corporation. The facts are that Messrs. U. P. Sales Corporation Limited had borrowed Rs. 6,00,000 from the said bank and the assessee-company stood guarantee for the loan. The loan incurred by Messrs U. P. Sales Corporation Limited could not, however, be repaid. On August 2, 1948, the Gwalior Industrial Bank Limited went into liquidation and the assessee, three days thereafter, paid the amount of the loan to this bank on August 5, 1948, by a cheque drawn on the United Commercial Bank Limited. According to the assessee, the aforesaid amount was paid to the said bank as a guarantor on behalf of Messrs. U. P. Sales Corporation Limited. As the latter also went into liquidation on March 23, 1952, and as there was no chance of realising the amount, the assessee-company wrote off the debt at the end of the accounting year which commenced on 31st October, 1951, and ended on 18th October, 1952, the assessment year being 1953-54.;