Full Judgment Text & Judicial Ruling

1963 P T D 937

1963 P T D 937

[Madras India]

Before Ramachandra Iyer, Ofg. C. J. and Srinivasan, J

K. S. JANAKIRAM

versus

COMMISSIONER OF INCOME TAX, MADRAS

Case Referred No. 76 of 1957, decided on 31st July 1961.

Bad debt----

---- Freight broker guaranteeing loan of charterer to shipping line Broker to receive share of profits as consideration-Failure of shipping line to repay loan Freight broker discharging obligation Loss incurred Whether bad debt.

As part of a transaction of a charter party, the charterer advanced a sum of money to a shipping line for acquiring a vessel. The freight broker guaranteed the loan. In return, the broker was to obtain a share of the profits which would be earned by the shipping line, over and above his earnings on account of agency fees, brokerage, etc. The shipping line being unable to repay the loan, the broker had to discharge the obligation. He did so, wrote off the amount in his accounts and claimed it as a bad debt. The claim was rejected by the Appellate Tribunal. On a reference to the High Court :

Held, that no part of the sum which was guaranteed by the assessees could be treated as a bad debt as furnishing of guarantee is not a normal incident in the course of business of freight brokerage and it is also not customary for freight brokers to undertake such an obligation on behalf of shipping lines.

The connection between a business of freight brokerage and the business of securing advances to shipping lines is far too tenuous to support a claim that it was incidental to the business. Re fact that the assessee was to receive a part of the profits of the shipping line from the transaction showed that it was not entered into in the course of the business of a freight broker.

The question to be considered in such cases is whether the transaction is a necessary part of the normal course of business and is so closely interlinked with the business as to be incidental to the carrying on of the business.

Facts differ from business to business and what is allowable as a deduction in respect of one business may not be allowable in another business.

Commissioner of Income tax v. Subramanaya Pillal (1959) 18 I T R 85 and Madan Gopal Bagla v. Commissioner of Income tax (1956) 30 I T R 174 (S C) fol.

Commissioner of Income tax v. Jagannath Kissonlal (1961) 41 I T R 360 (S C) ; Morley v. Lawford & Co. (1928) 14 T C 229 and Strong & Co. v. Wood field (1906) A C 448 ref.

STATEMENT OF CASE

In compliance with the directions of the High Court of Judicature at Madras, under section 66 (2) of the Indian Income-ax Act, 1922, in Civil Miscellaneous Petition No. 7261 of 1956, dated October 29, 1956, we state a case agreed to by both the parties and refer it to the High Court of Judicture at Madras. The question of law on which the Tribunal has been directed to state a case is as follows

"Whether, on the facts and in the circumstances of the case the sums of Rs. 27,500 and Rs. 6,000 or any part thereof are allowable as deductions in computing the profits of the assessee to income tax ?"

We shall therefore confine ourselves, as far as possible, to the facts relevant to that question.

2. The International Clearing and Shipping Agency (hereinafter referred to as the "firm") was a partnership between K. S. Janakiram, the assessee in this case, and another carrying on in Madras, business as freight brokers to various shipping lines including Ashoka Lines Ltd., Calcutta (hereinafter referred to as the "owner"). The managing director of these owners was Captain G. Colin Tilley. Santhosh K. Doss was another active director thereof.

3. The aforesiad owners, not being in affluent circumstances at that time, with the object? of acquiring a bark, called Menaka (later re named Manek Prasad under which name it is hereinafter referred to) arranged with the aforesaid firm and with Inden Biselers (another firm with C. R. Kasi Viswanathan, as its managing partner, and hereinafter referred to as the "charterers") for an advance of Rs. 25,000 to be adjusted out of the freight on a charter of the same bark to the latter. This arrangement was brought about by a letter, dated September 24, 1952, from the aforesaid firm to the "owners", a copy whereof is annexed hereunto as Annexure "A" and forms part of the case.

4. The charterers, as one of the conditions of the advance, insisted on a guarantee from the aforesaid firm and from Janakiram, the assessee in this case, personally, for the return of the advance, if it became necessary within two days of a written demand. This guarantee was duly given in a letter to the charterers, dated September 24, 1952, a copy whereof is annexed hereunto as Annexure "B" and forms part of the case.

5. The period of the charter was the entire shipping season on the Malabar Coast of India during which the bark, the aforesaid Manek Prasad, had to do voyages between the Port of Beypore and the Ceylon Ports carrying tiles and ridges for the charterer at agreed freight rates, with a guaranteed minimum for each voyage. The advance was to be adjusted out of the first seven voyages in equal instalments.

6. The terms and conditions of the charter were the subject-matters of further correspondence. Copies of liters, dated September 26, 1952, and October, 1, 1952, suggesting modifications are annexed hereunto as Annexures "C" and "D" respectively and form part of the case. The terms were eventually finalised and the charter party, a copy of the draft whereof is annexes hereunto as Annexure "E" and forms part of the case, was signed by Janakiram as the attorney of the charterers and the fact intimated to the owners by letter, dated September 30, 1952, a copy whereof is annexed hereunto as Annexure "F" and forms part of the case.

7. Thereafter, on a suggestion emanating from Janakiram, the assessee, in his letter Annexure "F" aforesaid, for the part the firm and Janakiram had played in the negotiations in the aforesaid transaction, the owners agreed to hay the aforesaid firm Rs. 600 on every call of the aforesaid bark Manek Prasad at Beypore and at Colombo and b. sides, one third share of the net profit on all the voyages of the bark covered by the charter to the assessee. This agreement has been reached in the letter addressed to the "firm" to the "owners" aforesaid, dated October 20, 1952, and letter dated October, 23, 1952, vice versa, copies whereof are annexed hereunto as Annexures "G" and "H" respectively and form part of the case.

8. The aforesaid charterers, in accordance with the above arrangement sent four cheques to the aforesaid firm, totalling Rs. 27,500 which were duly remitted to the owners aforesaid by means of telegraphic transfers from time to time. This includes Rs. 2,500 over and above the original stipulation and guarantee. These amounts were originally dealt with in the account of the charterers aforesaid but on December 31, 1952, picked out and adjusted to two contra accounts, Inden Biselers Reconciliation accounts and Manek Prasad accounts. Copies of the ledger account of Inden Biselers (charterers), Inden Biselers Reconciliation, Manek Prasad and Ashoka Lines Ltd. (owners), are annexed hereunto as Annexures "J-1", "J-2", "J-3" and "J-4" respectively and form part of the case.

9. The aforesaid firm was dissolved on December 31, 1952, and the business was taken over by Janakiram, the assessee, lock, stock and barrel with all the assets and liabilities outstandings as on that day at their book values. The business thereafter was carried on by the assessee as his sole proprietory concern on the same lines as before. In his books opened on January 1, 1953, he brought in, accordingly, the aforesaid balances in the accounts of Inden Biselers Reconciliation account and Manek Prasad too as shown in Annexures "J-2" and "J-3" aforesaid.

10. The aforesaid bark Manek Parasad was disabled during the first voyage itself and consequently required to be abandoned which was done on its return voyage at the Cochin Port. In these circumstances there was no occasion for any insurance claim on the bark. The charter party, Annexure "E", could not therefore be performed.

11. The assessee paid Rs. 7,000 on March 14, 1953, and Rs. 10,090 on May 9, 1953, to the accounts of the owners aforesaid. These were transferred later on, on July 15, 1953, to the account Inden Biselers, the charterers. In the books there is no narration indicating the circumstances under which these transfer entries had been made. The balance in this account was settled ultimately and squared off by various adjustments as shown therein.

12. There is no written demand on record from the charters to the assessee for any amount as due under the guarantee terms set out in Annexure "B" aforesaid.

13. The assessee wrote off, inter alia, the aforesaid advance of Rs. 27,500 in its profits and loss account of the calendar year 1953, the "previous year" for assessment year 1954 55 on December 31, 1953, and claimed it as deduction under section 10 (2) (xi) in the assessment. The Income tax Officer disallowed the claim for the following reasons reproduced from his order :

"It appears to me that the loss of Rs. 27,500 to the assessee is not one which arose in the normal course of his trade. Guaranteeing the repayment of sums borrowed by Ashoka Lines Ltd., in the event of the latter failing to pay the advance cannot be said to have arisen in the course of the assessee's trade. It is seen from the assessee's letter to the Ashoka Lines Ltd., dated October 20, 1952, that the ship would be insured by Ashoka Lines Ltd., at all times and against all risks and perils, that such crafts were usually covered against. The assessee said that any amount paid by the insurance company would have been paid to the Ashoka Lines Limited, but not to him although the moneys borrowed by Inden Biselers were utilised for the purpose of purchasing the ship. As however the bad debt did not relate to loss in the course of the assessee's regular trade, it is unnecessary for me to go into the other matters on this point. The claim will be disallowed.

14. The assessee's appeal to the Appellate Assistant Commissioner was unsuccessful. He held that the advance in question was not one made in the course of the assessee's business as there was no custom proved for a freight broker to make such advances ; the liability was also a liability for the firm which the assessee had taken over and accordingly was, therefore, only capital in his hands. His full reasons are to be found in paragraphs 3 and 4 of his order, copy whereof is annexed hereunto as Annexure "K', and forms part of the case.

15. In his appeal to the Tribunal the assessee contended that it was a trade loss ; further the purpose of the advance by the aforesaid firm was to earn profit and that the advance was consequently its trade debt ; as the debt was later taken over by the assessee into a similar business carried on by him, it was a trade debt of the assessee too ; as it became irrecoverable, it was a bad debt allowable under section 10 (2) (xi). It was also alternatively contended that at least the freight of Rs. 4,962 adjusted for the first voyage should be allowed as a deduction, deeming it as included in the present claim.

16. In the above appeal, the Tribunal held that the guarantee effected by the assessee on his own behalf had not been proved to have been necessary for the freight broker business that the assessee was carrying on ; the debt was accordingly not a trade debt and the loss was not properly deductible under section 10 (2) (xi). On the alternative contention, the Tribunal held that the freight recovered by the assessee on behalf of the "owners" was more or less set off against the current repairs also advanced by the assessee in the same account and on behalf of the same owners so that there were no means of identifying it with the claim on hand. For these reasons, the Tribunal dismissed the assessee's contention. Paragraphs 4, 5, 6 and 7 of the Tribunal's order, a copy whereof is annexed hereunto as Annexure "L" and form part of the case, contain the Tribunal's full reasoning and conclusion on this contention.

17. For the purposes of the above decision, the following facts were not placed before it in the grounds of appeal or in the course of the arguments

(a) the amount guaranteed was only Rs. 25,000 and that the excess of Rs. 2,500 paid and claimed as deduction did not form part of the guarantee ; and

(b) there was no occasion for any insurance claim by the owners since the vessel Manek Prasad was only disabled on route to Cochin from the Ceylon ports and had to be consequently abandoned.

18. With a view to assist the charterers aforesaid to clear their cargo held up at Beypore, due to delay in commissioning the aforesaid Manek Prasad, the "owners" aforesaid, by themselves chartered another bark called M. V. Jehangir, which they placed at the disposal of the charterers on the same terms and conditions, as far as possible as contained in the other charter party, Annexure "E" aforesaid. The circumstances under which this motor vessel was engaged are set out in the letters from the "owners" to the firm aforesaid, dated October 21, 1952, December 3, 1952, and December 12, 1952, and the firm's letter dated December 10, 1952, copies whereof are annexed hereunto as Annexures "M-1", "M-2", "M-3" and "M-4" respectively and form part of the case.

19. The charterers aforesaid advanced Rs. 6,500 on December 8, 1952, in respect of this charter to the "owners" through the aforesaid firm. The remuneration of the "firm" aforesaid for thi3 vessel was agreed at Rs. 300 for every call at ports, as against Rs. 600 for Manek Prasad aforesaid.

20. The charterers did not approve of the sea worthiness of the above vessel when it was put alongside the quay at Beypore and accordingly refused to load it.

21. The assessee paid the aforesaid sum of Rs. 6,500 in the calendar year 1953. It was written off on December 31, 1953, and claimed as deduction in the accounts of the calendar year 1953 as the "previous year" for the assessment year 1954 55.

22. In this case too, there was no written demand from the charterers to the assessee for any amount as due on the assessee's personal guarantee.

23. The Income tax Officer disallowed the claim for the following reasons extracted from his order

"Here again I consider that the loss to the assessee did not arise in the course of his regular business. This craft s.s. Jehangir was taken probably on lease by Ashoka Lines Ltd. If Inden Biselers refused to load their goods for fear that this vessel was not fit for sea sailing, the craft must have been utilised for carrying goods of others. In fact, from a letter dated June 2, 1953, which the assessee has written to Ashoka Lines Ltd., I see that Jehangir sailed to Cochin and earned some freight. The Rs. 6,500 which Inden Biselers advanced to Ashoka Lines Ltd., was utilised for advancing it to the owner of the craft, possibly towards lease amount. The craft was being used for the business of Ashoka Lines Ltd. In any event, however, since the assessee was only a guarantor for Ashoka Lines Ltd., and in virtue of his undertaking he had to reimburse the loan which Inden Biselers had given to Ashoka Lines Ltd. It is not a debt which arose in the course of the assessee's regular trading. I am unable, therefore, to accept the claim for deduction."

The Appellate Assistant Commissioner dismissed the appeal upon which the assessee appealed to the Tribunal contending that the facts and the circumstances were identical with those relating to Manek Prasad aforesaid and the loss was accordingly deductible. The Tribunal dismissed this conteation too as, in its opinion, it could not also be said to have been made in the course of the assessee's business as in the case of Manek Prasad : it was not a trade debt either.

S. Krishnamurthi for the Assessee.

S. Ranganathan for the Commissioner.

JUDGMENT

SRINIVASAN, J. The assessee was a partnership firm doing business as freight brokers for various shipping lines including Ashoka Lines Ltd. Later, it became the proprietory concern of the assessee. It would appear that a firm known as Ind., Biselers was in need of a vessel for the carriage of tiles from the ports on the west coast to ports in Ceylon. A charter party was? entered into by this firm with Ashoka Lines Ltd., the latter agreeing to provide a vessel called Menaka, later re named Manek Prasad. The Ashoka Lines Ltd. (hereinafter referred to as the owners) had to purchase the vessel and make it available to the charterers, Inden Biselers. They were however in somewhat straitened circumstances and had need of funds to enable the purchase. The charterers agreed to advance a sum of Rs. 25,000 which was to be adjusted against the freight payable. The charterers were, however, unwilling to rely solely on the owners with regard to the repayment of this sum. They accordingly required the assessee, the freight broker, to stand guarantee for the repayment of the amount. Such a guarantee was given by the assessee in a letter to the charterers.

The advance was in due course paid by the charterers to the owners, who utilised the amount in the acquisition of the vessel Manek Prasad and fitted it out for the voyages in question. The understanding was that the freight payable to the owners on account of the first seven voyages was to be adjusted against the advance. In so far as the guarantee furnished by the assessee is concerned, it provided thus :

"In consideration of your having agreed to advance the sum of Rs. 25,000 (rupees twenty five thousand) to our principals, Messrs. Ashoka Lines Ltd . . . . . I. K. S. Janakiraman, managing partner, . . . . . . on my behalf and on behalf of the firm, guarantee the repayment of the sum of Rs. 25,000 (rupees twenty five thousand) to you within two days of your sending me a written demand for the payment.

I further state that if our principals named above do not perform the charter party entered into between you and them on 23rd September, 1952, I shall indemnify you against all loss or damage you may incur by such breach of agreement."

It appears that there was some delay in making the vessel available to the charterers. It was finally so made available during the first week of December 1952. Unfortunately, the vessel became unfit for further use after the first voyage and in consequence the owners failed to carry out their part of the contract under the terms of the charter party. It is not clear from the statement of the case or from the other records made available to this Court why the owners took no steps to refund the sum of Rs. 25,000 which they had received as advance from the charterers. But the assessee, by reason of the guarantee which he had given, made payments of a total sum of Rs. 27,500 to the charterers in discharge of his obligation. This amount the assessee wrote off in his profit and loss account for the calendar year 1953, the relevant year for the assessment year 1954 55, and claimed it as a deduction under section 10 (2) (xi) of the Act. The Income tax Officer held that the loss of Rs. 27,500 did not arise to the assessee in the normal course of his trade and disallowed the claim. The Appellate Assistant Commissioner thought that the making of advances, as the one in the present case, was not required in the course of the assessee's business : there was also no custom of the trade established to show that it was usual for freight brokers to make such advances. He came to the conclusion that the loss was a capital loss and declined to grant the relief prayed for. The Tribunal took almost the same view of the matter and uphold the rejection of the claim.

In addition to this transaction, it would appear that in order to meet the contingency of the delay occasioned in making Manek Prasad available to the charterers on the stipulated date, another vessel called M. V. Jehangir was procured and placed at the disposal of the charterers, but the charterers found the vessel to be un seaworthy. It appears also that the charterers made a further advance of Rs. 6,000 to the owners to help them in procuring this vessel. There was, however, no guarantee offered by the assessee in respect of this advance, but nevertheless, this amount of Rs. 6,000 was paid to the charterers by the assessee in precisely the same manner as the other sum of Rs. 27,500 referred to. The assessee wrote off this amount as a loss and claimed to be entitled to deduct this sum under section 10 (2) (xi) of the Act. The department and the Tribunal rejected this claim for the same reasons as set out earlier.

On the application of the assessee, the Tribunal was directed to state a case, and the question it has submitted runs :

"Whether on the facts and in the circumstances of the case, the sums of Rs. 27,500 and Rs. 6,000 or any part thereof are allowable as deductions in computing the profits of the assessee to income tax ?"

The short question that we are called upon to determine is whether in undertaking to foot the loss which was properly that of the owners, the Ashoka Lines Ltd., in respect of a transaction which was principally between the owners, the Ashoka Lines Ltd., and the charterers, Inden Biselers, the assessee was engaging in a transaction which can be said to be in the course of his own regular business which was merely that of a freight broker.

The earliest letter on record proceeding from the assessee to the owners reads :

"I attach hereto a copy of the charter party that Mr. Kasi wants signed in respect of the bark, also a copy of the guarantee he requires from me. If you telephone me before 12 noon tomorrow whether it would be in order for me to sign the same, I shall do so for drawing the advances and remitting the same to you in time."

It is also seen from a letter written by the owners to the assessee, Annexure "B", dated 1st October 1952, that as a special consideration for the assessee in furnishing the guarantee on behalf of the owners, the assessee was to get "Aside from the agency fees and brokerage, etc., for International Clearing and Shipping Agency, you would also get one third of the net profits she earned, the same to apply on any other country craft which we were to place on this same trade." That is to say, the assessee was promised a third share in the profits earned by the owners over and above what the assessee's brokerage firm would get on account of the freight, agency, etc.

The short contention of the learned counsel for the assessee is that this was a transaction put through by the assessee in the interests of his own business as a freight broker, that the expenditure was incurred in anticipation of profits and gains, which would accrue to his freight brokerage business if he, the assessee, could ensure that the charter party arrangement went through without a hitch. He claims that in engaging in this transaction, he was doing nothing more than an act in the promotion of his own business and that, therefore, if the expenditure turned out to be unfruitful, it must nevertheless be regarded as incurred in the normal course of his business, eligible for deduction under section 10 (2) (xi) of the Act.

But what in effect the transaction amounted to is claimed to be nothing more than that the assessee himself advanced a loan to the owners in order to enable them to acquire the vessel in question. The effect of the guarantee resulted in his offering to make a payment to Inden Biselers of a sum of money which Ashoka Lines Ltd. owed to Inden Biselers. By reason of his discharge of the obligation of the owners to Inden Biselers, the owners became debtors of the assessee to a like amount. According to the assessee, the owners were unable to pay this amount and he, therefore, wrote it off as a loss. Since he incurred this expenditure only for the purpose of the promotion of his business, so it is argued, this expenditure must be regarded as one incidental to his business.

After giving careful consideration to the arguments advanced, we are unable to accept the contention that this can be regarded as a bad debt arising in the course of the normal business of the assessee. The assessee was a freight broker to various shipping lines including the Ashoka Lines Ltd? His business as a freight broker did not involve his engaging in transactions leading to lending monies for the purchase of vessels by or on behalf of the shipping lines. It is not contended before us that it was customary in the case of freight brokerage business for freight brokers to meet or undertake to meet such obligations of the shipping lines as in the present case. It is no doubt true that advancing money to the shipping lines to acquire a vessel for the purpose of the charter party would enable the assessee to earn brokerage and agency commission as a freight broker in respect of the voyages on which…

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