1980 (4) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee was entitled to the deduction of Rs. 75,201 as an expenditure or as a business loss out of his income.

Summary:

1. Nature of Liability Discharged by the Assessee:
The assessee, who was the managing director of Chopda Electric Supply Co. Ltd., paid Rs. 73,520.80 to the Bank of India as a guarantor for a loan taken by the company. The company went into liquidation, and the assessee could not recover the amount paid. The court noted that under s. 128 of the Contract Act, the liability of the surety is co-extensive with that of the principal debtor. Upon payment, the assessee stepped into the shoes of the creditor u/s 140 of the Contract Act. The loss incurred by the assessee was deemed a capital loss.

2. Claim for Deduction u/s 10(2)(xv) of the Indian Income-tax Act, 1922:
The assessee claimed the amount as a deduction u/s 10(2)(xv) of the Act, arguing it was an expenditure laid out wholly and exclusively for the purpose of business. The court found that the assessee's activities, including investment in shares and holding positions as director or managing director, did not constitute carrying on a business. The repayment of the loan was not considered an expenditure laid out for business purposes, as there was no legal obligation for the assessee to guarantee the loan.

3. Claim for Deduction u/s 12(2) of the Act:
The Tribunal also considered the claim u/s 12(2) of the Act, which pertains to income from other sources. The court held that the repayment of the loan did not qualify as an expenditure incurred solely for the purpose of making or earning income, profits, or gains. The assessee's income from dividends and director's fees was not connected to the loan repayment.

4. Tribunal's Findings:
The Tribunal found insufficient material to establish that the assessee was carrying on a regular business of managing the company. It also noted that the activities related to different companies did not constitute the same business. Consequently, the claim for set-off of the loss was rejected.

5. Court's Conclusion:
The court concluded that the assessee's claim for deduction under both s. 10(2)(xv) and s. 12(2) of the Act was not permissible. The question referred to the court was answered in the negative, against the assessee. The assessee was ordered to pay the costs of the reference.