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TMI Blog1981 (2) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... nection to the course of business of commission agency, where the assessee-firm had to advance money to the constituents against the goods received from them for sale on commission basis and the advance from time to time were adjusted towards the sale proceeds of such goods. The constituents were required to pay interest to the assessee on such advances. The ITO analysed the interest income and found that out of the total income for the assessment year in question of Rs. 2,39,345, 87 per cent. interest was attributable to advance in the course of commission business, 7 per cent. in respect of fees from the Veraval branch and the balance was from traders and bankers. The net amount debited to the profit and loss account on account of interest was to the tune of Rs. 30,288 after adjusting interest receipt of Rs. 2,39,345 against the interest payment of Rs. 2,69,634 by the assessee-firm. The ITO, therefore, concluded that the interest earned by the assessee-firm was in the course of commission agency business and not from the money-lending business. The ITO thereafter proceeded to examine the two sets of accounts of M/s. Mohmad Peer Mohmad of Nasik in the trading books of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the assessee had been advancing various amounts to various parties on sarafi accounts and earning interest on such advances, the said activity could not be said to be a part of the commission agency business carried on by the assessee. The Tribunal also examined the particular advances made by the assessee-firm to M/s. Mohmad Peer Mohmad of Nasik and concluded that these advances could not be said to be made in the ordinary course of business of money-lending and, therefore, the assessee's claim for writing off the bad debt arising out of the money-lending business was not sustainable. The Tribunal, therefore, addressed itself to the alternative question whether the amount of loss could be allowed as incidental to the business under s. 28 of the I.T. Act, 1961. The Tribunal having regard to the fact that the assessee bad admittedly dealings with M/s. Mohmad Peer Mohmad of Nasik, and, since there was no evidence to suggest that any partner of the said debtor-firm was related to the partner of the assessee-firm, held that the impugned loss should be allowed as deduction under s. 28 of the said Act, because the said M/s. Mohmad Peer Mohmad of Nasik had approached the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout disclosing that of his principal ". The Factors Act, 1889, which was placed on the statute book in the U.K. without referring to factor or a commission agent, introduced and defined the term " mercantile agent " which is said to mean " having in the customary course of his business as such agent authority to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods ". The same definition of "mercantile agent " has been incorporated in s. 2(9) of the Sale of Goods Act, 1930, which reads as under: " 2. (9) 'Mercantile agent' means a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of goods." A person appointed as an agent for the sale or purchase of goods on commission having authority to sell or purchase would be a mercantile agent. (vide Sitaram Co. v. Ratilal, AIR 1969 Cal 472). According to s. 171 of the Contract Act, bankers, factors, wharfingers, attorneys of High Court and policy-brokers, subject to a contract to the contrary, have a general lien on all goods b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts, 24th Edn., para. 2119). " An agent has also implied authority to act in accordance with the customs and usages of the place where, or the business in respect of which, his express authority permits him to act, subject to the condition that such custom and usages must not be unreasonable, nor change the essential nature of the contract of agency. " (vide Halsbury's Laws of England, 4th Edn., Vol. 1, pp. 446, 743). In view of these well accepted legal principles, in our opinion, by necessary implication, either short-term or long-term financing is an integral part of the commission agency business. As a commission agent, one either buys the goods or sells the goods for one's principal. When he acts as a commission agent for sales of goods, he advances the amount to his principal and adjusts the sale proceeds against such advances. When he acts as a commission agent for buying the goods, he purchases the goods for supply to his principal from his funds and then he is reimbursed by his principal on supply of such goods. A commission agent, therefore, has got to advance amounts from time to time according to the nature of his business. It may be a short-term advance if he is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of the business as factors or commission agents for purchase and supply of goods. It is a matter of surprise how the Tribunal lost sight of the finding made by the ITO that in the course of the business of commission agency, the assessee-firm had advanced money to the constituents who were required to pay interest on such advances. It is no doubt true that the ITO has found that these advances were made to the constituents against the goods received from them for sale on commission basis, but that observation of the ITO, in our opinion, does not detract from the nature of the business of commission agents, whether for sale or purchase of the goods, which, in our opinion, necessarily requires the advances to be made. We should not be, however, understood to subscribe to the view that if in a given case a trader doing commission agency business makes advances or lends money to an unknown outsider or to a complete stranger, it would be a part of his commission agency business. In the present case, however the ITO has not only found that the assessee-firm was making such advances in the course of commission agency business but the ITO, Rajkot, has also recorded the statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was allowable as a bad debt, and, consequently, therefore, a trading loss under section 28(1). It is no doubt true that every loss is not so deductible unless it is incurred in carrying out the operation of the business. [vide CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC)]. In that view of the matter, therefore, for the reasons stated in this order, we, are of the opinion that the said loss being a bad debt is allowable as trading loss under s. 28 of the I.T. Act, 1961, and, therefore, for the reasons stated hereinabove, the answer to the question referred to us is in the affirmative, that is, in favour of the assessee and against the revenue.
The question referred to us at the behest of the assessee, therefore, need not be answered as conceded by the learned advocate for the assessee.
The result is that the question referred to us at the instance of the revenue is answered in the affirmative, that is, against the revenue and in favour of the assessee, while the question referred to us at the behest of the assessee does not survive and, therefore, does not require to be answered. The Commissioner shall pay the costs of this reference to the assessee. X X X X Extracts X X X X X X X X Extracts X X X X
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