Judgement Appeal (No. 32 of 1939) from a judgment and order of the High Court (November 6, 1936, and September 1, 1937, respectively) upon a reference made under s. 66, sub-s.2, of the Indian Income-tax Act, 1922. The respondents Messrs. Motiram Nandram, under the terms of an agreement dated December 17, 1930, by which they were to become the organizing agents to a company called the White Kerosene and Mineral Oil Company, which imported and dealt in fuel oils and motor spirit, deposited Rs.50,000 with that company. The respondents were authorized to recover their deposit from the deposits to be made by selling agents recommended by them. The company, however, became insolvent before the respondents had recovered more than Rs.10,500, and nothing more was ever in fact recovered from the company. The respondents claimed to be entitled to deduct the Rs.39,500 from their profits in the year of account, 1932-33, and the question referred to the High Court was " Having regard to the terms of the agreement and the other circumstances of the case, was the "Assistant Commissioner justified in holding that the item "of Rs.39,500 was not a trading loss but a loss of capital ?" The facts, the terms of the agreement, and the relevant statutory provisions appear from the judgment of the Judicial Committee. The two judges of the Court of the Judicial Commissioner, to whom the reference was made, differed in their opinions; Subhedar A.J.C. being in favour of the respondents, Pollock A.J.C. being against them. On re-argument before the High Court at Nagpur (constituted pending the rehearing of the case) Gruer J. agreed with the view of Subhedar A.J.C, and the question referred was accordingly answered in the negative. 1939. Nov. 3. J. M. Tucker K.C. and Hubert Hull for the appellant. This is a case where English authorities would be in point. It is agreed that the Rs.39,500 was an irrecoverable debt—a loss. The sum of Rs.50,000 was not even paid away as an expense; it was merely a deposit, and the assessees were to get it back; admittedly there was the risk of it being lost. The loss was claimed by the respondents as a deduction, but it is not clear in respect of which particular business it was claimed; there is only one return, and they claimed it generally as a business loss. The loss was claimed by the respondents as a deduction, but it is not clear in respect of which particular business it was claimed; there is only one return, and they claimed it generally as a business loss. The position is really the same under the Imperial Act as under the Indian Act, namely, that there is no specified method of drawing up accounts, except that there must be a proper system of making up a revenue account; and in the Indian Act there is an express prohibition against deducting anything in the nature of capital expenditure, whereas there is not such a clear restriction in the English Act, but it is to be gathered from a number of House of Lords decisions. It is submitted, first, that the Board are merely dealing here with what is said to be a question of law arising out of the order of the Assistant Commissioner, and that question of law is whether the Assistant Commissioner was right in holding that this was not a trading loss, but a loss of capital. In the Law. Rep. 67 Ind. App. 71 ( 1939- 1940) Commissioner of Income-Tax V. Messrs. Motiram Nandram 181 course of stating the facts the Assistant Commissioner clearly says and holds that this was not a loan made in the course of the moneylending business of the respondents. If that is a question of fact, as, it is submitted, it is, then the only possible question of law which can arise on that is whether there is evidence to support it. The evidence in this case was the agreement itself. There is ample evidence on which the tribunal of fact could come to the conclusion that in making this deposit the assessees were not doing it as moneylenders for the purpose of earning profits as money lenders, but for the purpose, as the agreement states, of being appointed the organizing agents in the oil business. The assessees say that they can claim that this is a bad debt incurred in carrying on the agency business, and that therefore they are entitled to write it off against the profits of that business. The answer to that would be that not every bad debt incurred in carrying on business is a deductible expense. In Rm. Ar. Ar. Rm. The answer to that would be that not every bad debt incurred in carrying on business is a deductible expense. In Rm. Ar. Ar. Rm. Arunachalam Chettiar v. Income-tax Commissioner (( 1936) L. R. 63 I. A. 233.) this Board said that (Ibid. 246.) " The "basis of the right to deduct irrecoverable loans before "arriving at the profits of money-lending is that to the money -lender, as to the banker, money is his stock in trade or "circulating capital he is dealing in money." In the present case what is being dealt with is an oil agency business, in which the business of an oil agent is not to lend money, and therefore if he lends money in the course of his oil agency business that is not an outlay of circulating capital, but of fixed capital. In all the English cases which in any way approach this matter, unless the person shows when he lends money in the course of carrying on his business that his business involves a lending of money, he cannot treat any bad debts as losses of his business for revenue purposes. The respondents might say that they made a loss on their agency business which they could set off, but even so, the bad debt was capital expenditure, because their agency business did not involve the lending of money. The principle in England is that for an assessee to be entitled to deduct any expenditure in arriving at his assessable profits it must be wholly and exclusively expended for the purpose of the business, and it must not be capital expenditure. That is the same position as in India. The present case stands on the same footing as City of London Contract Corporation, Ld. v. Styles.(( 1887) 2 Tax Cas.239, 244.) If this were an out and out payment of Rs.50,000 it would still be a capital expenditure—a payment to get the contract—a fortiori if it is only a loan. [Reference was also made to Stott v. Hoddinott (( 1916) 7 Tax Cas.85.); and Vallambrosa Rubber Co., Ld. v. Inland Revenue.( 1910 S. C. 510, 526.)] Henderson (H.M. Inspector of Taxes) v. Meade-King Robinson & Co., Ld. (( 1938) 22 Tax Cas.97, 104.) is not unlike the present case. [Reference was also made to Stott v. Hoddinott (( 1916) 7 Tax Cas.85.); and Vallambrosa Rubber Co., Ld. v. Inland Revenue.( 1910 S. C. 510, 526.)] Henderson (H.M. Inspector of Taxes) v. Meade-King Robinson & Co., Ld. (( 1938) 22 Tax Cas.97, 104.) is not unlike the present case. It is also submitted that the principle underlying Tata Hydro-Electric Agencies, Bombay v. Income-tax Commissioner, Bombay Presidency and Aden (( 1937) L. R. 64 I. A. 215, 224.) is applicable. On the facts stated the deposit was an investment of capital made solely in connection wth, and for the purpose of, the new agency business of the respondents, and any loss thereof was a loss of capital, and therefore not deductible in computing the profit or loss of the respondents business. The respondents did not appear. Nov. 14. The judgment of their Lordships was delivered by SIR GEORGE RANKIN. In this case the respondents have not been represented before their Lordships. The appeal is brought by the Commissioner of Income-tax, Central and United Provinces, Lucknow, from a decision of the High Court at Nagpur given upon a reference made to that Court under s. 66, sub-s.2, of the Indian Income-tax Act, 1922. The question of law is as to the admissibility of a deduction of Rs.39, 500 in computing the profits of the assessees business. The year of assessment in respect of which the question arises is the year 1933-4, and as it is not contested that the sum in question was expended or lost in the "previous year," 1932-3, the deduction, if permissible, is claimed for the proper year. Law. Rep. 67 Ind. App. 71 ( 1939- 1940) Commissioner of Income-Tax V. Messrs. Motiram Nandram 182 By the terms of s. 10 of the Act the profits or gains of a business are to be computed after making certain allowances, one of which is provided for by the terms of cl. (ix.) of sub-s. 2 as follows "(ix.) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains." The assessees are a Hindu undivided family, consisting of three brothers, who carry on business under the style of Motiram Nandram at Hinganghat, in the district of Wardha in the Central Provinces, with a branch at Balaghat. Until 1930 their business or businesses consisted in dealing in cloth and in yarn and as moneylenders. But by an agreement in writing, dated December 17, 1930, they agreed to become organizing agents to a Bombay firm which, under the name of the White Kerosene and Mineral Oil Company, imported and dealt in kerosene motor spirit and fuel oils. The terms of this agreement are of importance for the decision of this appeal, but it will be sufficient to state their effect so far as is necessary to exhibit the course of dealing to which it looked forward. The agreement refers to the Bombay firm as “the company,” and to the assessees as "the organising agents." It recites that the assessees were carrying on business as cloth merchants; that they had requested the company to appoint them organizing agents in a defined territory known as Eastern Central Provinces; and that they had offered to deposit with the company Rs.50,000. The company by the agreement appointed the assessees to be organizing agents for five years in respect of the territory specified. Clause 4 recited that in consideration of such appointment the assessees had on December 8 and 12, 1930, deposited Rs.3000 and Rs.22,000—in all Rs.25,000. It provided that on or before January 17, 1931, they should deposit a further Rs.25,000. "The said sum of Rs. 50,000 shall remain at the disposal, of "the company for the purposes of the companys business, "and shall carry interest at the rate of 7 per cent, per annum "until the deposit is returned by the company to the "organising agents out of the selling agents deposits as "hereinafter provided." The assessees undertook the duty of finding suitable selling agents for the companys goods in the territory in question. These agents were to be recommended by the assessees, but were to be appointed by the company, and were to enter into agreements with the company under which they should make deposits with the company, which the latter could use for the purposes of its business. The deposits were to be received on behalf of the company by the assessees, who were authorized to retain and appropriate them to the extent of Rs.50,000 towards the return of their own deposit with the company. The deposits were to be received on behalf of the company by the assessees, who were authorized to retain and appropriate them to the extent of Rs.50,000 towards the return of their own deposit with the company. In respect of all contracts made by the company with the selling agents, the assessees guaranteed to the company the due payment of the price of such part of the indented goods as was not covered by the security deposits of the selling agents. If the assessees could not find selling agents who were willing to make deposits, they were to recommend persons for appointment by the company as selling agents on a salary to be paid by the company. But the assessees were to be responsible to the company for the fulfilment of all obligations to the company of all selling agents, and were to countersign all indents by selling agents for goods. The assessees commission was to be at the following rates a guarantee commission of 1 per cent, on all goods sold in the territory through selling agents; a commission of four annas on every eight Imperial gallons of kerosene, and of two annas six pies on every gallon of motor spirit. Out of this commission the assessees were to pay commission to the selling agents. The assessees were also to get a certain commission on fuel oil sold in the territory by the company; and were to be at liberty to canvass for orders for fuel oil, but not to effect sales, save through selling agents, without special permission of the company. Appropriate terms of commission were specified for such business. The commission account was to be made out every three months, and the assessees were to be paid their commission within a fortnight of the adjustment of the account. The Law. Rep. 67 Ind. App. 71 ( 1939- 1940) Commissioner of Income-Tax V. Messrs. Motiram Nandram 183 company was to provide the assessees with certain staff and office accommodation, and to make certain allowances for the remuneration of a representative of the assessees at Hinganghat. The assessees duly completed the deposit of Rs.50, 000 as provided for by cl. 4 of the agreement, but the scheme was short-lived, as the company in 1931 became insolvent before the assessees had recovered more than Rs. 10,500 from deposits made by selling agents. The assessees duly completed the deposit of Rs.50, 000 as provided for by cl. 4 of the agreement, but the scheme was short-lived, as the company in 1931 became insolvent before the assessees had recovered more than Rs. 10,500 from deposits made by selling agents. The sum of Rs.39,500 was outstanding and repayable by the company, but though the assessees on October 14, 1931, and November 23, 1931, recovered judgment for that sum, together with certain interest (amounting in all to Rs.42,272), in the High Court at Bombay, nothing was in fact realized in satisfaction thereof. The assessees claim to deduct the sum of Rs.39, 500 from the profits of their business or businesses in the year of account ( 1932-3), and this, if permitted, would convert their "total income" finally assessed by the Assistant Commissioner at Rs. 19,189 into a loss of over Rs.20,000. The income-tax officer refused to allow the deduction on the ground that the bad debt was a capital loss. The Assistant Commissioner took the same view, holding 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 a new business or a new source of income.” The Commissioner agreed in this opinion, and stated the facts of the case for the opinion of the Court, framing the question of law as follows "Having regard to the terms of the agreement (Exhibit A) and the other circumstances of the case, was the Assistant Commissioner justified in holding that the item of Rs.39,500 was not a trading loss but a loss of capital ? " The reference was first heard by two learned judges of the Court of the Judicial Commissioner, Central Provinces, who gave judgment on September 30, 1935, Subhedar A.J.C. being in favour of the assessees, and Pollock A.J.C. being against them. On November 6, 1936, after the High Court of Judicature at Nagpur had been established, Gruer J. as third judge agreed with Subhedar A.J.C. The judgment appealed from is thus a judgment answering the question referred in the negative by a majority of two judges to one. On November 6, 1936, after the High Court of Judicature at Nagpur had been established, Gruer J. as third judge agreed with Subhedar A.J.C. The judgment appealed from is thus a judgment answering the question referred in the negative by a majority of two judges to one. The view taken by Subhedar A.J.C. was that the deposit was made by the assessees in the course of their moneylending business, and Gruer J. also concluded that the transaction should be looked upon as a variation or extension of the "assessees moneylending business." Pollock A.J.C, on the other hand, considered that the deposit was money invested "in acquiring a new business, and that it was not a loan made in the course of the assessees moneylending business, "nor money laid out in the ordinary course of an existing business." Their Lordships are of opinion that the character of the expenditure which the assessees now seek to bring within cl. (ix.) of s. 10, sub-s.2, must be determined with reference to the business of organizing agents in which the assessees engaged upon the terms of the agreement of December 17, 1930. This business was of a different nature from that of moneylender, and the principle that money is the stock in trade or circulating capital of a moneylender cannot of itself determine the question which arises in this case. Subhedar A.J.C. considered that the assessees had nothing to do with the oil business in which the company and the selling agents were alone interested and Gruer J. makes a similar observation Paragraph 13 provides that the organising agents are not to effect any sales of the companys goods themselves. Their duties were to organise the network of selling agents to be guaranteed by them but appointed by the company. Thus they were not actually carrying on the companys business itself.” But apart from the fact that the assessees under the agreement were to be at liberty to canvass for orders and, with special permission, to effect sales, the question is not whether the assessees were engaging in the business of merchants in oil. They were entering upon the business Law. Rep. 67 Ind. App. 71 ( 1939- 1940) Commissioner of Income-Tax V. Messrs. Motiram Nandram 184 of organizing agents for a firm of importers— a business different in character from that of moneylender. They were entering upon the business Law. Rep. 67 Ind. App. 71 ( 1939- 1940) Commissioner of Income-Tax V. Messrs. Motiram Nandram 184 of organizing agents for a firm of importers— a business different in character from that of moneylender. They had undertaken to find suitable persons to be appointed as selling agents, and to guarantee the fulfilment of all obligations incurred towards the company by such selling agents, some of whom might be working on a salary basis without having given security. The nature of the deposit of Rs.50,000 must be considered in relation to this business. Both of the learned judges who found in favour of the assessees appear to have considered that the course of business indicated in the agreement of December 17, 1930, bore analogy to the case of a proprietor of estate borrowing money and appointing the lender to be manager of the estate. But this, in their Lordships judgment, is to rewrite the agreement. The assessees might have recouped themselves out of deposits made by selling agents at any time, but though the interest at 7 per cent, would have ceased to be payable, the agency would still have gone on till the end of five years, and the assessees work and commission, as well as their liabilities under their guarantee, might meanwhile have been heavy. It is impossible to regard the provision for a deposit as unconnected with the fact that the assessees were guaranteeing the selling agents obligations. The deposits of the selling agents and of the organizing agents were alike deposits by way of security according to the scheme of the agreement, though its language—save for the use of the word deposit "—is not express upon the point in the case of the organizing agents. When the deposit is considered in relation to the organizing agency, the special terms of the agreement of December 17, 1930, are important, since various suggestions have been made as to the true character of the deposit. One suggestion is that the deposit should be looked upon as the purchase price of goods paid to the company in advance, and thus a mere trading expense; but this cannot be accepted. It would be a highly inaccurate statement of the effect of the agreement. One suggestion is that the deposit should be looked upon as the purchase price of goods paid to the company in advance, and thus a mere trading expense; but this cannot be accepted. It would be a highly inaccurate statement of the effect of the agreement. The Rs.50,000 was doubtless laid out with a view to earning profits in the business of organizing agents in addition to the interest of 7 per cent., but it was not so laid out with reference to any particular transaction carried out in the course of such business. It was in one aspect a loan made to the company, but it was not a loan made in the course of carrying on the business of organizing agents or in the course of the business of a moneylender. It was not a recurring expenditure. On the other hand, it was contemplated that in whole or in part the deposit should be returned to the assessees by the receipt of deposits from selling agents; so that if the Rs.50,000 does fall to be regarded as invested in a business of organizing agents, it was invested with a prospect that it might be a temporary investment, and not a permanent one—in other words, that the capital might later be withdrawn from the business. The question in such a case as the present must be what is the object of the expenditure? “and it must be answered from the standpoint of the assessees at the time they made it—that is, when they were embarking upon the business of organizing agents for the company. The deposit was clearly exacted by the company as a condition of the assessees being given an agency which they hoped to manage profitably. Their Lordships think that the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature, and that the deposit cannot, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. They think that the view taken by the income-tax authorities is correct, that this appeal should be allowed, and that the question referred to the Court by the letter of reference dated March 1, 1935, should be answered in the affirmative. They will humbly advise His Majesty accordingly. The assessees must pay the costs of the reference in the Judicial Commissioners Court and High Court, and also the costs of this appeal.