Discontinued business losses and legal expenses cannot be deducted from another business unless trading assets were taken over.

Guarantee broking activity was treated as a separate business that ceased after 1947, because no new clients were introduced after April 30, 1947 and later commission receipts did not show continuance. Legal expenses incurred in resisting a claim arising from that discontinued business were not allowable deductions, as they were not incurred for the money-lending business or for protection of a trading asset. The decretal amount paid in respect of the same dead business was also not allowable, since a loss from a discontinued and distinct business cannot be set off against profits of another business unless its trading assets or liabilities were taken over as stock-in-trade.

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Issues: (i) Whether the guarantee broking activity ceased after 1947; (ii) whether the legal expenses of Rs. 1,227 and Rs. 510 were allowable deductions; (iii) whether the decretal amount of Rs. 11,314 paid by the assessee was allowable.

Issue (i): Whether the guarantee broking activity ceased after 1947

Analysis: The guarantee broking activity consisted of introducing clients to the bank and earning commission under a distinct contractual arrangement. The money-lending business carried on in partnership was a different commercial activity, with a different source of liability and a different ownership structure. Receipt of commission or interest after the notice stopping fresh introductions did not establish continuation of the broking business, because the evidence showed that no new clients were introduced after April 30, 1947.

Conclusion: The guarantee broking business ceased after 1947, and it was not a continuing business in the relevant years.

Issue (ii): Whether the legal expenses of Rs. 1,227 and Rs. 510 were allowable deductions

Analysis: The expenditure was incurred in resisting a claim arising from the discontinued guarantee broking business. It was not shown that the expense was incurred for the conduct of the money-lending business or for protection of any trading asset. The liability sought to be resisted was capital in nature, and the alleged security deposit had not become stock-in-trade of the money-lending business.

Conclusion: The legal expenses were not allowable deductions.

Issue (iii): Whether the decretal amount of Rs. 11,314 paid by the assessee was allowable

Analysis: The loss arose from a separate and discontinued guarantee broking business, and there was no material to show that its assets or liabilities had been taken over as stock-in-trade of the assessee's money-lending business. Loss of a dead and distinct business cannot be set off against profits of another business carried on in the accounting year.

Conclusion: The decretal amount was not allowable.

Final Conclusion: The reference was answered against the assessee on the deduction issues, while the cessation of the guarantee broking business was affirmed; the assessee was held liable for the Commissioner's costs.

Ratio Decidendi: A loss or expenditure arising from a separate business that has been discontinued cannot be deducted from the profits of another business unless the former's trading assets or liabilities have been shown to have been taken over as stock-in-trade of the continuing business.

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