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Issues Involved:
1. Whether the sum of Rs. 453 being overdrawings of an employee against his salary should be treated as an irrecoverable loan of the applicants' money-lending business under Section 10(2)(xi) of the Income-tax Act. 2. Whether the sum of Rs. 94,388 paid by the applicants to the Ceylon Government as interest under Section 46 of the Ceylon Ordinance No. 1 of 1938 for default of paying estate duty is allowable as a deduction under Section 10(2)(iii) or 10(2)(xv) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Overdrawings of Rs. 453 as Irrecoverable Loan: The first issue pertains to whether the sum of Rs. 453, which represents overdrawings by an employee, can be treated as an irrecoverable loan under Section 10(2)(xi) of the Income-tax Act. The employee, Veerabahu Pillai, took advances while in service, and a promissory note was taken for the amount due. This sum was written off as a bad debt during the accounting period ending 13th April 1943. The deduction claimed was disallowed by the Income-tax authorities and the Appellate Tribunal. The court held that for an amount to be deductible as a bad debt under Section 10(2)(xi), it must be a loan made in the ordinary course of the money-lending business. The amount in question was an overdrawing and not a loan made in the ordinary course of business. The conversion of the liability into a loan by taking a promissory note does not change the nature of the transaction at its inception. Therefore, the contention that the amount should be treated as an irrecoverable loan was rejected. 2. Interest of Rs. 94,388 Paid to Ceylon Government: The second issue involves whether the interest of Rs. 94,388 paid to the Ceylon Government for default in paying estate duty can be deducted under Section 10(2)(iii) or 10(2)(xv) of the Income-tax Act. The estate duty was payable under the Ceylon Ordinance and was not paid within the stipulated time, resulting in the liability to pay interest. The court examined the applicability of Section 10(2)(iii), which allows the deduction of interest paid on borrowed capital for business purposes. The court found that the unpaid estate duty could not be considered as borrowed capital. The liability to pay interest was statutory and not a result of a consensual borrowing act. Therefore, the interest did not qualify for deduction under Section 10(2)(iii). Regarding Section 10(2)(xv), which allows deductions for expenditure incurred wholly and exclusively for business purposes, the court noted that the estate duty was a composite payment covering all properties of the deceased, not just the business assets. Hence, the interest paid on the unpaid estate duty was not an expenditure incurred exclusively for business purposes and did not qualify for deduction under Section 10(2)(xv). Conclusion: Both questions were answered in the negative and in favor of the Income-tax Commissioner. The court concluded that the overdrawings by the employee could not be treated as an irrecoverable loan, and the interest paid to the Ceylon Government was not deductible under the relevant sections of the Income-tax Act. The assessee was ordered to pay costs of Rs. 250 to the Commissioner.
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