9911796707
TMI Blog1936 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the letter of reference] are as follows. The appellant [for this purpose he will be referred to as an individual] carries on a money-lending business in various places and in addition is possessed of property at various places and of dividends, all of which are subject to Indian income tax. At a place called Perambalur he carries on two business, one of which is a business of money-lending, and prior to March 31, 1930, he had also carried on, but in partnership with one A. Somasundaram Pillai, a third business in the purchase and sale of cotton. This business had been started in 1926, the respective shares of the appellant and Pillai in both profit and loss being 5/8ths and 3/8ths. It appears that Pillai was a working partner, a man of little or no means : there does not appear to have been any written agreement of partnership, and neither party undertook to bring any capital into the partnership in the strict sense of this expression-that in the sense in which the word is used in clauses (c) and (d) of Section 13 of the Indian Partnership Act (IX of 1932). The money necessary for purchasing cotton and carrying on the business was provided by the appellant on the terms that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 5/8ths of the losses of the cotton firm. In particular, although the cotton business was closed at the end of the year 1929-30, viz., on March 31, 1930, no such claim was made in respect of the year of assessment 1931-32 for which assessment the last year of the cotton business was the year of account. What happened after March 1930, was as follows. On April 1, 1930, the debit against Pillai in the books of the cotton partnership was transferred to the account of the appellant's money-lending business at Perambalur. The meaning of this transfer and its justification invite comment which may be postponed for the present. On September 29, 1930, a further debit was made to this new account of Rs. 2,569 by way of interest, bringing the total debit to Rs. 36,638. On this date Pillai gave to the appellant a promissory note for this amount, and a fresh folio was opened in the books of the appellant's money-lending business styled " A. Somasundaram Pillai, Promissory Note Account ". On March 28, 1931, the appellant took from Pillai a mortgage of certain house property for Rs. 500. On March 31, 1931, that is on the last day of the year of account with which the present assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pillai never became a debtor of the money-lending business at all. As it is reasonably clear that Pillai, who is described by the learned Chief Justice as " a man of straw " was at no material date possessed of any capital, it will be convenient to consider the question pronounced by the Commissioner first of all from the point of view of the appellant as at the time when the cotton business was closed down. It appears to their Lordships to be reasonably clear that in respect of five-eighths of the loss made by the cotton partnership in its last year of trading, namely 1929-30, the appellant in the year of assessment, 1930-31, was entitled to claim a deduction from his other income. The same is true mutatis mutandis in respect of previous assessment. Their Lordships fully approve of the decision in the case already cited, Commissioner of Income Tax, Madras v. Arunachalam Chettiar, and of the reasons given in the judgment of SCHWABE, C. J., for so holding. In particular they are of opinion that the learned Chief Justice rightly rejected the contention put forward in that case, that an unregistered firm was for income tax purposes an " entity " or that the same person as an individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of more than five-eighths of the loss in the cotton business, it is necessary now, if the question stated by the Commissioner is to be answered, to formulate precisely the further claim which is under discussion. Is the sugges tion that at the end of any year's trading one partner in a continuing partnership, treating the other as insolvent, can claim to set off the whole of the firm's loss in the previous year ? Or is it that he can do so on the dissolution of the firm ? Or that later, according as the other partner's insolvency becomes established he can set off in one year the whole of such partner's share of loss for several years ? Looking at the matter as a question of what a partner in a firm may claim to deduct from his other income, their Lordships are not of opinion that in any of these forms the claim can be regarded as permissible. In one year a partner may draw out more, in another year less, than his share of profits. In one year a partner may have expended money on behalf of his firm ; in another year another partner may have done the like. Questions may arise, regardless of whether the firm has otherwise made a profit or loss, as to the firm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax at all. In neither case does the individual partner have to pay again on his share of profits if the tax has already been assessed on the firm (Section 14(2)(b)). Moreover, in the case of the registered firm by the operation of Section 48 the individual partner may obtain a refund of tax paid on his share if the rate at which he is chargeable to tax as an individual is not maximum rate. This full procedure, however, is not always followed in the cases of registered firms : in order to avoid unnecessary payments and unnecessary proceedings for a refund, the partner is sometimes taxed directly on his share at the rate ultimately payable by him. Now the basis of this system is that the individual partner is chargeable on his share of the firm's profit regardless of all questions whether he actually receives it as income paid to him or whether under the articles of partnership he is entitled to draw it out. Special stipulations between the partners may obstruct the partner's right in the year of account or at all to withdraw his aliquot portion of the total profits. All such matters are disregarded by the statute and save upon this principle the working of the Act could har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a course, whether in the year following the dissolution or, as logic would permit, in some subsequent year in which the partner's insolvency has crystallised. The " bad debt " would not, if good, have come in to swell the taxable profits of the other partner. In the present case the claim to set off is in fact made in the second year of assessment after the dissolution of the business. It has already been observed that the scheme of the statute is not to treat partner A as if in connection with the firm's affairs he was trading vis-a-vis B, or doing business with B as the other party. Still less can it properly be held that years after the dissolution of the business A is doing business with B and making good debts or bad debts due from him. Their Lordships are accordingly of opinion, that the question propounded by the Commissioner of Income Tax has been rightly answered by the High Court of Madras in the negative. It remains, however, to note that the appellant in the year 1930-31 took steps to give another character to his partner's share of the losses made in the cotton business between 1926 and 1930. As the Income Tax Officer put it " on April 1, 1930, the debi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to be repaid. When A purports to lend money to A and B, much may be done with the consent of B. The transfer of the entry to the debit of Pillai from the books of the cotton partnership to the books of the appellant's money lending business may in the circumstances of this case be taken as having been effected with the consent of Pillai. The element of novation, however, comes in to late. Pillai's inability to meet his share of the loss was just as hopeless by the end of March 1930 as at any later time. The appellant's return for the year 1930-31 did not have to be rendered until months after March 1930, and if he filled in time by making entries in his books at the beginning and end of the year 1930-31, that delay does not entitle him to choose the next year for his claim to a set off. From before the moment at which this debt was transferred from the cotton business it was altogether bad and its badness was the reason of the transfer. It cannot, therefore be considered as a bad debt made by the appellant in the course of money-lending and still less can it be considered as becoming bad in the year of account, hence the process by which the transfer is made on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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