TMI Blog1965 (4) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... st was taxed as income from the money-lending business of the assessee in the earlier assessment years. The assessee had another account, a current account, with the firm. In this account were recorded amounts borrowed by the assessee. The firm, in its turn, charged interest on such borrowals, and the payment of this interest by the assessee to the firm, being in respect of moneys borrowed for the purposes of the business of the assessee, was allowed as deductions in the computation of the assessee's income. The assessee also maintained a separate account in respect of the profits of the partnership. The firm was dissolved with effect from July 15, 1954. On the date of the dissolution, there was a credit of ₹ 2,77,421 in favour of the assessee, representing amounts advanced by the assessee to the firm. The current account referred to showed a debit against the assessee of ₹ 1,98,447, being the total of withdrawals by the assessee, together with interest. The net credit balance in favour of the assessee was thus ₹ 78,974. As part of the arrangement of dissolution, the assessee became entitled to certain amounts. Certain liabilities were also allotted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the claim of the assessee to the following three items: (1) ₹ 78,974, (2) ₹ 26,600 and (3) ₹ 12,000, which were claimed as bad debts of his money-lending business, which he was entitled to write off and claim as deduction? , for the determination of this court. In its appellate order, in dealing with the first of the amounts, the Tribunal stated thus: The assessee-family, no doubt, is a money-lender at Muar and at Madras. It is, however, not in this capacity that the Muar business had advanced various amounts to the firm. It is only on the instructions of the assessee that the remittances had been made. None of these remittances is on the basis of any money-lending documents. Interest on these remittances has also not been adjusted in the books of Muar from year to year. All these clearly show that when the advances were made to the firm, they were made by the assessee only as a partner towards the additional working capital that it had stipulated in the deed to advance if and when found necessary. If these advances are lost, the loss is only capital...The Appellate Assistant Commissioner has ignored these fundamental requisites of a money-lending adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther sum needed for the business shall be put in by all or any of the parties hereto and such further investment will carry interest at six per cent. per annum and such interest shall be paid out to the investing partner from and out of the profits of the firm in addition to his share in the profits of the business. Such further investments can be made by any of the parties hereto up to rupees three lakhs individually. Clause 5 provides that the parties hereto shall divide the profits or losses equally. This clause has necessarily relevance only to the profits remaining after any interest had been paid to the partner who had put in any amounts by virtue of clause 4. The relevant clause of the partnership deed clearly distinguished between the capital put in by a partner and any further advances made by the partner. It has to be noticed that the firm was constituted for the purpose of carrying on a business in exports and imports and quite obviously it did not need any large amount as fixed capital. Such sums as the firm might on occasions require could be advanced by any of the partners on the terms as provided in the instrument. When the document in question specifically r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be allowed to treat the investments as a part of money-lending transactions of the assessee when it suits them, and when it comes to the question of disallowance of irrecoverable loans out of these very transactions they cannot be permitted to take up the position that these were not a part of the money-lending transaction of the assessee. Upon the facts of this particular case it must be held that these investments are a part of the money-lending business of this assessee and, therefore, his claim to have a deduction for the irrecoverable loans must be allowed. Reliance has been placed upon this decision by the learned counsel for the assessee and we must say that this decision lends considerable support to the contentions advanced. Mr. Narayanaswami, learned counsel for the assessee, contends, and rightly in our opinion, that the assessee has two capacities. One is that it is a money-lender and the other a partner of the firm. Though as a partner it may possess other rights and be subject to other liabilities, it is not prevented in the course of the money-lending transactions to advance moneys to the partnership. Even the partnership law recognises this position. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could have advanced these amounts in his capacity as a money-lender to a third party and if these amounts had become unrealisable, it could have demanded deduction under section 10(2)(xi) of the Act ; we see nothing in principle which justifies denial of the claim solely for the reason that the money was lent to the partnership of which the assessee was a partner. It is true that the assessee was concerned with furthering the interests of the partnership and in order to enable the partnership to make profits, advanced these moneys. If the assessee was not carrying on business also as a money-lender, the position would be that the loss of this amount would represent only a loss of capital. But when even the partnership law recognises the distinction between capital and advances made by a partner, we can find no justification for treating such advances only as additional capital furnished by a partner. That the mode of treatment is of importance in construing the nature of the transaction has been indicated in two decisions of this court, to which one of us was a party: Kannappa Chettiar v. Commissioner of Income-tax [1962] 46 I.T.R. 576 and Murugappa Chettiar v. Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge. The arrangement resulted in the continuing partner having to pay a sum of ₹ 23,500 to the assessee and in respect of this amount he executed a promissory note. The assessee's contention is that this asset was taken over by its money- lending business and since it realised only a sum of ₹ 11,000 and odd and the balance of ₹ 12,000 became irrecoverable, it is entitled to write off this sum under section 10(2)(xi), and in support of the claim in this regard Mr. Narayanaswami, learned counsel for the assessee, relied upon a decision of this court in Commissioner of Income-tax v. Venkatasubbiah Chetty [1946] 14 I.T.R. 227. In that case, the assessee, a Hindu undivided family, was carrying on a money-lending business. It had earlier carried on a separate money-lending business in partnership with another person. That was dissolved and the family received as part of its share certain promissory notes executed by persons to whom the partnership had lent moneys. These debts were taken over by the money-lending concern of the family and entered in its books and the promissory notes were being renewed from time to time. The interest received by the family on these pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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