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TMI Blog1971 (3) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... er, Ongole (hereinafter referred to as " the assessee ") is a firm consisting of two partners, viz., N. Annaji Rao and N. Kuppu Rao, who are brothers. The firm which came into existence with effect from April 1, 1950, was carrying on the business of distribution of oil products of Burmah-Shell and also derived income from other sources. Another firm constituted under an instrument of partnership dated December 21, 1941, for a period of five years with effect from October 9, 1941 (hereinafter referred to as " the Nellore firm ") consisted of two partners, viz., P. T. Gopalachari and Annaji Rao with equal shares in the profits or losses. One of the clauses of the deed required Sri Annaji Rao to contribute the capital of Rs. 10,000. A fresh agreement was entered into between the partners, P. T. Gopalachari, Annaji Rao, P. T. Ramanujam and P. T. Venkasam on March 31, 1947, with effect from October 8, 1946, when the period of five years under the prior deed of partnership expired. The entire capital of Rs. 20,000 required for the partnership was contributed by Shri Annaji Rao and the other partners undertook to pay their individual shares of Rs. 5,000 each to him. If the capital of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance by way of capital was made, and (2) that the assessee who was assessed on accrual basis was a partner of the Nellore firm which was registered under the Act and the deemed profits have not reached the assessee and, hence, it is entitled to set off the amount of Rs. 38,394 in the year of adjustment. The Tribunal, on a consideration of the entire facts and circumstances, found that the assessee was merely a partner in the Nellore firm but it was not carrying on the business of being a partner in a firm and that it was carrying on money-lending business. It was further held that the profits earned by the Nellore firm have been ascertained and credited to the account of the assessee represented by Sri Annaji Rao, one of its partners and, hence, it was not right to state that the profits earned by the assessee in the Nellore firm did not reach it ; that the assessee, subsequent to its allocation, had deposited the income receipts in the capacity of a depositor as the assessee had complete control and domain over the amounts standing in the account of Sri Annaji Rao in the books of account of the Nellore firm and that the loss, was not a business loss or a loss of revenue nature, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year of any person is. It is an inclusive definition which is of wider import. It takes in all income, profits and gains received, accrued or arisen or deemed to have been received, accrued or arisen to him in the year of account from whatever source derived. Chapter III deals with taxable income. Section 6 specified the heads chargeable to income-tax, namely, salaries, interest on securities, income from property, profits and gains from business, profession or vocation, income from other sources and capital gains. Section 10 provides for the computation of business income. The income derived by an assessee in respect of any business, profession or vocation carried on by him is chargeable to tax under section 10(1). The business profits or gains chargeable under sub-section (1) of section 10 read with section 3 has to be computed after making the deductions specified in subsection (2) to section 10. The tax being levied on the income earned by a person in any previous year, it is the total income computed as per the provisions of the Act, but not the gross receipts of a person that is chargeable to income-tax under section 3. The unit of assessment under the Act being the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax said : "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." The Supreme Court in A. V. Thomas & Co. Ltd. v. Commissioner of Income-tax , after approving the dictum of Rowlatt J. as to what is meant by a debt, observed thus : "A debt in such cases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section a debt means something more than a mere advance. It means something which is related to business or results from it. To be claimable as a bad or doubtful debt, it must first be shown as a proper debt ...... Section 10(2)(xi) is in two parts. One part deals with an assessee who carries on the business of a banker or money-lender. Another part deals with business other than the aforesaid. Since this was not a loan by a banker or money-lender, the debt to be a debt proper had to be one which if good would have swelled the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or is in respect of his business carried on in the relevant accounting year and it is incidental to his business or it had become irrecoverable in the relevant accounting year and the amount had actually been written off as irrecoverable in the account books. See B. D. Bharucha v. Commissioner of Income-tax . If any one of the aforesaid essential ingredients is lacking or not established, the assessee will not be entitled to claim any amount as bad debt within the meaning of section 10(2)(xi) of the Act. The basis for the claim of the assessee was its assumption that it had to lend monies to the Nellore firm in the conduct of its business. This assumption was not found to be true by the Tribunal. It is pertinent to notice the following passage in paragraph 11 of the Tribunal's order : "On a question from us, it was stated clearly by the learned counsel that the assessee was not carrying on money-lending business. We can, therefore, summarily remove this complication from our case. In our opinion, this is a case not of a business debt, but of a partnership debt, i.e., the debt owing to the assessee arises not from the carrying on of the business but by virtue of the assessee bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital and the residue, if any, shall be divided among the partners in the proportion in which they have been entitled to their share of profits. The mere fact that a partner of a firm has advanced monies to the firm on which he would be entitled to interest at 6% will not in any way make in every case such partner a money-lender or constitute such advancements money-lending business. There may be cases where the partners may be actually doing money-lending business and advancing monies to the firm in which they are also partners. Where a partner borrows money from third parties at lesser rates of interest and advances the same to the firm in which he is a partner at higher rates of interest he may be held to be doing money-lending business and he may be called a money-lender. In order to hold a person as doing money lending business, there must be an activity of business of money-lending; otherwise it is not possible to conclude that he is a money-lender. Hence, the provisions of section 13(d) or section 48(b)(ii) of the Indian Partnership Act, referred to above, do not advance the plea of the assessee herein that the assessee's advancing monies over and above its share of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad debt after writing off the same as bad and irrecoverable. The income-tax authorities and the Tribunal disallowed the claim of the amount by the assessee as bad debt. This court, on a reference, observed that the Tribunal was " influenced in its conclusion by the view that when a partner advances money to a firm of which he is a partner, it cannot be money-lending business ".Referring to the provisions of section 13(d) of the Partnership Act, it was observed by this court thus : "It is sufficient to state that we cannot accept the view of the Tribunal that in no event can a partner who advances moneys to a firm of which he is a partner occupy the position of a creditor or be said to carry on the business of money-lending." In that case, the learned judges reframed the question into two parts thus: "(1) Where a partner finances a firm of which he is a partner, it could not be treated as a money-lending business, and (2) whether, in the circumstances of the case, there was money-lending business, and the sum of Rs. 9,000 is a bad debt?" The learned judges have answered the first part of the question in favour of the assessee, i.e., that where a partner finances a firm of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest earned on such advances had been taxed as the assessee's income from money-lending. On July 15, 1954, when the firm was dissolved, the amounts advanced by the assessee were found to be Rs. 2,77,421, whereas the borrowals and interest amounted to Rs. 1,98,447. The net credit balance in favour of the assessee was found to be Rs. 78,974. The claim of the assessee that the sum of Rs. 78,974 should be allowed as bad debt for the assessment year 1956-57 was disallowed by the income-tax authorities and the Tribunal holding that the advances were not accompanied by any suitable money-lending instrument. The High Court, on a reference, held that the assessee invested its moneys in the firm in its capacity as money-lender and the department consistently treated the interest income on the advances so made by the assessee as income from money-lending business and, hence, allowed the claim of the assessee as bad debt. The facts of that case are distinguishable from those of the one on hand. Admittedly, the assessee in that case was a money-lender and the advances to the firm have been made in its capacity as a money-lender. Hence, this decision will not render any assistance to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is equally devoid of any merit. It is not the business of the assessee to advance monies to the Nellore firm. The amount in question can, under no stretch of reasoning, be held to be stock-in-trade of the assessee-firm. The assessee was carrying on the business of distributing the oil products of Burmah-Shell. It also derived share income from the Nellore firm. It also returned an income of Rs. 1,214 as interest on securities. The assessee did not incur any loss in the course of carrying on its business. The assessee had voluntarily agreed to receive Rs. 95,000 towards the amount due to it by the Nellore firm. The assessee has released its rights in the Nellore firm for a sum of Rs. 95,000 in full settlement and discharge of its claims. In order that a loss can be claimed as business loss, it must be established that it springs directly from the carrying on of the business and is incidental to it. See Badridas Daga v. Commissioner of Income-tax and Commissioner of Income-tax v. Nainital Bank Ltd. We may notice the legal position succinctly summarised by the learned judge, Subba Rao J. (as he then was), speaking for the court, in Commissioner of Income-tax v. Nainital Bank Ltd. at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel relied upon the decision of the Supreme Court in Kikabhai Premchand v. Commissioner of Income-tax and Commissioner of Income-tax v. Shoorji Vallabhdas and Co. In Kikabhai Premchand's case the assessee, a dealer in silver and shares, maintained his accounts on mercantile system and valued his stock at cost price both at the beginning and at the end of the year. He, being the sole owner of the business, withdrew some silver bars and shares from the business crediting the business with their cost price and settled them on certain trusts in which he was the managing trustee. The question arose whether the assessee derived income from the stock-in-trade so transferred. The transaction was held by the Supreme Court to be not of a business nature resulting in income to the assessee liable to be taxed. In that case, the assessee did not really make any profit on the date when he transferred stock-in-trade at the cost price to the trusts, even though the market price was higher than the cost price of the stocks shown in his accounts. We shall now turn to the case of Shoorji Vallabhdas & Co. Therein, the assessee-firm, a managing agent of two shipping companies, had credited to itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits..... Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits." We may refer to a recent decision of ours in Commissioner of Income-tax v. Smt. Allareddi Sudarsanamma, unreported judgment in R.C. No. 56 of 1968 dated 8th December, 1970, wherein a similar contention raised by the counsel was negatived. As pointed out by the Income-tax Officer in his order of assessment dated January 22, 1963, the share income of the assessee from the Nellore firm for the first period commencing from April 1, 1959, and ending with July 14, 1959, was provisionally taken at Rs. 6,589 as per the particulars furnished by the assessee as shown below : Rs. Share of Profit 4,330 Interest on securities (tax deduction at source) 301 Interest 1,958 --------------- 6,589 --------------- The partner, Annaji Rao, died on July 14, 1959, when the Nellore firm was dissolved. The settlement was made on September 2, 1959, but the debt was actually written off subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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