1940 (10) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Whether there was any material before the Income-tax Officer to justify his rejection of the accounts of the money-lending business.
2. Whether in framing his estimate of Rs. 18,000 for money-lending, the Income-tax Officer was correct in law in holding that the interest on the loan of Rs. 15,000, advanced to Babu Lal in February 1922, was received during the account year November 1935-November 1936.
3. Whether on the facts of the case, the interest of Rs. 546, paid to one of the partners of the firm to which the petitioner had succeeded under Section 26(2) of the Act, has been correctly disallowed.

Issue-wise Detailed Analysis:

1. Justification for Rejection of Accounts:
The Income-tax Officer (ITO) rejected the accounts of the assessee's money-lending business due to several concealments in the books. The ITO found that the assessee had not shown any income from money-lending in the initial return and had later made corrections, including showing an income of Rs. 5,000 from money-lending. Additionally, the ITO discovered an omission of Rs. 200 received as interest from Shiv Narain of Pipalmandi, which was not recorded in the books. The ITO concluded that the books could not be used as a safe basis for computing the income due to these concealments. The court affirmed that these materials justified the ITO's rejection of the accounts.

2. Income from Babu Lal Transaction:
The second issue revolved around whether the interest on a loan of Rs. 15,000 advanced to Babu Lal in February 1922 was received during the account year November 1935-November 1936. The court noted that possession of the mortgaged property was delivered to the assessee in 1934, but the sale deed was executed on June 8, 1936, which fell within the accounting year. The court held that the title to the property became complete only on the execution of the sale deed, making the income assessable in the accounting year. The court rejected the argument that the income should have been assessed in the year possession was taken, stating that Section 53A of the Transfer of Property Act did not invest the transferee with title in the property.

3. Disallowance of Interest Payment:
The third issue concerned the disallowance of Rs. 546 paid as interest to one of the partners, Bansidhar Ganga Prasad, after the dissolution of the partnership. The court found that the assessee had succeeded to the business under Section 26(2) of the Act. The court noted that the ITO and the Assistant Commissioner had disallowed the interest payment, treating it as interest on capital invested by the former partner, not as capital borrowed. The court agreed with this interpretation, stating that no allowance could be made under Section 10(2)(iii) for interest on capital invested by a former partner. The court also pointed out that the assessee had treated the advance as an investment in their grounds of appeal.

Conclusion:
The court answered all three questions of law in favor of the Department, affirming the ITO's actions and decisions. The court directed that a copy of the judgment be sent to the Commissioner of Income-tax, Central and United Provinces, and ordered the assessee to pay half the costs of the reference, with a fee of Rs. 200 to the Department's counsel.