1947 (1) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of a sum as a bad debt in the assessment year 1941-42.
2. Whether an irrecoverable debt covered by a decree can be considered a bad debt of the assessee's money-lending business.
3. Whether interest on arrears of rent relating to agricultural lands is agricultural income and thus exempt from tax.

Detailed Analysis:

Issue 1(a): Allowability of a Sum as a Bad Debt in the Assessment Year 1941-42
The assessment proceedings pertain to the year 1941-42, with the accounting period being Fasli year 1347 (29th September 1939 to 16th September 1940). The assessee's father had purchased Belliaghatta Jute Mills in 1912, and substantial sums were advanced to the managing agents, James Luke and Sons. The mill was sold in 1932, but the right to realize outstanding dues was reserved. James Luke and Sons lent large sums to Watt Brothers Ltd. without the assessee's permission, resulting in a debt of Rs. 1,54,433. The Income Tax Officer disallowed the claim for bad debt in 1933-34, stating the debt had not become irrecoverable. The assessee took legal steps to recover the amount but ultimately realized only Rs. 10-9-0 out of the total sum in 1940.

The court concluded that the debt was not a money-lending debt but a debt to the Belliaghatta Jute Mills, which had closed in 1932. The debt became irrecoverable in 1940, but since the jute mill business was closed, it was considered a capital loss. The court held that the assessee could not claim this amount as a bad debt in 1941-42.

Answer to Question 1(a): Negative.

Issue 1(b): Consideration of the Debt as a Bad Debt of Money-Lending Business
The assessee argued that the debt should be treated as a bad debt of his money-lending business. However, the court found that the assessee had not shown that Rs. 1,58,522 remained due as part of the sum advanced to James Luke and Sons. The court noted that the assessee had treated the advance as repaid in his accounts and had not claimed it as a bad debt of the money-lending business before the Income Tax authorities.

Answer to Question 1(b): Negative.

Issue 2: Irrecoverable Debt Covered by Promissory Note
Shyam Lal Das, an employee, had misappropriated money and executed a promissory note in 1934. The assessee obtained a decree in 1938 but could not realize the amount. The court found that the debt was not a true debt lent out in the ordinary course of the money-lending business but was related to zamindari collections embezzled by the employee. As per Section 10(2)(xi) of the Act, only loans made in the ordinary course of money-lending business are deductible.

Answer to Question 2: Negative.

Issue 3: Interest on Arrears of Rent as Agricultural Income
The court agreed that interest on arrears of rent relating to agricultural lands is agricultural income and is exempt from tax under Section 4(3)(viii) of the Act. This was based on the authority of a previous decision by the court.

Answer to Question 3: Affirmative.

Conclusion:
The assessee's claims regarding the bad debts related to the jute mill business and the promissory note were disallowed. However, the interest on arrears of rent was deemed agricultural income and thus exempt from tax. Each party was ordered to bear its own costs for the hearing.