1951 (10) TMI 2 - SC - Income Tax

Whether, on the facts and in the circumstances under which the sum of ₹ 8,197 was dealt with by the respondent, it is a permissible deduction from his income under section 10(2)(xi) of the Income-tax Act in the assessment year? Held that - The facts are that when a division was made between the partners on the 12th September 1942, the books of the partnership were closed, an account of the debtor was opened in the family books and be was debited with the amount of ₹ 8,197, indicating that he became a debtor of the new partnership of the business and the debt became a loan advanced by the assessee s money-lending business to the debtor. When later on there were payments, the debtor received credit for such payments in this account with the respondent and must have got a discharge receipt from him. He was thus recognised as a debtor of the new firm and the amount in question being a loan of the money-lending business of the respondent, it was an admissible deduction under section 10(2)(xi) of the Act. Appeal dismissed.

Summary

Issues:
- Whether the claimed bad debt is admissible under section 10(2)(xi) of the Income-tax Act.
- Whether the sum of Rs. 8,197 can be considered a permissible deduction under section 10(2)(xi) of the Income-tax Act.

Analysis:
The case involved an appeal from the High Court regarding the admissibility of a claimed bad debt under section 10(2)(xi) of the Income-tax Act. The respondent, a manager of a Hindu undivided family, had taken over an outstanding debt from a partnership and later claimed it as a bad debt in his separate money-lending business. The respondent had divided the outstandings with his partner and treated his share of the debt as a loan given by his money-lending business to the debtor. The Income-tax Officer initially disallowed the claim, but the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed it. The Tribunal referred two questions to the High Court, which were answered affirmatively, granting a certificate to file an appeal to the Supreme Court.

The main issue before the Supreme Court was whether the sum of Rs. 8,197 could be considered a permissible deduction under section 10(2)(xi) of the Income-tax Act. The High Court examined the accounts and concluded that the debt had ripened into a decree in favor of both partners, and there was no novation required after the decree. The Court emphasized that the respondent had treated his share of the outstanding debt as part of his money-lending business and a loan given to the debtor. The entries in the books of account supported this conclusion, indicating that the debt became a loan advanced by the respondent's money-lending business. The Court rejected the argument that the outstanding debt became a capital asset of the new business after the partnership closed, affirming that it was an admissible deduction under section 10(2)(xi) of the Act.

In conclusion, the Supreme Court upheld the decision of the High Court, dismissing the appeal with costs. The Court agreed that the sum of Rs. 8,197 was a permissible deduction under section 10(2)(xi) of the Income-tax Act based on the treatment of the outstanding debt as a loan in the respondent's money-lending business.