1968 (11) TMI 11 - HC - Income Tax

Dissolution of Firm - one partner overdrawn money - This was treated by other partner treating it as loan and entered into his account maintained in that regard - Tax was also paid on interest - However part payment was made. Balance was claimed as debt - held that claim of debt was not allowable

Issues Involved:
1. Whether the amount of Rs. 45,605 was a capital loss or allowable as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.
2. Whether the debt on accounting was converted into a loan in the ordinary course of money-lending business.

Detailed Analysis:

Issue 1: Capital Loss vs. Bad Debt
The primary question was whether the amount of Rs. 45,605 should be treated as a capital loss or as a bad debt deductible under section 10(2)(xi) of the Indian Income-tax Act, 1922. The Income-tax Officer initially opined that the amount was not a bad or irrecoverable debt incurred during the money-lending business but was a capital loss from the partnership business. This view was based on the fact that the original liability arose from overdrawn amounts and not from a loan. The Appellate Assistant Commissioner, however, allowed the deduction, treating the sum as part of the money-lending business since it was transferred to the money-lending account and income-tax was realized on it. The Tribunal upheld this view, citing the Supreme Court decision in Commissioner of Income-tax v. R. S. A. Sankara Ayyar, which treated the amount as a loan due to its entry in the money-lending account.

Issue 2: Conversion of Debt to Loan
The High Court examined whether the debt on accounting became a loan in the ordinary course of money-lending business. Initially, Ramniranjan Kejriwal did not borrow money from the assessee but withdrew sums as a partner in a firm. Upon dissolution of the firm, it was found that Kejriwal owed Rs. 52,903 to the assessee. This amount was unilaterally debited by the assessee in his money-lending books. The court noted that for a debt on accounting to become a loan, there must be an agreement between the parties or an operation of law. However, there was no evidence that Kejriwal agreed to treat the debt as a loan. The Tribunal had relied on the Supreme Court's decision, but the High Court found that the facts of the present case were different. In Sankara Ayyar, the original transaction was a loan, and there was a practice in Madras allowing such conversions without debtor's consent. In contrast, the original transaction here was not a loan, and there was no evidence of such practice in Bengal or Bihar.

The court also addressed the argument that the department's realization of taxes on interest should estop it from denying the loan's existence. The court rejected this, stating that the realization of taxes did not constitute a final determination on whether the debt was converted into a loan. The court concluded that the unilateral act of the assessee in transferring the debt to the money-lending account was insufficient to establish it as a loan.

Conclusion:
The High Court answered the question in the negative, ruling that the amount of Rs. 45,605 could not be considered a bad debt in the ordinary course of money-lending business and was not allowable as a deduction under section 10(2)(xi) of the Indian Income-tax Act, 1922. Each party was directed to bear its own costs.

SANKAR PRASAD MITRA J. agreed with the judgment.

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