1970 (7) TMI 12 - HC - Income Tax

Whether the amount due on account of interest charged from Jagannath working partner and which was written off because it could not be recovered can be allowed as a deduction from the total income of the previous year because the receipt of the said interest was included in the total income of the respective years being revenue receipts

Summary

Issues:
Whether the interest amount written off due to non-recovery can be allowed as a deduction from total income of the previous year as a revenue loss.

Analysis:
The case involved a firm carrying on business as commission agents, which also dealt in gur and shakkar. A working partner, Sri Jagannath Prasad, retired from the firm with a debit balance in his capital account, including an amount of Rs. 39,302 on account of interest charged during the relevant period. The firm wrote off the entire sum of Rs. 94,544 at the end of the previous year and claimed it as a revenue loss for the assessment year 1956-57. However, the Income-tax Officer disallowed the claim, considering it a loss of capital, which was upheld by the Appellate Assistant Commissioner and the Tribunal.

The firm used to charge interest on the debit balance in the partner's capital account and debited the interest to his account regularly. Despite this, the firm's claim of Rs. 39,302 as a bad debt under section 10(2)(xi) of the Act was rejected. The court held that the amount in question cannot be considered a trading debt since the firm operated in arhat, gur, and shakkar businesses. Additionally, as the assessee-firm succeeded the original firm with all its assets and liabilities, the amount written off was deemed an asset in the hands of the succeeding firm, not a trading loss.

The court cited a similar case from the Bombay High Court where debts due from retiring partners were treated as capital sums, not revenue, and could not be written off against profits. The court agreed with the Tribunal's decision, answering the question in the negative against the assessee. The respondent was awarded costs of Rs. 200 for the reference, with counsel's fee assessed at the same amount.

In conclusion, the court held that the interest amount written off due to non-recovery could not be allowed as a deduction from the total income of the previous year as a revenue loss, as it was considered a capital sum and not a trading debt.