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TMI Blog1985 (10) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm has been credited year after year to a current account. Interest has also been credited on the balances to the credit of the account periodically. As on 12-4-1980, being the last date of the previous year relevant for the assessment year under consideration, the amount due to the assessee by way of share capital and accumulation to the credit of the current account amounting to in all Rs. 25,593 was written off as irrecoverable and claimed as a bad debt or business loss in the assessment relating to 1980-81. To be precise, the accumulation to the credit of the assessee in the current account was Rs. 20,593 and the capital contribution was Rs. 5,000. The basis for claiming the same as a bad debt or as a business loss was that the firm had become defunct and the assessee was not able to recover the amount due to her from the firm. The ITO disallowed the claim stating that, in the absence of the latest final accounts of the firm, it was not possible to decide whether the claim had become a dead loss and also held that in any case the consequent loss as a result of the failure of the assessee to recover the amount would be of capital in nature. He, therefore, disallowed the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the firm in the course of her money-lending business. He was of the view that there was no difference between this amount and the capital investment of Rs. 5,000 by the partner. As to the argument that the assessee was assessed on the share of profits as also the interest on the accumulated balances, he held that this would be of no significance, inasmuch as, the assessments were necessitated by the fact that she was a partner of the firm and, therefore, her share of profit from the firm had to be subjected to assessment in her hands. In fine, he held that there was no conscious act on the part of the assessee in advancing any monies to the appellant-firm specifically in the course of money-lending business. He also found that the firm had not still been dissolved, as it was only in a dormant state and the assessee still continued to be a partner of the same. In conclusion he held, that the claim of the assessee for allowance of the same as a bad debt was untenable firstly on the ground, that the sum in question was not lent to the firm by the assessee in the course of her money-lending business and secondly, that she failed to establish that the amount had become bad and irrecov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 3 of the partnership deed wherein the following narration is fund: "3. The capital of the partnership shall be Rs. 25,000 having been contributed and recorded in the partnership books of accounts in the names of respective partners as follows: Rs. 1. KR. Rukmani Achi 5,000 1/5 share 2. RM. Chintamani Achi 5,000 1/5 share 3. M. Sakuntala Achi 5,000 1/5 share 4. T. Seetha 5,000 1/5 share 5. M. Rohini 5,000 1/5 share The share capital may be increased or decreased as may be agreed upon by all the partners. Any other monies contributed by the partners shall be credited to their respective current accounts. No interest will be credited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee cannot, according to him, be considered to be amounts advanced during the ordinary course of the business of money-lending by the assessee. The accumulations in the current account cannot by any alchemy be altered into money-lending advances which at no stage they were or could be. Even if the assessee was a money-lender, for any amounts advanced by her to be considered to be money-lending debts, she should have consciously advanced the same to the firm. In the present case her relationship with the firm was that of a partner and she was entitled to her share of profits as and when the accounts of the firm were finalised at the end of each accounting period. Instead of enforcing the claim for withdrawal of the share of profits, she had allowed them to accumulate in a current account. By this process she could not claim, that she had made a corresponding advance of the monies to the firm as a money-lending debt, or during the ordinary course of her business of money-lending. Our attention was invited to the decisions in S. Srinivasan v. CIT [1967] 63 ITR 273 (SC), Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123 (Mad.) and CIT v. United India Roller Flour Mills Ltd. [1985] 155 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted with deposits made or loans advanced. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with the firm ; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which could convert those accumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of the firm or because of their admission to the benefits of the firm, and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct-matter under consideration. It is not stated that there was any other amount provided by the minors on which interest has been paid. As the amounts represented accumulated profits and as a mere provision in a partnership deed is not effective to convert it into loan or deposit, we consider that the decision of the Supreme Court would directly apply to this case. It was pointed out by the Supreme Court that the profits accumulated to the credit of the wife and minor child in that case because they did not draw their share of profits after distribution of profits took place. They merely allowed those profits to remain with the firm. It was further added that there was no suggestion in that case that either the wife or the minor sons or any one on their behalf purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. The relevant passage is found at page 276. The principle of the Supreme Court decision is that in cases where there was a subsequent arrangement between the partners or the persons who are competent to enter into any arrangement on behalf of the minors and the firm, so as to pay interest by conversion of the amount into a dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money-lending advances. In this connection the learned departmental representative submitted that the narration in paragraph 3 of the partnership deed does not have the effect of conferring that status of money-lending creditor on the assessee with reference to the share of profits credited in the current account. 8. We have carefully considered the rival submissions and also the authorities referred to earlier. We are inclined to agree with the submissions made on behalf of the department. On a balance of consideration of the various factors referred to earlier, we are of the opinion, that neither at the stage of credit of the share of profits into the current account of the assessee nor subsequently by any contract, implied or otherwise, the assessee has assumed the status of a money-lender with reference to the share of profits credited in the accounts. Paragraph 3 of the partnership deed only makes a reference to the fact that partners' current account shall bear interest. Periodical credit of the share of profit in the current account does not ipso facto convert each instalment of such credit into a money-lending advance, merely because, the assessee also happens to be a mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, therefore, unable to agree with the claim for deduction as a bad debt, even though, it has been written off by the assessee. The mere fact that these amounts have also been assessed in the hands of the assessee does not confer any extra right on the assessee to claim the same as bad debt so long as the amount was not advanced during the ordinary course of the money-lending business of the assessee. 9. As regards the claim for allowance of the same as a business loss, the proposition has simply to be stated to be rejected, inasmuch as, by the same token, as in the other case, the loan cannot be considered to have arisen during the course of the business of the assessee or incidental to the business of the assessee. Under no commercial principles of accounting a loss of this nature could be considered to be a revenue loss. Here again it can only be classified as a loss of capital. 10. Coming to the decision of the Tribunal relied upon by the learned representative for the assessee, we find that we are unable to agree with the view expressed therein, in view of the fact, that the salient aspects of the issue referred to by us earlier, have not been considered by the Bench in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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