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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 ..... its in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to paragraph 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 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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 capital accounts of partners. Partners' current accounts shall bear interest which will be adjusted to their accounts at the end of each year on closing of accounts at the rates of interest that may be fixed by all the partners from time to time." With reference to the above he submitted, that any monies contributed by the partners, over and above their capital contribution mentioned earlier, would be entitled to interest and the credit of the partner's share of income periodically in her current account would, without the partner exercising her right of withdrawal, would amount to the partner having voluntarily advanced the amounts in question at interest. His further submission in this regard was, that, since the partner was also separately carrying on her own money-lending business, these periodical credits to her current account should be considered to be advances made by her voluntarily to the firm on interest and, therefore, her inability to recover the same wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 ITR 358 (Mad.). 7. In S. Srinivasan's case the question for consideration was with reference to the following facts: A firm consisted of husband and wife and a stranger as partners and his two minor sons were admitted to the benefits of the partnership. As per one of the clauses of the partnership deed the firm could receive advances from the partners in case of necessity and pay interest thereon. For a number of years the shares of profit of the wife and the minor sons were allowed to accumulate in their current accounts in the firm's books. From a particular date interest at 9 per cent was allowed thereon. The question was whether the interest so allowed was assessable in the hands of the husband under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. The Supreme Court held that it was so assessable. While coming to this conclusion the Supreme Court held that the accumulated profits of the wife and minors with the firm could on no account be equated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longed 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 interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii) in the Income-tax Act." The Madras High Court in Misrimul Sowcar's case, while dealing with a similar question, has followed the decision of the Supreme Court and observed as under : " 'The cases when interest is earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deposit or loan, then the position would be different. This is because it is open to the partners to invest their further funds in the firm making it clear that they are doing so in the same manner as if they are strangers. If with reference to strangers interest paid would not be construed as interest payment arising out of the terms of the partnership, similarly in the case of partners also, the interest would not be traceable to the membership in the firm. Learned counsel for the assessee sought to equate clause 3 of the present case with such a position. As envisaged by the Supreme Court the agreement must be subsequent to the crediting of the share of the profits. In the present case, the treatment of the accumulated profit as a loan is almost simultaneous with its credit. Therefore, there is no scope or basis for any subsequent agreement in relation to it. The exception contemplated by the Supreme Court in the passage at page 276, in cases of subsequent agreement would not, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriodical 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 money-lender. In normal circumstances the share of profit credited to a current account of the partner in the books of the firm would be liable to withdrawal by the partner. The fortuitous circumstance of the same not being withdrawn over a period of years would not confer upon the credit balance the status of a money-lending advance so as to enable the assessee to claim the same as a bad debt. Sub-section (2) of section 36 clearly lays down that the debt should represent money lent in the ordinary course of the business of money-lending. This qualification is absent in the present case with reference to the credits in the current account. In this context the observations of the Supreme Court in S. Srinivasan's case are quite relevant and also very significant. We have already extracted them earlier. Their Lordships made a distinction between the accumulated profits remaining in the firm and a conscious deposit or advance made of the same by a partner. Their Lordships have observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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