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TMI Blog1998 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... f income of the assessee, for the assessment year 1980-81. The assessee was a partner in Kaviram and Co., with 1/5th share in the partnership for the profits and her capital contribution was Rs. 5,000. Besides the capital account, her share of profits in the firm has been credited year after year to a current account and the interest has also been credited on the balances to the credit of the account periodically. The amount due by way of share capital and accumulation to the credit of the assessee in the current account amounted to Rs. 25,593 and the assessee has written off the entire sum as irrecoverable and claimed the same as bad debt or business loss in the assessment proceedings relating to the assessment year 1980-81. The Income-tax Officer disallowed the claim which was confirmed by the Appellate Assistant Commissioner. In the appeal preferred by the assessee before the Appellate Tribunal, the assessee did not press her claim for allowance of the loss which arose on the loss of the capital of a sum of Rs. 5,000 and the claim was confined only to the allowance of Rs. 20,593 being the balance of accumulated profits in the current account of the assessee as on April 12, 1980. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd cold and take up a position that there was no bad debt which can be claimed by the assessee. Learned counsel for the assessee also submitted that the assessee advanced money standing in the current account and when there was an advance to the firm and the conditions under section 36 of the Act have been complied with, the Tribunal failed to notice that there was a debt due to the assessee and it is open to the assessee to claim the same as a bad debt, when it becomes irrecoverable. According to learned counsel for the assessee, the Tribunal proceeded on an erroneous basis and failed to notice that it is always open to a partner to advance money from the current account and he relied upon a decision of the Patna High Court in Deoniti Prasad Singh v. CIT [1947] 15 ITR 165, in support of his proposition that where the Department treated the bonds and promissory notes as investment in the money-lending business, the Department could not, when the question of deduction of irrecoverable loans arises, be permitted to take up the position that the advances were not part of the money-lending business of the assessee. He also strongly relied upon a decision in C. T. Narayanan Chettiar v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off as irrecoverable in the books of account of the assessee, the assessee is entitled to claim the same as deduction as a bad debt. Mr. C. V. Rajan, learned counsel for the Revenue, on the other hand, submitted that it is incorrect to state that the Tribunal has not construed the provisions of section 36 of the Act for the purpose of allowing the claim of the assessee. According to learned counsel for the Revenue, the latter part of section 36(2)(b) of the Act would apply to the facts of the case and merely because the share of profit was assessed, it does not mean that the debt was taken into account. According to learned counsel for the Revenue, what was taken into account was only the share of profit and not the debt, and as far as the decision of this court in C. T. Narayanan Chettiar v. CIT [1966] 60 ITR 690 is concerned, according to learned counsel, there was no dispute in that case that the advance was in the nature of money-lending business and in view of the factual finding, this court held that the debt was a money-lending debt. He submitted that the decision of the Supreme Court in S. Srinivasan v. CIT [1967] 63 ITR 273, would apply to the facts of the case as the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the course of money-lending business, it is not open to the assessee to claim the same as a bad debt when it becomes irrecoverable. There is a vital distinction between the amount in the current account and the amount treated as a loan or a debt and the distinction is that where some amount is credited to the current account, it is open to a partner to withdraw the amounts as of right and as his own money, but in the case of a debt or a loan, it can be recovered only on the basis of the demand and when the borrower repays the same. The legal relationship between the parties will also change from that of a partner to that of a debtor-creditor, in the event the share of profit credited to the current account is treated as a debt or a loan. The assessee has not stated anywhere that there was a conversion of the share of profit to a debt, much less, there is any evidence to show that it was an advance which arose in the course of money-lending business and in the absence of any evidence, we are of the opinion, the accumulated profit credited to the account of the assessee continues to be the accumulated profit and has not shed its character as accumulated profit and been converted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test laid down by this court reads as under : "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 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 the 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 view of the finding of the Appellate Tribunal that there was no subsequent contract by the assessee with the firm to convert the accumulated profit as a debt of the firm, in our view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of the said business. But, there is nothing to show, on the facts of the case, that the money was advanced in the course of money-lending business or a loss was sustained by the assessee during the course of the money-lending business. Therefore, on the facts of the case, the decision of the Supreme Court is distinguished and it has no application to the facts of the case. So also, the decision of this court in Devi Films Pvt. Ltd. v. CIT [1970] 75 ITR 301, is not of much relevance as in that case the loss occurred during the course of a business and it was found to be a trading loss. There is no dispute as found by this court in Godavari Bai v. CED [1972] 86 ITR 533, that there can be independent relationship between the firm and a partner and for that purpose, the partner should establish that there was a debtor and creditor relationship and to establish the legal relationship, the assessee should come with relevant materials and evidence in support of her plea that the amount standing by way of accumulated profit in the firm was treated either as an advance or as a loan. In the absence of any material and in the absence of any finding by the Appellate Tribunal that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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