Jaganmohan Reddy, J.
1. The Income-tax Appellate Tribunal has referred the following question under section 66(1) of the Indian Income-tax Act, 1922:
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 9,622 was rightly assessed as profit within the meaning of the proviso to section 10(2)(xi) of the Act?'
2. The Assessee is a Hindu undivided family and was being assessed for the year 1958-59 for which the relevant accounting period was from 3-11-1956 to 22-10-1957. The business, in respect of which the assessment was made was money lending business and it appears that an amount of Rs. 52,742 was due to the assessee from one Subhakaran Sriram at the beginning of the assessment year 1957-58. Some further advances were made during that year and the final amount due was Rs. 53,942. As the debtor's financial position became unsatisfactory, he approached for a settlement of his account and by a letter dated 11-10-1956 he offered to transfer to the assessee certain shares, a carpet and a house property at Warangal on the understanding that after such part satisfaction of the debt, the balance due from him would be waived by the assessee-creditor. The assessee agreed to the proposal and accordingly the debtor transferred the shares and the carpet of the value of Rs. 4,140 during the accounting year itself.
Having regard to the further promise in transfer the house property valued by the debtor at between Rs. 15,000 and Rs. 16,000 the assessee estimated a sum of Rs. 32,500 as irrecoverable leaving a balance of Rs. 17,302 to be recovered against such property. For the assessment year 1957-58, the assessee claimed as a bad debt the sum of Rs. 32,500 which has been estimated as irrecoverable, but the Income-tax Officer refused to allow the claim. On appeal, however, the Appellate Assistant Commissioner allowed the axsessee's claim with the following observations;
'However, after writing off this amount, the assessee was lucky enough to recover an amount of Rs. 322 in cash and Rs. 1,602 by sale proceeds of shares belonging to the debtor which came into his possession accidentally. Under Section 10(2A) the Income-tax Officer should treat these amounts as profits and gains of the business. Similarly, it necessary, the market value of the house be determined on the date on which it was taken over and the difference, if any, be treated as income of the relevant accounting year. The assessee also agreed to such adjustments.'
3. There was, however, no appeal against the said order and it is apparent from the observations extracted above that the assessee also agreed for an estimate of the market value of the house, if and when transferred and to have the difference between the value at which it was transferred and the market value as profits arising in the year of transfer. In the accounting year relevant for the assessment year 1958-59, as already observed, the assessee recovered a sum of Rs. 322 in cash and Rs. 1,602 by way of sale proceeds of shares making a total or Rupees 1,924. After this recovery the balance still to be recovered was Rs. 15,378. It would appear that during the same accounting year the debtor also transferred the house property by a deed of conveyance dated 8-10-1957 but the assessee did not make any adjustment in the account of the debtor in that year. The adjustment entry was passed only in the accounting year relevant for 1959-60 assessment.
The value of the property was Rs. 15,378. It was exactly the same amount that remained as balance in the debtor's account. Even though the entry in the account was made only in the accounting year relevant for 1959-60 assessment, the Income-tax Officer treated the transaction as one effected in the assessment year 1958-59. According to him the value of the property conveyed was Rs. 35,000 made up of Rs. 25,000 being the value of the site and Rs. 10,000 the value of the building. As this exceeded the amount due from the debtor according to the accounts, viz., Rs. 15,378 the Income-tax Officer treated such excess of Rs. 21,547 (which is a mistake for Rs. 19,622) as liable to tax under Section 10(2A) of the Act in the assessment year 1958-59. On appeal, the Appellate Assistant Commissioner merely stressed on the applicability of the proviso to Section 10(2)(xi) of the Act rather than the provisions of Section 10(2A) of the Act, but in the result confirmed the assessment made by the Income-tax Officer.
4. Before the Appellate Tribunal, two contentions were raised: (1) that the amount in question was not liable to tax under the provisions of the Act, and (2) that in any case, the valuation adopted for the property was excessive. With respect to the first contention, it was argued that the proviso to Section 10(2)(xi) was not applicable, because there had been no recovery as contemplated in the proviso. The Tribunal negatived this argument. With respect to the second contention, it observed that merely because the amount outstanding was Rs. 15,378 and the property was taken over in complete discharge of the debt, it cannot be stated that the value of the property must also be taken, in fact, to be of the exact amount. In the result, the Tribunal, however, reduced the estimated value of the property from Rs. 35,000 to Rs. 25,000 made up of Bs. 10,000 for the site and Rs. 15,000 for the building and consequently held that the excess liable to tax was Rs. 9,622.
5. Mr. Rama Rao on behalf of the asses-see contends that under the proviso to Section 10(2)(xi) of the Act, the Tribunal having once held that there was no collusion between the debtor and the lender, the value of the house at which it wits conveyed must be treated as discharge of the debt and the question of estimate does not arise except when the lender ultimately sells the house and adjusts the debts.
6. In support of this contention he has cited three cases. But before we examine those oases, it will be profitable to read Section 10(2)(xi) of the Income-tax Act and understand the meaning and import of that provision bereft of any case law.
'10(2). Such profits or gains shall be computed after making the following allowances, namely:
(xi) When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee:
Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to he a profit of the year in which it is recovered, and it less, the deficiency shall be deemed to be a business expense of that year;'
7. The above provision, in so far as A banking or money-lending business is concern-ed, postulates the writing off of a sum which is irrecoverable. The Income-tax Officer is vested with a discretion to ascertain that sum having regard to the facts and circumstances of the case. Once a certain amount from the amount due has been written off as irrecoverable, the balance of the debt due is the only one which is to be treated as a debt. The Legislature, however, in such cases wherein a certain amount has been written off, has provided for recovery, at a subsequent period, of any amounts due on account of the debt. Those amounts can either be in cash or in kind, such as where there is a transfer of moveable or immoveable properties. If, therefore, the amount ultimately recovered in respect of the debt is gerater than the difference between whole debt and the amount written off, i.e., the amount allowed by the Income-tax Officer as irrecoverable, the excess is deemed to be the profit of the year in which it is recovered. On the other hand, if the difference is less, the deficiency is to be a business expense of that year. In so far as the proviso is concerned, we find little difficulty in understanding the meaning and import.
What it means is that once the whole or a part of a debt Is written off, any ultimate recovery by the assesses of any amount, which is in excess of the difference between the original debt and the amount written off, is to be treated as profit, because in so far as the assesses is concerned, when once he applies for and successfully induces the Income-tax Officer to write off a certain amount, he is prepared to forgo the debt by that amount and any subsequent recovery in excess of the difference between the original loan and what was written off. is to be treated as an unexpected Rain or profit.
8. In the present case the appellate Tribunal has done just that, viz., it had taken the difference between the original debt and the amount written off Rs. 32,500 and finding that the value of the house was more than this difference, computed the excess as profit.
9. Mr. Rama Rao contends that under the proviso the Income-tax Officer is not vested with any jurisdiction to make an estimate of the house, particularly when it has been found that there is no collusion between the lender and the debtor and that consequently the value given in the instrument of conveyance must be treated as the value of the property. With this contention we are unable to agree because the property has been conveyed for the balance of the amount, that was due on the date and though there was no collusion, the debtor agreed to transfer and the lender agreed to accept the house in total discharge of the debt. If the value of such property was more than the balance of the debt, the lender was to get that advantage. It was part of the agreement between the parties that on the transfer of certain properties the debt should be discharged and in compliance with that agreement, shares, a carpet and the house were transferred.
The realisation of these would show what the amount would be and consequently how much of the loan was discharged. In so far as the carpet and the shares were concerned, they were sold in the previous years of assessment and the money value could be fixed. But in respect of the house, the money value could not be fixed because the asset has not been sold. It is for this reason that Mr. Rama Rao contends that the Income-tax Officer must wait till the asset is sold in order to determine the money value. There is no warrant for this contention in the provision to which we have referred. The proviso uses the words 'the amount ultimately recovered' and the question is what do these words mean? The ultimate recovery is a final recovery qua the debt. No doubt the word 'amount' is mentioned in the proviso. But that does not confine it only to the case where the property is sold and the price is realised.
The amount can be fixed by estimate also and we think that those words are capable of that meaning. If so, jurisdiction is vested in the Income-tax Officer under Section 10(2)(xi) of the Income-tax Act to estimate the value of a property transferred or given towards the discharge of the debt. The assessee has not been given the discretion or choice to treat the debt as recovered or not. If it were otherwise, it would amount to giving the assessee a discretion to postpone the realisation of the price for an indefinite period. The Legislature did not postulate a state of such uncertainty. This interpretation is further strengthened by the fact that in so far as the debtor is concerned, the debt has been discharged and the lender cannot claim anything more from him. In the circumstances, it is the date when the transaction is complete and the debtor has been fully discharged, which should be taken as the date on which the debt is said to have been ultimately recovered.
10. We now propose to examine the three cases cited by the learned Advocate to ascertain whether they in any way support the proposition which is contended for by him.
11. A. H. Wadia v. Commissioner of Income-tax Bombay, is not a case under Section I0(2)(xi) of the Income-tax Act but is one under the Government Trading Taxation Act (III of 1926). As is well-known, the income of the Native States was not liable to tax and consequently, in 1926 the Government Trading Taxation Act was passed which made any income accruing or arising in British India as a result of trading by the Government taxable. Section 12 (1) of the Indian Income-tax Act brings within the ambit of the charging section (Section 4) income accruing or arising from any money lent at interest and brought into British India in cash or in kind. It is the validity of this legislation that was considered in that case. Mr. Rama Rao relies on certain observations at page 76 of the reported judgment (of ITR); (at p. 26 of AIR). But those observations of Kania. C. J. do not warrant a conclusion that under Section 10(2)(ii) proviso the amount ultimately said to be recovered is that amount which is realised after the sale of the property.
12. The Commissioner of Income-tax in his letter of reference in that case had stated:
'During the course of Durban's money-lending transactions in Bombay and elsewhere some of the mortgagors made default in payment of the principal and interest and the Durbar filed suits to enforce the mortgages and obtained decrees for the sale of the properties. The mortgaged properties which are all in British India were put up for sale in execution of these decrees and were purchased in Court auctions by the Durbar and the Durbar still continues to own these properties. Item C represents income from these properties. '
It was therefore concluded that the original money-1ending transactions consisted of advancing loans on mortgages and had come to an end with the sale of the properties under the directions of the Court. Kania, C. J. observed:
'The purchase by the Durbar of these properties can be either it continuation of the money-lending transactions, coupled with the desire at a proper time to sell the properties and realise the amounts lent or retaining the properties as investments, like other properties purchased by the Durbar in British India.
A little later it was further observed: 'The question whether the properties so left in the hands of the Durbar form part of his money-lending business or not is a conclusion to be drawn from the evidence led before the Taxing Authorities.'
13. These passages have nothing to do with the interpretation of Section 10(2)(xi) proviso. In that case, the debt having been realised by sale of the mortgaged properties, irrespective of the fact whether the Durbar purchased the properties or someone else did, the properties so purchased were treated as investment not forming part of the money lending business because it is obvious that the debt having been discharged those assets, when purchased in court auction, vested in the lender as investments.
14. The facts in Sadiram Ganga Prasad v. Commissioner of Income-tax U. P., : 28ITR316(All) show that the business carried on by the assessee was not a money lending business hut a business in speculation. In the year 1932, a sum of Rs. 15,000 and odd was found due to the assessee from a flour merchant. As the debtor was unable to pay, the assessee purchased a house from the debtor for Rs. 10,000 and wrote off the BALAnce of Rs. 5,000 and odd, which was allowed as a deduction in 1933-34. The assessee got possession of the house but in 1943, it was decided by the High Court that the vendors had no title to the house and the assessee lost the house. In the assessment year 1944-45 he claimed a deduction of Rs. 10,000 as a had debt, or in the alternative, as business loss.
It was held that, as the property was not purchased as stock-in-trade but as a capital and there was also no evidence to show that in 1943, when the debt revived owing to the decision of the High Court that the vendors had no title, the vendors were in a position to pay the debt, and the assessee had not even taken any steps against the vendors after 1943, the loss caused to the assessee by the house going out of possession cannot he treated either as a revenue loss or a bad debt. It is apparent from page 320 of the judgment that from the question that had been previously referred to for decision it appeared that the deduction was claimed under Section 10(2)(xi), but then it was claimed as a business loss. The assessee's learned advocate, Mr. Pathak categorically contended that the question of the applicability of Section 10(2)(xi) did not therefore arise in that case. Then Lordships, however, considered the applicability of Section 10(2)(xi) as an alternative argument because originally that question was referred. At page 321 dealing with his argument, the learned Judge observed thus:
'The proper way to construe the legal position appears to us to be that when Dhaunkal Ram Mani Ram sold the house to the assessee for Rs. 10,000 and the debt was adjusted as paid off to that extent in the books of account, the assessee must he deemed to have paid to the vendors the sale price with one hand and received from the vendors with the other Rs. 10,000 in part satisfaction of the debt due from them. The debt was thus paid off and when the sale deed was held to he invalid the old liability revived which could be enforced either in accordance with the terms of the express covenant contained in the sale deed or on the basis of the implied covenant under Section 55 of the Transfer of Property Act, The assessor's ease was that as the house was lost to him he was entitled to claim a deduction of the price paid for the house as a bad debt under section 10(2)(xi), From the facts stated that the property was purchased not as stock-in-trade but as it capital accretion, the loss caused to the assessee by the house going out of his possession cannot be treated as a revenue loss or as a bad debt.'
15. These facts are quite distinguishable and the proposition of law enunciated on the basis of those fads does not in any way sop-port the contention of the learned advocate for the assessee. It may also be borne in mind that the property was purchased for a certain price and the balance thereof subsequently was sought to be written off as a debt which was not recoverable, It is not as if a certain sum was written off and some property was taken for the balance of the amount as in this case, towards the full discharge of the debt. There is, in our view, a distinction in these two methods. In the first case, the transaction is one of purchase and sale and in the other transfer of an asset for the discharge of what is outstanding irrespective of whether the value of the property so transferred is more or less.
16. Alapali Ramaswami v. Commissioner of Income-tax, Hyderabad, : 35ITR73(AP) is also an authority for the proposition that it is a question of fact in each case whether property purchased by a moneylender in discharge of loans advanced by him forms part of the stock-in-trade of his business, and that it depends on whether, after purchase, he treats the property as part of the stock-in-trade of his business by such acts as including the value of the property in the accounts or charging the expenditure incurred in respect of the property to the business or treating the in-come derived therefrom as income of the business and that the burden is upon the Department to prove that such property forms part of the stock-in-trade of his business. That case considered the division in (1949) 17 ITR 63: (ATR 1949 FC (8) and a few other cases, viz., Gurucharan Prasad v. Commissioner of Income-tax, : 19ITR42(All) ; Virappa Chettiar v. Commissioner of Income-tax, 4 ITR 204 : AIR 1930 Mad 123; Himatlal Motilal v. Commissioner of Income-tax, 6 ITC 159 and Chettiappa Chettiar v. Commissioner of Income-tax 31 Mad LW 215 : AIR 1930 Mad 119.
17. Subbarao, C. J, as he then was summed up the law thus at page 82 (of ITR): (at p. 549 of AIR):
'The general principle is that it in a question of fact in each case whether a property purchased by a money-lender in discharge of a loan advanced by him has been made part of the stock-in-trade of his business. The burden is upon the Department to prove that fact though the onus may shift to the assessee having regard to other circumstances or presumptions. If it is a part of the stock-in-trade, the profit made in the purchase and sale of that property becomes taxable income. The incorporation of the pro-perty purchased with stock-in-trade may be effected by diverse ways. The value of the property may be added in the accounts to that of the assets of the business. The income from it and the expenditure incurred in respect thereof may be brought into the business accounts as cross-items. It may he mortgaged or otherwise charged to swell the capital of the business. It may be part of an integrated scheme of buying and selling systematically followed depending upon the ebb and flow of the tide of the market not only as a means of realisation of the debts but as a device to earn profits. The said dealings do not exhaust the modes of acquisition of properties by a money-lender. There may be honest cases of purchase of land in discharge of a loan for the purpose of investment in immovable property without any intention of making it a part of the assets of the business. There may also be eases, particularly during the days of depression when the prospects of money-lending business are bleak, when a money-lender may close his business and convert his cash, which is in the shape of loans, into immovable property or reduce his business to the minimum extent possible and invest his excess cash on hand or money lent on loans in immovable properties without any idea of bringing them into his business with the faint hope that in future he may again improve his business. It cannot, therefore, be predicted as a proposition of law that, whenever a money-lender purchases properties in discharge of loans to third parties, the said proper-ties become part of the assets of the business. That question falls to be considered on the facts of each case.'
18. Having regard to these observations and the provisions of Section 10(2)(xi), it is apparent that the Appellate Tribunal took into consideration the nature of the transaction and the attitude of the assessee, in arriving at a conclusion that it was part of stock-in-trade of the money-lender and proceeded to assess the value of the property in the manner set out in the proviso to Section 10(2)(xi) of the Income-tax Act. During the course of the appeal before the Appellate Assistant Commissioner not only was the agreement between the lender and the debtor to write off Rs. 32,500 made the basis of the claim for the relief, but also the assessee agreed specifically to treat the market value of the house to be determined on the date on which it was taken over and the difference, if any, as income of the relevant accounting year.
19. In the circumstances, we have no option but to answer the question in the affirmative with costs of the Department. Advocate's fee Rupees 250/-.