MANCHANDA J. - This is a case stated under section 66(2) of the Income-tax (hereinafter referred to as the Act) by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal).
The questions referred ar :
'(1) Whether there was any material before the Tribunal for the finding that neither of the two amounts of Rs. 3,25,000 and Rs. 16,005 was a bad debt arising during the course of the money-lending business of the assessee?
(2) What was the true nature of the transactions and whether in view of the true nature of the transactions, the debt could still be claimed as bad debts in working out the assessable income of the assessee?
(3) Whether there was any material on which the Tribunal could arrive at the finding that the debts had become bad prior to the year of account in question?'
Before dealing with the facts pertaining to these questions, it may be noticed that Mr. Gulati, the learned standing counsel, had raised a preliminary objection that this court was no longer competent to decide this reference. Ajmer now forms part of the Rajasthan State, and the Rajasthan High Court alone is competent. A similar objection was taken in Income-tax Reference No. 277 of 1960 and for the reasons stated therein this objection is overruled.
The facts pertaining to the questions referred are thes :
The assessee was a Hindu undivided family whose karta was Motilal. The assessee had been carrying on business as shroffs, bankers, merchants and commission agents. The relevant year of assessment is the assessment year 1942-43, the accounting year ending Kartik, Maru Samvat year 1998 corresponding to October, 1941. The first alleged bad debt was an amount of Rs. 3,25,000 due from Shantilal, a younger brother of Motilal, the karta of the assessee family, who had been adopted by a cousin. The debtor, Shantilal, was the proprietor of Messrs. Amolakchand Mewaram. The second bad debt of Rs. 16,005 was due from Mansukhlal Panthulal. The asssessee claimed that these were all debts which related to his money-lending business and the debts had become bad and irrecoverable in the relevant year of account.
As regards the first debt the debtor had a current account with the assessee for a number of years in which there were large cash payments on either side. This account was also credited with the sales of cotton and other goods made by the assessee on behalf of Messrs. Amolakchand Mewaram. The account was debited with speculation losses and differences paid by the assessee on Messrs. Amolakchand Mewarams account. In 1931 the debits to the account of the debtor rose to about Rs. 11,00,000. In November, 1931, a part of this debt was secured by means of mortgage of the immovable properties of Messrs. Amolakchand Mewaram for Rs. 3,00,000. This sum was credited to the current account and the debit raised in a new account called 'Amolakchand Mewaram mortgage account'. In the accounting year 1932-33, the assessee took over the interest of Messrs. Amolakchand Mewaram in the managing agency of Edward Mills Ltd. and also the share of Edward Mills Ltd. for Rs. 4 1/2 lakhs for which also a credit was given in the current account in the same year. On November 3, 1932, the assessee also obtained a pronote from Messrs. Amolakchand Mewaram for Rs. 3,25,000 crediting the amount to the current account and raising a debit in a new account styled 'Amolakchand Mewaram pronote account'. It is this latter account which forms the subject-matter of the first debt said to have become bad in the relevant year of account. After these adjustments were made to the current account there was a debit balance left of Rs. 25,625. After 1932 there were only petty transactions and some adjustments till 1938-39, when the balance in this account stood at Rs. 9,017. The assessee in that year took over the debtors membership card with the East India Cotton Association for a sum of Rs. 20,000. This resulted in a credit balance in favour of the debtor in the sum of Rs. 11,253. Thereafter, there was only one debit entry of Rs. 980 in 1938-39, and in the relevant accounting year the balance stood to the credit of Amolakchand in the sum of Rs. 10,273. The aforesaid mortgage account and the pronote account were carried forward from year to year but no interest was charged in those accounts. The assessee family was adjudicated insolvent by the Bombay High Court in July, 1938. Thereafter, on a scheme of composition being sanctioned, the adjudication was annulled on the 15th April, 1941.
In respect of the second debt claimed to have become bad of Rs. 16,005 the facts were that this was an amount due from one Mansukhlal Panthulal. A decree from the Bombay High Court was obtained in 1932 against the debtor who is the father-in-law of the younger brother of the karta of the assessee family. Although a decree was obtained in 1932 no effort was made to execute the decree and recover the amount.
These two debts were claimed to have become bad in the relevant year of account. The departmental officer rejected the claim and on further appeal to the Tribunal the claim of the assessee met the same fate. In respect of the first debt of Rs. 3,25,000, on the basis of a pronote taken on November 3, 1932, from Amolakchand Mewaram, the debtor, the Tribunal found that the money was not advanced to this firm in the course of its money-lending business but that there were continuous dealings between the parties and large sums become due from the debtor to the assessee. In other words the finding of the Tribunal was that the advances were not made in the course of money-lending but were as a result of trading transactions or merely friendly loans. The reason for the latter finding though not given in so many words is as set out in the order of the Tribunal that 'no money-lender would have advanced money on a pronote to a person (debtor) of the firms financial position when the pronote of Rs. 3,25,000 was taken.' Apart from this finding that the money was not advanced in the course of the assessees money-lending business, it was found that the debt had become bad earlier in the year 1938-39, when the only remaining assets which was the debtors membership card of the East India Cotton Association was taken over at a valuation of Rs. 20,000. Further, that no amount whatsoever had been realised by the assessee in the pronote account for nearly a decade. No effort was also made to recover the amount by taking any legal proceedings. The claim put forward on behalf of the assessee that there was a ray of hope for recovering the outstandings, inasmuch as the debtor expected some decrees to be passed in his favour was examined by the Tribunal and it was found that at the material time the assessee had no hope of recovering any part of his debt.
In respect of the bad debt of Rs. 16,005 due from one Mansukhlal Panthulal, the Tribunal similarly held that although the decree of the Bombay High Court was passed in 1932 no effort whatsoever had been made to recover the amount and further that the debtor was the father-in-law of the younger brother of the karta of the assessee family. It was also found on the evidence produced that the said amount was not advanced in the course of money-lending business and the debt had become bad prior to the year of account.
A reference having been asked under section 66(1) and the Tribunal having declined to make a reference, this court, as already observed, directed the Tribunal to state a case under section 66(2). This has been done and the questions set out hereinabove have been referred.
Mr. Pathak, learned counsel for the assessee, has contended that there is no material for the Tribunals finding that the advances were not made by the assessee in the course of its money-lending business. No security whatsoever was taken by the assessee for the advances made from time to time, and considering the close relationship which once existed between the debtor and the creditor and looking at the nature of the accounts, it cannot be said that the department had no material for coming to the conclusion that the advances were not made in the course of its money-lending business. In any event, it does not make any substantial difference whether the advances were in the course of money-lending business or in the course of trading between the parties, as the main question which really arises in this case is as to whether even if the debts were trading or money-lending transactions did they become bad in the relevant year of account and not on some date anterior to the year of account. In order to succeed in claiming that a debt has become bad it is incumbent upon the assessee to establish that the debt was good immediately at the commencement of the relevant year of account and that it had become bad during the year of account. In the present case the pronote for Rs. 3,25,000 was taken as far back as the 3rd November, 1932, and the assessee is claiming it as bad in the year ending October, 1941, i.e., almost after a decade. During this decade the assessee did not charge any interest, nor did it take any legal steps to recover the amounts due. The evidence of the assessee and of the debtor, apart from its being only self-serving statements, is extremely vague and it does not at all show that there could possibly have been any ray of hope still lingering in the assessees mind that any part of this debt of Rs. 3,25,000 could be recovered. No doubt the debtor has given a long list of suits in which he was expecting that decrees would be passed in his favour but most of those expectations were shattered long before the relevant year of account. At best, he could only have had hope of realising something from a decree against Baij Nath Gauri Datt but even that suit was decided by the civil judge of Mathura on the 29th March, 1940, against him. Even if this could be said to have been a flicker of hope it was completely snuffed in the assessment year 1941-42, and no possible hope could have survived justifying the assessee in claiming the debt as bad in the relevant assessment year 1942-43. On a consideration of the evidence on the record it cannot be said that there was no material for the Tribunal to have come to the conclusion that the two debts had become bad prior to the year of account.
For these reasons, all the three questions are answered against the assessee and in favour of the department. The assessee will pay the costs of this petition which we assess at Rs. 200. The fee of learned counsel for the department is also assessed at the same figure.