GOSAIN J. - This reference under section 66(1) of the Income-tax Act has been made to this court by the Income-tax Appellate Tribunal on an application being made to it for this purpose by Messrs. Lehnu Mal, Asa Ram, hereinafter called the assessees. The assessees are a Hindu undivided family and are carrying on the business of timber merchants at Yamuna Nagar. Sometime in the year 1948, they advanced a sum of Rs. 30,000 to one Ghungarmal Batel of Simla and used to receive certain amounts as interest from their debtor which were duly shown in the income-tax returns and on which income-tax was duly paid. In the accounting year in question, the assessees received a sum of Rs. 1,500 from the aforesaid debtor and wrote off the balance of Rs. 20,664 treating the sum as a bad debt. During the assessment proceedings for the year 1956-57, they claimed this amount of Rs. 20,664 as a deduction. This claim was rejected by the income-tax authorities and also by the Appellate Tribunal on the ground that the assessee did not carry on money-lending business and the debt was, therefore, not advanced during the course of carrying on the said business and reliance for this purpose was placed by them on the provisions of section 10(2) (xi) of the Indian Income-tax Act. At the time of hearing of the appeal before the Appellate Tribunal, the assessees also claimed that as the interest on this loan was being taxed in the hands of the assessees under section 12 of the Act, the amount of Rs. 20,664 should be considered as a revenue loss or revenue expenditure. The Appellate Tribunal rejected this argument and observed in its order as follows :
'The argument is fallacious. In the first place, no such ground was taken in the memo of appeal preferred before the Appellate Assistant Commissioner. Secondly, it is not possible to hold that the amount of Rs. 20,664 was an amount of revenue loss which could be considered under Section 12 nor can it be considered as an expense which the assessee had to incur for the purpose for earning income assessable under the head income from other sources.'
The assessees then made an application to the said Tribunal asking for a reference under section 66(1) of the Act and the Tribunal has thereupon referred the following point of law for decision to this court :
'Whether, on a true interpretation of section 12 of the Indian Income-tax Act, the deduction of Rs. 20,664 claimed by the assessee was permissible under section 12 of the Indian Income-tax Act ?'
Now it is conceded by Mr. S. M. Sikri, learned counsel for the assessees, that his clients are not carrying on the business of money-lending and also that the loan in question was not advanced in the ordinary course of such business. It is not disputed that the assessees cannot, in these circumstances, avail of the provisions of clause (xi) of sub-section (2) of section 10 of the Act and the claim in question cannot obviously be allowed under the said provisions. The only contention raised by Mr. Sikri is that the case is covered by sub-section (1) of section 12 of the Act inasmuch as the income on the interest of this loan was, in some previous years, taxed by the department under head 'income from other sources,' and any loss suffered in the aforesaid 'other sources' must, therefore, be treated as an allowable deduction. He urges that profits and gains of the said other sources could be calculated only after allowing the loss in the same and that the amount of Rs. 20,664 claimed by the assessees in this case must be held to be such a loss.
After giving our careful consideration to the matter, we regret we cannot accept this contention. It is not possible to hold that the amount of Rs. 20,664 was a revenue loss nor is it possible to find that this was an expense which the assessee had to incur for the purpose of earning income assessable under the head 'income from other sources'. At the most, it could amount to a complete or partial loss of the source itself which would evidently be a capital loss. We are wholly unable to distinguish this case from the one in which an assessee merely carrying on the business of a timber merchant placed some of his spare money in a bank which ultimately failed. The assessee could not certainly claim the loss of the money as a revenue loss and it did not matter that the interest received by the assessee from the bank in some previous year had been treated by the income-tax authorities as income of the assessee from other sources and had on that basis been included in the assessment against the said assessee. In support of his contentions, Mr. Sikri relies on ruling reported as Commissioner of Income-tax v. S. M. Chitnavis, but the facts of that case are clearly distinguishable from those of the present, inasmuch as the assessees in that case were regularly carrying on the business of money-lending and the bad debt in the circumstances of the said case did clearly amount to a revenue loss. In our judgment, the present case is more aptly covered by a ruling of their Lordships of the Supreme Court in Commissioner of Income-tax v. Abdullabhai Abdulkadar in which a similar loss was found to be as one of capital. In the penultimate paragraph of that judgment, their Lordships observed as follows :
'This contention has even less substance than the claim of deduction under section 10(1). Under clause (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money-lending trade, debts can only be so described if they are due from customers for goods supplied or loans to constituents or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business; if it is not of that character it will be a capital loss. Thus a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal adviser is not deductible on its becoming irrecoverable because that is not a part of the profession of a solicitor : Commissioner of Inland Revenue v. Hagart and Burn-Murdoch.'
We are clearly of the opinion that the loss of Rs. 20,664 claimed by the assessees in the present case is one of capital and not of revenue. We, therefore, answer the question referred to us in the negative. The assessees will pay the costs of the Commissioner of Income-tax. Counsels fee Rs. 200.
TEK CHAND J. - I agree.
Question answered in the negative.