I. N. MODI J. - This is an application by the Commissioner of Income-tax, New Delhi, under sub-section (2) of section 66 of the Indian Income-tax Act, 1922, praying that we should compel a reference thereunder by the Income-tax Tribunal, Delhi, under the circumstances hereafter mentioned.
The assessee before us is His Highness Maharaja Karni Singhji of Bikaner. He was assessed to income-tax for the year 1955-56, the accounting year being that ending on March 31, 1955. The dispute is about two sums of Rs. 1,00,000 and Rs. 1,50,000 which were alleged to have been advanced by the after of the assessee, late His Highness Maharaaj Sardul Singhji of Bikaner, to one Ihsan-ul-Haq on the basis of two agreements dated the 26th November, 1948, and the 8th December, 1949 (see annexures 1 and 2 to this application). The assessee claimed a deduction for the total of Rs. 2,50,000 as bad debts under section 10(2)(xi) of the Act. The Income-tax Officer repelled this contention. His findings, put briefly, were : (1) that the assessees father did not carry on any money-lending business as such, (2) that this was not a case of money-lending on the facts and circumstances surrounding the transaction in question as evidenced by the relevant agreements, and (3) that the debts had not become irrecoverable in the assessment year or perhaps not at all. Aggrieved by this decision, the assessee went up in appeal to the Appellate Assistant Commissioner. The latter upheld the finding of the Income-tax Officer on the first two points, but, on the third point, he came to the conclusion that the debts had become irrecoverable on the further material which had been produced before him. In the result, he dismissed the assessees appeal. Thereafter, the latter went up in second appeal to the Income-tax Appellate Tribunal, Delhi Bench 'A'. The Tribunal held the that assessees was a case of money-lending and observed tht the more fact that he had returned the interest income as income form other sources in his income-tax returns could not be taken to mean that 'the factum of real business carried on the by the assessee should be forgotten.' The Tribunal further found that the particular instance which was in dispute was a case of money-lending and the loss which resulted to the assessee in consequence thereof and which he had to write off was allowable as a deduction of a bad debt. In the result, the Tribunal allowed the assessees claim with respect to the amount in question. Thereafter, the Commissioner of Income-tax made an application to the Tribunal under section 66(1) of the Act for referring the question of law which arose from its order to this court, but it was rejected by its order dated the 16th December, 1963, on the ground that the finding arrived at by the Tribunal were those of the fact and no question of law arose form them. Hence the present application.
We have heard learned counsel for the parties and have come to the conclusion that there is force in the application made too use. In support of his application, it is strenuously contended before us by learned counsel for the income-tax department that whether the assessee in a given case carried on a money-lending business at the relevant time is a mixed question of law and fact. In support of this proposition, our attention has been invited to G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, Jaldu Manikyala Row v. Commissioner of Income-tax and Champaran Cane Concern v. State of Bihar.
Now in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax it was laid down by their Lordships of the Supreme Court that the expression 'in the nature of trade' appearing in the definition of 'business' in section 2(4) of the Income-tax Act postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business; and that would make the question whether a transactions is in the nature of a trade and its decision thereon, one of mixed law and fact. Where, therefore, the question is whether a transaction is in the nature of trade or business even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly and necessarily to address itself to the legal requirements associated with the concept of trade or business. The final conclusion of the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point, and such a challenge is open under section 66(1) because it is a challenge on a ground of law.
Similarly, in Jaldu Manikyala Row v. Commissioner of Income-tax it has been held by a Bench of the Andhra Pradesh High Court that it is now settled law that the question whether or not a given transaction is a venture in the nature of trade is, in most cases, a mixed question of fact and law and as such is open to review by the High Court in the exercise of its jurisdiction under section 66 of the Income-tax Act. It was further laid down that it was equally well-settled that in determining whether a venture was din the nature of trade, no general or universal test could be laid down, and it was not possible to formulate a single criterion or apply an exclusive yardstick to be drawn from the totality of circumstances present in that case.
Again, in Champaran Cane Concern v. State of Bihar it was held that whether a concern is a partnership firm or is not a partnership firm is ordinarily a question of fact; but it is also a mixed question of fact and law in the sense (and this is what is important to note for our purpose) that if the authorities who have to ascertain questions of fact apply a wrong principle of law in instructing themselves as to what they have to find, then their findings of fact is not conclusive because they have done it according to wrong principles. It was further laid down that the question therefore whether on the facts and circumstances established in the case under consideration an inference of a partnership firm within the meaning of the Partnership Act follows is a question of law.
We need not multiply authorities, as, in our opinion, the cases to which we have invited attention above fully govern the cases before us. As we understand the instant case, the question whether, on the facts and circumstances, which were held to be established by the Tribunal, an inference could properly be drawn that the assessees father was carrying on a money-lending business at the relevant time is a question of law. For, in deciding that question, the essential ingredient of what is business of the purpose in view must be kept in mind. In Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax it was laid down by their Lordships of the Supreme Court in a case under the Excess Profits Tax Act that the first part of the definition of 'a business' in the Excess Profits Tax Act was the same as the definition of a business in section 2(4) of the Indian Income-tax Act, and, therefor, whether a particular activity amounted to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture was always a difficult question to answer. It was further pointed out, referring to the decision of their Lordships of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co., that the words 'a business' were not doubt wide, but underlying the same was the fundamental idea of the continuous exercise of an activity, and that the would 'business' connoted some real, substantial and systematic or organized course of activity or conduct with a set purpose. It was also pointed out that a single and isolated transaction might conceivably fall within the definition of business as being an adventure in the nature of trade, provided the transaction bears clear indicia of trade, and, consequently, it was laid down that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary commonsense principles.
Bearning these principles in mind, it seems clear to us that the question whether the assessees father carried on a money-lending business as such at the relevant time or around it, is mixed question of law and fact and so also the further question as to whether the transitions with which we are conceded fall within its scope, and we fell bound to observe that the learned Members of the Tribunal were not quite correct when they said that the question which was sought to be raised on behalf of the revenue was a pure question of fact. In this connection we also feel bound to point out that both the Income-tax Officer and the Appellate Assistant Commissioner had relied on certain reasoning in coming to the conclusions to which they did, adverse to the assessee, and the Tribunal somehow did not think it necessary to meet those reasons in their order of reversal.
Another fact that particularly strikes us in this connections being of considerable importance is that whereas the first two authorities read certain portions of the agreements which had been executed between the assessees father an the so-called debtor, the Tribunal did not address itself to them altogether. This, in our opinion, amounts to a misdirection in law on the part of the Tribunal, the more so as it was turning out a judgment of reversal.
We are, therefore, satisfied that certain point or points of law do arise out of the Tribunals order upon witched a reference is necessary. The next question is : What should be the shape of such question or questions The only question which we are asked to compel a reference on and which has been suggested by the petitioner before us is a follows :
'Whether, on the acts and in the circumstances of the case, the amount of Rs. 2,50,000 was an allowable deduciton in the hands of the assessee under section 10(2)(xi) of the Income-tax Act, 192 ?'
It seems to us, with all respect, that the question as framed is a very wide one and may conceivably include at least one matter which does not arise out of the order of the Tribunal. That question is : Whether assuming that the debts in questison were advanced in the course of a money-lending business and were instnaces of such money-lending, they were 'bad debts' in respect of which deductions could be claimed under section 10(2)(xi) of the Income-tax Act ?
Now we wish to make it quite clear that the question of these debts being bad or irrecoverable does not arise out of the order of the Tribunal because the finding of the Appellate Assistant Commissioner thereon in disagreement with that of the Income-tax Officer was that the debt was bad and irrecoverable, although on the other two points arising in the case, the Appellate Assistant Commissioner agreed with the findings of the primary authority, that is, the Income-tax Officer. We say so because this particular finding does not appear to us to have been assailed at all one behalf of the revenue before the Income-tax Tribunal, and, that being so, it is not open to it to raise this question before us as arising out of the order of the Tribunal, and this question must rest where it was finally left by the order of the Appellate Assistant Commissioner.
In these circumstances, we are of opinion that, properly speaking, two questions arise out of the order of the Tribunal which may be stated some-what as follows :
'(1) Whether, on the facts and circumstances of this case, the assessees deceased father, His Highness Maharaja Sardul Singhji can be held to have carried on a money-lending business at the relevant time within the meaning of section 10(2)(xi) of the Indian Income-tax Act, 1922 and
(2) If the answer to the above question is in the affirmative, whether the alleged loans advanced to Ihsan-ul-Haq were advanced in the ordinary course of such business or were in the nature of capital losses ?'
For the reasons mentioned above, we partly allow this application and require the Appellate Tribunal to make a statement of the case to this court referring the aforementioned questions. In the circumstances, we leave the parties to bear their own costs of this application.