Frederick William Gentle, C.J.
1. In these three cases, referred to the Court by the Income-tax Appellate Tribunal, the facts and circumstances in many respects are the same; by agreement of learned Counsel for the parties they have been heard together. The questions referred in each case are substantially of like effect but the wording in one of them is slightly different. In Referred Cases Nos. 19 and 27 the question is:
Whether on the facts and in the circumstances of this case the claim of the respondent to deduct the sum of Rs. 10,000 was allowable in law.
In Referred Case No. 23 the question is:
Whether on the facts and in the circumstances of this case the claim to deduct the sum of Rs. 10,000 as a bad debt incurred in the account year made by the respondent was legally sustainable.
2. The Tribunal, setting aside the order of the Income-tax Officer, which was upheld by the Appellate Assistant Commissioner, decided that by virtue of the provisions of Section 10(2)(xi) of the Indian Income-tax Act, the sum of Rs. 10,000 was a bad debt and deductible in each case when calculating the assessable income. These cases have been stated at the instance of the Commissioner of Income-tax, Madras, who challenges the correctness of the findings by the Tribunal.
3. Formerly, five Nadar brothers (1) Mathalai, (2) Rajakani, (3) Sankaralingam (4) Kandaswami and (5) Dhanushkodi carried on a joint family business, dealing in coffee and cardamom. Supplies were obtained from an agriculturist named W.P.A. Marimuthu Nadar, to whom the business advanced money; by 1930 Marimuthu owed Rs. 1,32,500 to the joint family. On February 3, 1930, the brothers effected a partition and, thereupon they carried on the same' business in partnership; the debt due from Marimuthu was treated as due to the firm. Seven months later, on September 11, 1930, the partnership was dissolved; at that date Marimuthu's indebtedness amounted to Rs. 1,24,000; on dissolution, this sum was divided into 5 equal parts and each brother was given Rs. 24,800 of the debt due to the firm. Three separate businesses were then constituted; there were two partnerships, between (a) Mathalai and Rajakani and (b) Sankaralinga and Kandaswami; the other brother, Dhanushkodi, carried on business on his own account. Each business dealt in coffee and cardamom obtaining supplies from Marimuthu by advancing moneys to him against future deliveries and he paid interest on the amount owing by him. In the two partnerships, each partner was separately credited in the books with Rs. 24,800 due from Marimuthu. In addition, some of the brothers, individually carried on a money-lending business utilising that sum as stock-in-trade; all accounts were kept on a mercantile basis; in each of the partner's accounts the amount of interest due on the sum outstanding and any credits were entered and the balance remaining was ascertained every year. Dhanushkodi carried on business with the same goods but, in his case, the sum of Rs. 24,800 was entered in the accounts of his business and was not separately treated; he may have engaged in money-lending but no point in that connection was made by Mr. Subbaraya Aiyar, who appeared for all the assessees; interest on the sum due to Dhanushkodi, including any amount or the balance of the sum of Rs. 24,800 was added each year to the general accounts. In each of the five accounts, Marimuthu executed a promissory note, payable on demand, for the amount credited in 1930, and each year thereafter, a new promissory note was similarly signed by him in respect of the balance due from him. This continued until Marimuthu's death, about 1934, and thereafter, until 1937, his brother, Rathnaswami signed similar promissory notes. In the assessments for income-tax, in respect of some of the assessees, as will appear hereafter more particularly, the interest upon Marimuthu's debt, was included amongst other items under Section 12 of the Indian Income-tax Act and tax thereon was paid although, in some instances and to some extent, it had not actually been received.
4. In 1937, the amount due from Marimuthu, or rather from his successors, including Rathnaswami was Rs. 1,66,000. That indebtedness was reduced to the sum of Rs. 1 lakh by means of payments totalling Rs. 66,000 by way of sales of property and shares belonging to Marimuthu and a cash payment of Rs. 5,000. On September 24, 1937, a deed of mortgage was executed by Marimuthu's brother and other legal representatives or successors in favour of the five brothers to secure payment of that sum of Rs. 1 lakh at 6 per cent per annum. Thereafter, until 1940, the brothers' accounts were each debited with Rs. 20,000 but with no interest. In 1941 the mortgagors threatened to cry in aid the provisions of the Madras Agriculturists' Relief Act and claimed that, by virtue of those provisions, the actual indebtedness was much less or was non-existent. On April 1, 1941, the total outstanding of Rs. 1 lakh--Rs. 20,000 in respect of each brother--was settled at a sum of Rs. 50,000 and in each account Rs. 10,000 was credited and the balance of Rs. 10,000 was written off. It is the sum written off, that the assessees claimed should be allowed as a bad debt in the income-tax assessment and which was allowed by the Tribunal.
5. It is accepted that Marimuthu's debt was rightly considered as good in 1930, when the partition took place and when each separated brother took a one-fifth portion upon the dissolution of the subsequent partnership at the end of 1930 and also, that the debt remained good until the legal representatives or successors of the debtor threatened in 1941, to rely upon the provisions of the Madras Agriculturists' Relief Act. Further, it is not questioned, that the acceptance of Rs. 50,000 in full satisfaction of the aggregated debts amounting to Rs. 1,00,000 and that the writing off of Rs. 10,000 by each brother were correct and that the indebtedness was bad to that extent.
6. Referred Cases Nos. 19, 23 and 27 respectively relate to the assessment of,:--Dharmaraja (son of Dhanushkodi, now deceased), it being convenient to treat Dhanushkodi as the assessee; Mathalai, who was a partner of his brother Rajakani; and Kandaswami, a partner of his brother Sankaralinga. The Tribunal held that the sum of Rs. 1,24,000 was a debt due to the joint family business and of the partnership between all the brothers, which existed for a few months in 1930, and it was an asset of each business. It was also held that:--(a) Dhanushkodi brought his debt into his coffee and cardamom business, he dealt with the debtor as a customer and the debt became part and parcel of the trading assets of the business and any loss in the trade was an allowable deduction; (b) Mathalai, in partnership with Rajakani, conducted a coffee and cardamom business; in addition he carried on a money-lending business and the debt of Rs. 24,800 formed part of the floating assets of that business; (c) as regards Kandaswami, who was in partnership with Sankaralinga, he was assessed upto 1934-35 on income from money-lending and, later, interest, if any, on Marimuthu's debt was assessed under Section 12, the sum of Rs. 10,000 was a part of the amount on which tax had been paid as interest accrued for which Kandaswami was not entitled at the respective times of such accrual and, as the amount given up was interest over-collected, it was not any part of the capital due and he was entitled to have that sum deducted. In each of the Referred Cases the sum of Rs. 10,000 was allowed against the profits of the year as a bad debt and deductible as such from the total income for the year.
7. As to Referred Case No. 19.--When Dhanushkodi started his coffee and cardamom business in 1930, as stated previously, his one-fifth portion of the debt of Rs. 1,24,000 was credited as an asset in his business accounts, for which Marimuthu signed a promissory note for Rs. 24,800 payable on demand and, whereby that amount became a debt due to Dhanushkodi. By August, 1934, probably it was earlier, the amounts credited in the accounts for goods supplied by Marimuthu to Dhanushkodi exceeded the amount of the debt and interest. The accounts were kept on a mercantile basis. Whilst advances were made to Marimuthu nevertheless, the sums credited in respect of goods supplied can be treated as payments by him and such payments can be, and they, are appropriated by Dhanushkodi towards the earliest debts, in the absence of any appropriation by his debtor. By August, 1934, at the latest, the aggregate of the sums credited to Marimuthu was more than sufficient to liquidate the debt of Rs. 24,800 and interest. Thereafter, any sums reflected by the accounts, due to Dhanushkodi were solely in respect, and arose out, of business transactions with Marimuthu and, after 1934, with his legal representatives or successors; they increased or decreased, from time to time, according to payments made and goods supplied in the ordinary course of business. Those were trading debts and, in 1937, they aggregated over Rs. 30,000. In that year payments were made by crediting the prices of, or proceeds from, sales of land and shares, and by cash, resulting in a reduction of the indebtedness to Rs. 20,000. In 1941, Rs. 10,000 was accepted in full discharge, leaving a sum of Rs. 10,000, which was written off. That transaction of complete liquidation of the indebtedness is not challenged as being incorrect; it resulted in the balance of Rs. 10,000 being irrecoverable. That amount was, in my view, a bad debt of the trading business and the order of the Appellate Tribunal for its deduction, as such, from the amount of the profits for the year, was correct.
8. As to Referred Case No. 23.--Throughout the period from 1930 to 1941 Mathalai carried on a money-lending business, in addition to his partnership business with Rajakani in coffee and cardamom; the profits derived from money-lending were returned and assessed under Section 10 as business profits and they included, until 1937, interest due from Marimuthu on his debt of Rs. 24,800; after 1937, interest was not charged against him. The promissory note executed by Marimuthu in 1930, constituted him as Mathalai's debtor for Rs. 24,800. That sum was incorporated as stock in the money lending business. Mr. Rama Rao Sahib, for the Commissioner, conceded that, if in 1930 Marimuthu became Mathalai's debtor for the above sum of Rs. 24,800, and, since Mathalai has throughout carried on a money-lending business, the sum of Rs. 10,000 was a bad debt of the business and deductible from the amount of the profit, for the year. It is beyond doubt that Marimuthu became Mathalai's debtor and from 1930 to 1941 the latter carried on a money-lending business. It follows that the sum of Rs. 10,000 is allowable as a bad debt.
9. As to Referred Case Mo. 27.---As in the other two cases, and in the same way, Marimuthu became Kandaswami's debtor for Rs. 24,800. Any money-lending business carried on by Kandaswami, which could have been only to a limited extent, was terminated by 1933; in respect of that year, the year of assessment was 1934-35 an assessment last included profit from money-lending. In the assessments of subsequent years there was no item under Section 10, of income, profits or gains from money-lending, but under the heading ' other sources ' Section 12 income from Marimuthu's debt, when it was assessed, is included with interest on investments. It is manifest that in these assessments, undoubtedly made upon the assessee's income-tax returns, the debt due from Marimuthu was treated as an investment of capital and not as a business or trading asset.
10. Mr. Subbaraya Aiyar, for the assessee, contended that, whilst the several allowances, by way of deduction, contained in Clauses (i) to (xv) of Sub-section (2) of Section 10 are not included in Section 12, save to the limited extent as specified therein, nevertheless the principles of those allowances are applicable to the latter section. Section 12 relates to income, profits and gains from other sources not included under, inter alia, Section 10, business. In support of this contention reference was made to the decision of the Judicial Committee in Commissioner of Income-tax, Central Provinces v. Sir S.M. Chitnavis (1932) 63 M.L.J. 361 : 1932 L.R. 59 IndAp 290 which was pronounced before the clauses in Sub-section (2) formed part of the Section 10. At pages 296 and 297 of the judgment it was observed by their Lordships that:
Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amounts of the profits and gains of a year, account must necessarily be taken of all losses incurred....
Emphasis must be placed upon the word 'business' and the effect of the observations of the Board is restricted to bad debts in that connection which, alone, are deductible. The loss of income or of capital or acceptance of a smaller sum in settlement of a larger amount, e.g., of mortgage interest, when arising from investments, and not in connection with business assets, is not a bad debt falling within clause, (xi) of Sub-section (2) of Section 10.
11. Mr. Subbaraya Aiyar also placed reliance upon the method of accounting being on a mercantile basis, as an argument in favour of the deduction of Rs. 10,000, the sum written off against Marimuthu's indebtedness. I am unable to see that, because an owner of investments keeps his accounts on that basis, it can either make his ownership a business or affect, in any way, a loss arising from the extinction or depreciation of investment capital or income.
12. As pointed out, some of the clauses in Sub-section (2) of Section 10 are incorporated in Section 12 but Clause (xi) is not one of them. Had it been the intention of the Legislature that a loss, by way of a bad debt, in respect of an item of income falling within Section 12, should be deductible, then Clause (xi) would have been one of the incorporated clauses. The debt due from Marimuthu was clearly converted, if it was not already, into a capital asset and it was not a trading asset or part of the stock in trade of the business at the time when the balance of the indebtedness of Rs. 20,000 was extinguished by a payment of Rs. 10,000. The sum of Rs. 10,000 which was written off, was not a bad debt of a business and was not deductible from the profit of the year.
13. Mr. Rama Rao Sahib sought to place reliance upon the joining of the five brothers in one mortgage deed and aggregating the amount of their debts, each of Rs. 20,000 into a total of Rs. 1,00,000 as extinguishing the separate liability to each brother and creating a new entire debt to all of them. The creation of the mortgage deed, in the form which it took, was merely one of convenience but, thereafter, each brother continued the separate indebtedness of Marimuthu in his books for the amount due to him. There is no significance or inference arising from the creation of the mortgage.
14. In my opinion the answer to the question in Referred Gases Nos. 19 and 23 should be in the affirmative and to the question in Referred Case No. 27 the answer should be in the negative. The respective assessees are entitled to their costs in the first two Referred Cases and the Commissioner in the third Referred Case, Rs. 250 in each instance.
Yahya Ali, J.
15. I agree.