P.V. Rajamannar, C.J.
1. This case arises out of the assessment of one R.S.A. Sankara Aiyar, Kallidaikurichi, and the relevant period of accounting is from 16th December 1942 to 15th December, 1943. For a decision of the two questions referred to us, which will be set out later, the following facts have to be stated: The asessee is the manager of a Hindu undivided family. He carried on a money-lending business in partnership with one Kasi Aiyar. The business of this partnership was stopped in 1931, but the firm was not dissolved and continued to realise the outstandings due to it. A separate set of books was being maintained in respect of the realisations and outgoings of the firm. One of its outstanding debts was that due from one Kidar Pillai Maracair on a mortgage. There were some collections towards this debt, and finally a decree was obtained by the firm against the debtor sometime in 1940. In execution of the decree, certain lands of the debtor were sold. On nth September, 1942, a sum of Rs. 16,395-14-10 was still due. On that date, the two partners decided to close the accounts of the partnership, and in pursuance of that decision, the assets of the partnership including this outstanding decree debt were divided equally between the two partners. The assessee entered a sum of Rs. 8,197 representing his half share of the balance due from this debtor, Kidar Pillai Maracair, in the books of his own separate money-lending business on 12 th September, 1942. The ledger folio was opened in the name of the debtor in which he was debited with the said amount. No fresh undertaking or document was, however, taken from the debtor evidently because there was a decree obtained against him. Subsequently there were both receipts as well as expenditure in respect of this debt during the accounting period. The total realisation subsequent to the 12th September, 1942, was about Rs. 4,664, and the amount credited in the assessee's account as and for his share was Rs. 2,332. On 5th October, 1943, the balance then due in respect of this debt, namely, Rs. 5,880, was written off as irrecoverable. In the assessment for the year 1944-45 the assessee claimed an allowance of this sum of Rs. 5,880 as a bad debt under Section 10(2)(xi) of the Income-tax Act. The Income-tax Officer disallowed the claim on the ground that it had no connection with the business which the assessee was carrying on in the previous year and that it was really a loss of the defunct partnership. On appeal, the Appellate Assistant Commissioner allowed the assessee's claim on the ground that the debt had been taken over by the assessee as part of his money-lending business and the loss was sustained in the separate business carried on by him. On appeal, the Appellate Tribunal confirmed the decision of the Appellate Assistant Commissioner. Thereupon, the Commissioner made an application under Section 66(1) for a reference to this Court, and the Tribunal has referred the following two questions for our decision:
1. Whether there is any material for the Tribunal's finding that the bad debt of Rs. 5,880 claimed by the assessee, arose in respect of a loan made in the ordinary course of his money-lending business, within the meaing of Section 10(2)(xi) of the Income-tax Act.
2. Whether, on the facts and in the circumstances of the case, the assessee's claim to write off the sum of Rs. 5,880 towards his share of the irrecoverable portion of the decree debt in the assessment year is admissible under Section 10(2)(xi) of the Income-tax Act?
Section 10(2)(xi) of the Act provides that in the computation of the profits and gains of any business, in the case of an assessee carrying on a banking or money-lending business, a legitimate allowance will be a sum in respect of a loan 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. The question, therefore, is whether there is any material for the Tribunal's finding that the sum of Rs. 5,880 which was written off was in respect of a loan made in the ordinary course of the money-lending business of the assessee. The contention of Mr. Rama Rao Sahib for the department is that a mere entry of a debt due to the defunct firm in the account of the new money-lending business of the assessee is not sufficient to make that debt a loan made in the ordinary course in the latter business. He contends that there should be something in the nature of a novatio to which the debtor is also a consenting party before it could be held in law that the debt of the old firm became a loan made by the new firm. No direct authority was cited in support of this contention. Two decisions of the Calcutta High Court which were cited to us, Bissendyal Doyaram, In re : 6ITR165(Cal) , and Chimanlal Rameshwar Lal v. Commissioner of Income-tax, Bengal (1940) I.T.R. 408, were long before the enactment of Section 10(2)(xi) of the Income-tax Act. It is, therefore, unnecessary to consider whether the propositions laid down in the two decisions are sound. On the other hand, there is a decision of a Bench of this Court in Commissioner of Income-tax, Madras v. Venkatasubbiah Chettiar (1946) I.T.R. 227. 1946 L.R. 63 IndAp 238 : I.L.R. 59 Mad. 716 the ratio decidendi of which, we think, applies to the present case. In that case, the assessee was the manager of a Hindu joint family carrying on a money-lending business. In 1933, a separate money-lending business carried on in partnership by the family with another person was dissolved and the family received as part of its share certain promissory notes executed by persons to whom the partnership had lent money. These debts were entered in the books of the family relating to its own money-lending business and the promissory notes were renewed from time to time. The interest paid to the family by the debtors was included in the profits of the family and assessed' to income-tax. In the year of account in that case, 1941-42, the assessee wrote off as irrecoverable three of such promissory note debts and claimed to deduct the amount from the assessable income under Section 10(2)(xi) of the Indian Income-tax -Act. It was held by Sir Lionel Leach, C.J., and Patanjali Sastri, J., that the amount was allowable as a deduction under that provision. In dealing with the contention of the learned Counsel for the Commissioner that these promissory note debts were not loans made in the ordinary course of the family's money-lending business but were really made in the course of the defunct partnership business, the learned Chief Justice observed thus:
It is true that the money was actually lent by the partnership but the loans were allotted to the family on the dissolution of the partnership and they became part of the assets of the family's own business. The promissory notes which were actually written off as irrecoverable were not the original promissory notes but they were promissory notes which had been renewed by the borrowers in favour of the assessee.
Having regard to the fact that the Income-tax authorities had since the dissolution regarded those loans as part of the family's business and taxed the family on the interest paid in respect of them, the learned Chief Justice expressed his surprise that the Department should contend that Clause (xi) did not apply. Though it is true that there were in that case certain facts the like of which are not to be found in the present case, we consider that the principle underlying the decision in that case applies equally to this case. Though in that case fresh promissory notes were executed by the borrowers in renewal of the original promissory notes presumably for purposes of limitation, we do not think that such renewals were necessary to serve as the basis of a finding that the old debts became part of the stock in trade of the new business. In the present case, the debt had ripened into a decree in favour of both the partners, and we fail to see what novation there could be after decree. There is no authority to support the contention on behalf of the Department that there should be a novation or an act by the debtor also, before it can be held that the old loans though treated as part of the stock in trade of the new business can be held to be loans made in the ordinary course of the new business. The observations of the Judicial Committee in Arunachalam Chettiar v. Commissioner of Income-tax, Madras (1936) 71 M.L.J. 772 : (1936) I.T.R. 173 : 1936 L.R. 63 IndAp 238 : I.L.R. 59 Mad. 716 must be read in the proper context and having regard to the facts of that case. In that case, there were two different businesses, one a cotton business and the other a money-lending business. The reference to the element of novation at page 183 of the report has nothing whatever to do with the contention now pressed before us by the learned Counsel for the Department.
2. It has not been suggested in this case that the entry made in the account of the assessee's money-lending business on the 12th September, 1942, was not a genuine entry or that it was an entry made mala fide for the purpose of claiming a deduction by way of an irrecoverable debt. Any such suggestion would not have been accepted by us in view of the fact that subsequent to the date of that entry there were substantial realisations. On these facts, it cannot be said that there is no material for the Tribunal's finding that the bad debt of Rs. 5,880 arose in respect of a loan made in the ordinary course of the assessee's money-lending business. The answer to the first question must be in the affirmative.
3. In our opinion the answer to the second question must also be in the affirmative. On the facts already narrated, it is clear that the debt became irrecoverable in the accounting period. It is not as if subsequent to the entry on 12th September, 1942, there was no attempt to make further realistions. As already mentioned, there were such further realisations. The fact that the mortgaged lands had been sold away need not necessarily mean that the assessee had at the time of making the entry no hope of realising any further amounts towards the debt. The finding of the Appellate Assistant Commissioner and the Tribunal that the debt became bad in the year of account is correct, and the assessee was, therefore, entitled to an allowance of the sum of Rs. 5,880 under Section 10(2)(xi) of the Income-tax Act.
4. The answers to both the questions will be in the affirmative. The Commissioner will pay the costs of this petition to the respondent, Rs. 250.