(Judgment of the Court was delivered by the Honourable the Chief Justice.)
The managing partner of the assessee firm formerly carried on a money-lending business in partnership with his brother at Penang under the vilasam of A. Y. AR. at the end of 1939 the A. Y. AR. firm was dissolved and Muthukaruppan Chettiar started a new business at Penang under the vilasam of AR. M. M. He had four sons, who were joint with him and the new business belonged to the family. While the A. Y. AR. firm was carrying on business it advanced the sum of $ 5,000 to a customer of the firm on a second mortgage of immovable property. It became apparent that the chances of recovering this debt were very doubtful and succeeding agents of the firm refused to take it over at the face value. In consequence it was written down in the books of the A. Y. AR. firm to $ 5. When the A. Y. AR. partnership was dissolved, each brother took a half share of the assets and undertook to pay half of the liabilities. Under this arrangement, Muthukaruppan Chettiar became entitled to a half share of the second mortgage and when he started the new business with his sons it was entered in the books at the figure of $ 2.50.
The new business started on the 13th April 1940. The year of account with which this case is concerned commenced on that date. Muthukaruppan Chettiar, as the manage of the AR. M. M. firm, contended that the calculating the profits of the firm for 1940-41 it was entitled to deduct as a trade loss the sum of $ 2,500, being half of the sum of $ 5,000 which the A. Y. AR. firm had lent on the second mortgage. The Income-tax Office rejected this contention, but he allowed a deduction of $ 30, made up of the $ 2.50 and expenses which the firm had incurred in connection with the debt. The assessee appealed to the Appellate Assistant Commissioner who held that the firm was entitled to deduct $ 2,524, being half of the $ 5,000, plus expenses.
The Income-tax Commissioner through the Income-tax Officer contested the validity of this order before the Income-tax Appellate Tribunal, Calcutta Bench. The Tribunal held that the Commissioner was not entitled to raise the question because it had been put forward at a late stage and the Income-tax Officer had decided that the assessee was entitled to a deduction, although he had limited it to $ 30. The Tribunal did, however, hear the appeal and it decided it against the Income-tax authorities. At the request of the Commissioner the Tribunal has referred to this Court for decision the following questions :-
'(1) Whether in the circumstances of the case, it was open to the Income-tax Officer to appeal to the Appellate Tribunal under Section 33 (2) on the ground that no part of the bad debt was an admissible deduction under the Income-tax Act ?
(2) Whether in the circumstances of the case, the respondent firm is entitled in law to the allowance of the claim of $ 2,524 as a deduction from its income from business ?'
We consider that the Tribunal erred in holding that the Income-tax Officer was not entitled to prefer the appeal because the contention which was raised therein was belated and the Income-tax Office had agreed in principle to a deduction. The appeal was preferred on the instructions of the Commissioner who had the right to raise the question of the validity of the Appellate Assistant Commissioners order. The appeal was heard after full notice to the assessee, who was in no way taken by surprise. It involved a question of law and one which called for decision.
We are also of opinion that the Appellate Commissioner and the Tribunal erred in holding that the assessee was entitled to a deduction of $ 2,524. The assessee cannot be entitled to this deduction unless it represents a trading loss incurred during the year of account. It must be borne in mind that the assessee firm is an entirely different entity from the A. Y. AR. firm. In deciding what was the assessable income of the AR. M. M. firm during the year of account regard can only be had to what it started with and what was the position at the end of the period. One of its assets was a half share of this second mortgage. We are not concerned with the figure at which it stood in the A. Y. AR. firms books or with the figure at which the half share stood in the books of the assessee firm. Its real value on the 13th April 1940 must be ascertained. Now it has turned out that it had then no value. The record discloses that the first mortgagee took stops to bring the property to sale and the proceeds were not sufficient to pay off his prior loan. It is true that we have got to look at subsequent events to see what the value was on the 13th April 1940; but subsequent events clearly indicate that its value was nil. In these circumstances, no loss was sustained by the assessee firm during the year of account in this connection.
In this view it is unnecessary to discuss Chimanlal Rameswarlal v. Commissioner of Income-tax and Commissioner of Income-tax, Burma v. P. L. S. M. Firm which were quoted to us in the course of the argument.
The answer we give to the second question is that the assessee is not entitled to a deduction of the sum of $ 2,524.
As the reference has succeeded, the respondent must pay the costs, Rs. 250.
Reference answered accordingly.