SRINIVASAN J. - The assessee is a Hindu undivided family carrying on a money-lending business at Madras and at Muar in the Federated Malay States. Through its karta, the assessee was a partner in a firm, each of the partners of which had, under the terms of the partnership deed, to contribute a capital of Rs. 10,000. The partnership deed further provided that the partners could advance moneys to the partnership to the extent necessary, which was to bear interest at 6 per cent. per annum. The money-lending business at Muar was remitting moneys from time to time by bank drafts. These drafts were endorsed in favour of the partnership firm, and the amounts were credited to the loan account of the assessee. These were treated as advances to the partnership. In respect of these advances the partnership firm paid interest, and this quantum of interest was taxed as income from the money-lending business of the assessee in the earlier assessment years.
The assessee had another account, a current account, will the firm. In this account were recorded amounts borrowed by the assessee. The firm, in its turn, charged interest on such borrowals, and the payment of this interest by the assessee to the firm, being in respect of moneys borrowed for the purposes of the business of the assessee, was allowed as deductions in the computation of the assessees income. The assessee also maintained a separate account in respect of the profits of the partnership.
The firm was dissolved with effect from July 15, 1954. On the date of the dissolution, there was a credit of Rs. 2,77,421 in favour of the assessee, representing amounts advanced by the assessee to the firm. The current account referred to showed a debit against the assessee of Rs. 1,98,447 being the total of withdrawals by the assessee, together with interest. The net credit balance in favour of the assessee was thus Rs. 78,974.
As part of the arrangement of dissolution, the assessee became entitled to certain amounts. Certain liabilities were also allotted to it. One of these liabilities was a sum of Rs. 26,600 which the assessee had to discharge. In the deed of dissolution, it was agreed that one of the other partners. Thyagarajan Chettiar, had to pay a sum of Rs. 23,500 to the assessee. Out of this amount, the assessee realised a sum of Rs. 11,500 and the balance of Rs. 12,000 was not recovered.
The three sums referred to, Rs. 78,974, Rs. 26,600 and Rs. 12,000, were claimed as bad debts in the return of the income of the assessee for the assessment year 1956-57. The Income-tax Officer held these to be capital loss arising out of the dissolution of the firm. On appeal, the Appellate Assistant Commissioner took the view that the first of these items really represented unrealisable advances made by the assessee in the course of its money-lending business. He pointed out that in all the previous years, such advances had been treated separately from the profits arising from the partnership. He was satisfied that the sum of Rs. 78,974 could be allowed as a bad debt. The other two items were, however, disallowed, the appellate authority agreeing with the view of the Income-tax Officer that they represented capital losses.
There were appeals both by the department and the assessee before the Income-tax Appellate Tribunal. The Tribunal accepted the contention of the department that the advances represented by moneys received from the Muar money-lending business and transferred to the firms accounts as loans were not accompanied by any suitable money-lending instruments and that the acceptance of the claim of the assessee in earlier years that it advanced moneys as a money-lender or the assessment to tax of the interest income in respect of these advances was not relevant. The Tribunal accordingly took the view that the advances only represented an increase of the capital put in by the assessee into the partnership. The result was that the allowance of Rs. 78,974 granted by the Appellate Assistant Commissioner was set aside. The assessees appeals with regard to the two other sums also failed.
On the application of the assessee to this court under section 66(2) of the Act, the Tribunal has submitted a statement of the case and referred the following question : 'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the claim of the assessee to the following three items : (1) Rs. 78,974, (2) Rs. 26,600 and (3) Rs. 12,000, which were claimed as bad debts of his money-lending business, which he was entitled to write off and claim as deduction ?', for the determination of this court.
In its appellate order, in dealing with the first of the amounts, the Tribunal stated thus :
'The assessee-family, no doubt, is a money-lender at Muar and at Madras. It is, however, not in this capacity that the Muar business had advanced various amounts to the firm. It is only on the instructions of the assessee that the remittances had been made. None of these remittances is on the basis of any money-lending documents. Interest on these remittances has also not been adjusted in the books of Muar from year to year. All these clearly show that when the advances were made to the firm, they were made by the assessee only as a partner towards the additions working capital that it had stipulated in the deed to advances if and when found necessary. If these advances are lost, the loss is only capital... The Appellate Assistant Commissioner has ignored these fundamental requisites of a money-lending advance and has rested his decision mainly on the money-lending status of the assessee. He has been largely influenced in reaching this decision by the earlier assessment of interest paid and received on the assessees accounts with the firm. It may even be that in one of the earlier years 1952-53, the Appellate Assistant Commissioner had held these interest items as relating to the money-lending activities. The assessee can derive no support from such a decision for purpose of its instant claim. This aspect, to our mind, is the least important. It would have made no difference to the assessments of the assessee largely whether the interest was assessed as part of the firms profits or its money-lending...'
On the statement of facts adverted to in the earlier parts of this judgment as well as in the extract of the Tribunals order, we are by no means sure whether the inferences made by the Income-tax Appellate Tribunal are wholly justified. That the assessee was carrying on money-lending transactions at Madras also is not denied. When it received remittances from Muar, they were obviously assets which the assessee in its capacity as a business house doing business in Madras could utilise in any manner. It did so by investing the moneys in the partnership not as additional capital but specifically as advances made to the firm. How in these circumstances the absence of any 'money-lending documents' could affect the position, we are unable to see. It is not denied by the department and the Tribunal that during the past several years these advances have been dealt with in the account books of the partnership as advances and not as additional capital furnished by the assessee. The Tribunal may be right in its observation that the made of assessment that was done in any one year may not be binding in a succeeding year. But, where it has been shown that these transactions have been consistently looked upon in a particular manner, both by the assessee and the department, we would require some additional material before any change in the view could be accepted as valid.
The deed of partnership has been produced before us. It provides that each of the partners should contribute an initial capital of Rs. 10,000. Clause 4 specifies that the working capital shall be the amount of Rs. 30,000 there being three partners. It proceeds :
'Any further sum needed for the business shall be put in by all or any of the parties hereto and such further investment will carry interest at six per cent. per annum and such interest shall be paid out to the investing partner from and out of the profits of the firm in addition to his share in the profits of the business. Such further investments can be made by any of the parties hereto up to rupees three lakhs individually.'
Clause 5 provides that 'the parties hereto shall divide the profits or losses equally.' This clause has necessarily relevance only to the profits remaining after any interest had been paid to the partner who had put in any amounts by virtue of clause 4. The relevant clause of the partnership deed clearly distinguished between the capital put in by a partner and any further advances made by the partner. It has to be noticed that the firm was constituted for the purpose of carrying on a business in exports and imports and quite obviously it did not need any large amount as fixed capital. Such sums as the firm might on occasions require could be advanced by any of the partners on the terms as provided in the instrument. When the document in question specifically restricts the capital to a sum of Rs. 10,000 by each partner, we are unable to see how the Tribunal is justified in looking upon the advances as additional working capital. Obviously, if the partners could contribute further amounts as capital, the ratio of division of the profits would naturally depend upon the quantum of capital which each partner puts in. The document however, clearly states that the profits or losses shall be divided equally. The transaction of the several previous years between the firm and the assessee clearly establish that the advances made by the assessee over and above the initial capital of Rs. 10,000 was regarded by both sides as only advances bearing interest at 6 per cent. per annum and not as capital on foot of which a division of profits was to be effected. Why in the face of this consistent course of conduct the Tribunal should think it necessary to ask for any separate money-landing instruments is not clear.
In deoniti Prasad Singh v. Commissioner of Income-tax : 15ITR165(Patna) . was considered a case of a zamindar who took bonds and promissory notes form his tenants in lien of arrears of agricultural rents. The assessee zamindar was also a money-lender. In the relevant year, the department disallowed the claim of the assessee for deduction of such debts as had become bad and irrecoverable. It was found that in the past years the department has treated the bonds and promissory notes as investments of the assessees money-lending business and had taxed the accrued interest under money-lending. The learned judges of the Patna High Court observe thus at page 174 :
'The income-tax department for a number of years in the past have treated these investments-to use an expression which has been adopted by the Income-tax Officer in various years referred to above-as being part of the money-lending business of this particular assessee; the assessee was taxed on a portion of the interest which he showed as having accrued due to him from these investments and in one year as much as Rs. 10,000 was added on to the assessable income under this head. It may be that this was a result of a loose idea or an inaccurate appreciation of the legal position, but this defect was common both to the assessee and to the income-tax department. The department cannot be allowed to blow hot and cold at the same time. They cannot be allowed to treat the investments as a part of money-lending transaction of the assessee when it suits them, and when it comes to the question of disallowance of irrecoverable loans out of these very transaction they cannot be permitted to take up the position that these were not a part of the money-lending transaction of the assessee. Upon the facts of this particular case it must be held that the these investments are a part of the money-lending business of this assessee and, therefore, his claim to have a deduction for the irrecoverable loans must be allowed.'
Reliance has been placed upon his decision by the learned counsel for the assessee and we must say that this decision lends considerable support to the contention advanced. Mr. Narayanaswami, learned counsel for the assessee, contends, and rightly in our opinion, that the assessee has two capacities. One is that it is a money-lender and the other a partner of the firm. Though as a partner it may possess other rights and be subject to other liabilities, it is not prevented in the course of the money-lending transactions to advance moneys to the partnership. Even the partnership law recognises this position. Section 13(d) of the Partnership Act provides that 'subject to contract between the partners, a partner making, for purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe is entitled to interest thereon at the rate of six per cent. per annum.' Under section 48 of the Act, the mode off settlement of accounts between partners is laid down. It postulates that on the dissolution of the firm, the assets of the firm shall be applied in the following manner : (1) in paying debts of the firm to third parties; (2) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (3) in paying each partner rateably what is due to him on account of capital; and (4) the residue, if any, be divided among the [partners in the proportions in which they were entitled to share the profits. This provision of law accordingly distinguishes the capacity of a partner making advances to the firm over and above the capital, which he is called upon to subscribed nd give him the preferential right to be paid those advances, and ranks such right only next in order to the debts of the firm top third parties. While it may well be that in respect of such advances made to a firm, a partner may have no separate right of suit except to have his claim in that regard settled as part of the winding-up or dissolution, his right to be treated as a creditors of the firm is not denied. The very fact that these advances are to be paid before the assets of the firm are divided among the partners shows that even the partnership law recognises the distinction.
Mr. Balasubrahmanyan, learned counsel for the department, urges that the advances by a partner cannot be treated as loans by a money-lender and such advances could not be said to have been made in the course of the business of the assessee as a money lender. His contention is that the interest in the partnership as a partner is different from that of a money-lender, and that being so, these transactions represented by the advances cannot be treated as transaction entered into in the course of the business by a money-lender. Learned counsel accordingly claims that when a partner advances moneys to the firm, he cannot be deemed to do so as a money-lender. This line of argument ignores all the attendant features which we have adverted to. If the assessee could have advanced these amounts in his capacity as a money-lender to a third party and if these amounts had become unrealisable, it could have demanded deduction under section 10(2)(xi) of the Act; we see nothing in principle which justifies denial of the claim solely for the reason that the money was lent to the partnership of which the assessee was a partner. It is true that the assessee was concerned with furthering the interests of the partnership and in order to enable the partnership to make profits, advanced these moneys. If the assessee was not carrying on business also as a money-lender, the position would be that the loss of this amount would represent only a loss of capital. But when even the partnership law recognises the distinction between capital and advances made by a partner, we can find no justification for treating such advances only as additional capital furnished by a partner.
That the mode of treatment is of importance in construing the nature of the transaction has been indicated in two decisions of this court, to which one of us was a party : Kannappa Chettiar v. Commissioner of Income-tax (1) : 46ITR576(Mad) . and Murugappa Chettiar v. Commissioner of Income-tax (2) : 46ITR797(Mad) . In the present case, the mode of treatment is abundantly clear, in that the interest incomes on these advances were submitted to assessment as income from the money-lending business in the past years and accepted as such by the department. We are accordingly satisfied that the Tribunal erred in law in holding that this sum of Rs. 78,974 cannot be allowed as a deduction under section 10(2)(xi) of the Act.
The second item of Rs. 20,600 stands on a separate footing. This was admittedly an item of liability of the firm which was allotted to the assessee. This liability arose as an incident of the partnership transaction and we are not convinced that any ground exist for holding that it had been converted into a money-lending outstanding which became unrealisable. We agree with the view taken by the Tribunals below that this represents a capital loss and cannot be allowed.
In the case of the last item of Rs. 12,000 the position is slightly confused. On of the terms of the agreement entered into at the time of dissolution was that a partner, Thyagarajan Chettiar, owed to the firm at the time of dissolution a sum of Rs. 75,557. On dissolution of the firm, he took over the firm and was referred as a continuing partner in the deed of dissolution. The assessee was termed the second retiring partner, and clause 12(A) stated thus :
'Towards the amount of Rs. 75,557-1-1 shown as due by the continuing partner, it is mutually agreed between him and the other partners that he shall pay the second retiring partner a consolidated amount of Rs. 56,500 only, the balance of Rs. 19,057-1-1 to be borne solely by the second retiring partner.
(B) The continuing partner shall discharge the liabilities listed in Schedule E aggregating to Rs. 36,000 and shall execute a demand promissory note for the balance of Rs. 22,500 inclusive of Rs. 3,000 referred to in clause (3), in favour of the second retiring partner, carrying interest at 6 per cent. per annum.'
It appears from these clauses, therefore, that out of the sum of Rs. 75,557 payable by the continuing partner to the assessee, the latter gave up Rs. 19,057. In respect of the balance of Rs. 56,500 the continuing partner undertook to discharge certain liabilities, which presumably the assessee would otherwise have had to discharge. The agreement resulted in the continuing partner having to pay a sum of Rs. 23,500 to the assessee and in respect of this amount he executed a promissory note. The assessees contention is that this asset was taken over by its money-lending business and since it realised only a sum of Rs. 11,000 and odd and the balance of Rs. 12,000 became irrecoverable, it is entitled to write off this sum under section 10(2)(xi), and in support of the claim in this regard Mr. Narayanaswami, learned counsel for the assessee, relied upon a decision of this court in Commissioner of Income-tax v. Venkatasubbiah Chetty (1) : 14ITR227(Mad) . In that case, the assessee, a Hindu undivided family, was carrying on a money-lending business. It had earlier carried on a separate money-lending business in partnership with another person. That was dissolved and the family received as part of its share certain promissory notes executed by persons to whom the partnership had lent moneys. These debts were taken over by the money-lending concern of the family and entered in its books and the promissory notes were being renewed from time to time. The interest received by the family on these promissory notes had been included in the profits and assessed to income-tax. When the assessee wrote off as irrecoverable three debts, the department disallowed the claim under section 10(2)(xi). On a reference, this court held :
'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. Inasmuch as the income-tax authorities have since the dissolution regarded these loans as being part of the familys business and taxed the family on the interest paid in respect of them, it is rather surprising that they should now contend that clause (xi) does not apply. Since 1933 these loans have been regarded as having been made by the assessee in the ordinary course of its business.'
Accordingly the claim of the assessee was allowed.
It would be noticed as a point of distinction between the facts of that case and the present case that even at its inception, the debt dealt with in that decision was a money-lending debt, the advances having been made by the partnership of which the assessee was a partner. The assessee in that case was thus carrying on two money-lending business, l one in its individual capacity and the other as a member of a partnership. The nature of the debt was accordingly one of money-lending right through. In the present case, however, if the assessee had not been carrying on a money-lending business, quite obviously the sum of Rs. 75,000 and odd, which the assessee had to receive from the continuing partner if not realised, would have represented a capital loss. Even by the terms of the deed of dissolution, that part of Rs. 19,000 and odd which the assessee gave up, was undoubtedly a capital loss. The other part represented by all the liabilities to the extent of Rs. 36,000, which had been allotted to the assessee but which the continuing partner undertook to pay would have resulted only in a capital loss in the even of the continuing partner failing to pay and the assessee was called upon to discharge these liabilities. If we look at the facts in this setting, the mere circumstance that the assessee was carrying on a money-lending business is all that is relied upon in support of the plea that the balance, out of Rs. 23,500 became part of the money-lending transactions of the assessee, and the irrecoverable part, that is, Rs. 12,000 should be treated as one coming within the scope of section 10(2)(xi). We are not satisfied that the claim of the assessee can be accepted in the light of these features.
It follows that the assessee succeeds in respect of the first item and fails in regard to the other two. The question is answered accordingly. In the circumstances of the case, since the assessee has failed in part, we make no order as to costs.
Reference answered accordingly.