(Judgment of the Court was delivered by the Honourable the Chief Justice).
The assessee carried on a money-lending business in Rangoon in partnership with the S.P.K.A. firm. The firm composed of the assessee and the S.P.K.A. firm was known as the S.P.K.A.A.M. firm. On the March 14, 1929, the S.P.K.A.A.M. firm and another Chettiar firm carrying on business in Rangoon, styled the O.N.R.M.M. firm, entered into a lease of a building in Mogul Street, Rangoon, at a rent of Rs. 3,000 per month. Chettiars carrying on business in Rangoon all had their offices in Mogul Street. The lessees did not require the whole of the premises for their respective business and their intention was to sub-let parts of the building to other Chettiars. This they did, but the sub-lessees did not pay in full what was due from them by way of rent. The lessees themselves disputed the validity of the lease with their landlord and the case was carried to the Privy Council. The Privy Council held that the lease was valid and therefore the lessees were responsible for the rent.
On the January 2, 1935, after the Judicial Committee had given its decision, the lessees entered into a compromise with their landlord under which the remainder of the term of the lease was to be cancelled and the lessees were to pay to him the sum of Rs. 1,98,650 by way of rent, compensation and damages. Each of the sub-lessees had agreed to pay a proportion of the rent and to reimburse and indemnify the lessees in respect of any liability arising under the lease. The S.P.K.A.A.M. firm paid the landlord the Rs. 1,98,650 between January 1935 to June 1936 and then dissolved.
In 1937 the assessee and the S.P.K.A. firm filed a suit in the Rangoon High Court against the sub-lessees and their co-lessee, the O.N.R.M.M. firm, to recover their proportions of the Rs. 1,98,650. The O.N.R.M.M. firm was in fact liable to the extent of one half. In the year of account (1937-38) the plaintiffs settled with some of the defendants and the settlements resulted in a loss of Rs. 45,424. The loss was apportioned between the S.P.K.A. firm and the assessee, and the assessee wrote off in his books the sum of Rs. 22,712 being half of the total loss. In addition he treated the sum of Rs. 1,335 spent in the litigation as business expenses.
The Income-tax authorities refused to recognise these sums as being legitimate deductions in calculating the amount of profits for that year. The assessee objected and asked the Commissioner of Income-tax to state a case. He refused to do so, but was directed by this Court to make this reference under Section 66(3) of the Indian Income-tax Act. The question referred reads as follows :-
'Whether the petitioner was not entitled on the facts and in the circumstances of the case to claim a deduction of Rs. 22,712 and Rs. 1,335 in the computation of the profits of his Rangoon business as allowable business loss or bad debts properly written off and whether the disallowance of the claim by the Income-tax authorities as capital loss not connected with the petitioners money-lending business was legal or supported by any materials on record.'
The case has now been fully argued and we are of the opinion that the question should be answered against the assessee. The entering not a lease of a large building in Mogul Street was no part of the assessees business as a money-lender. He and his partner entered into the lease in the hope that they would be able to recover from their sub-lessees most of the rent to be paid to the landlord. This was a transaction which ws entirely outside the business of money-lending and this being the case the loss suffered could not be treated as a business loss. As it was not business loss it could only be regarded as a capital loss. The fact that the assessee chose to write off the amount in the books kept by him in connection with his money-lending business does not make any difference.
The question referred will be answered accordingly. The assessee must pay the costs, Rs. 250.
Reference answered accordingly.