SRINIVASAN J. - The assessee firm is a partnership carrying on money-lending business in India and at various places in the Federated Malay States. The father of the partners, who are all brother, died on March 9, 1943, and on his death, estate duty became payable to the Malayan Government. By an agreement entered into between the assessee firm and the Government of Malaya, the dues to the Government on this head were agreed to be paid in monthly instalments, with interest on the unpaid balances. During the year ended April 13, 1951, relevant to the assessment year 1951-52, a total debit of 12,719 dollars was made in respect of the interest payable on the balance of estate duty. This payment was claimed by the assessee firm as business expense relevant to the various branches in the Federated Malay States. The Income-tax Officer disallowed this claim and an appeal to the Appellate Assistant Commissioner also failed. In the further appeal to the Tribunal, the claim was made as an interest payment on capital borrowed for business purpose. This contention was rejected by the Tribunal and on this head, a question has been referred for the decision of this court.
On the passing of the Debtor and Creditor Ordinance by the Malayan Government after the reoccupation, certain liabilities which had been paid off in terms of the Japanese currency during the period of occupation were revived. In the discharge of such obligations, the assessee firm paid during the previous year relevant to the assessment year 1951-52, a total of 66,541 dollars. The Appellate Tribunal purported to disallow this claim. The relevant contention on this head included a claim by the assessee that in so far as the revival of the outstandings was concerned, the principle amounts should not be brought into in the computation as profits assessable during the years to which such realisation related, that is, the assessment years 1950-51 and 1955-56.
In respect of the above contentions, on the application of the assessee, the following questions stand referred under section 66(1) of the Act.
'Whether the interest of 12,719 dollars paid on the unpaid Malayan estate duty on the estate of the father of the partners of the assessee firm is allowance in whole or in part as a deduction in the assessment of 1951-52 under any of the provisions of the Income-tax Act?
Whether the payments of Rs. 66,541 dollars to the creditors in full discharge of their claims under the Debtor and Creditor Ordinance is deductible from the assessment of 1951-52 under any of the provisions of the Income-tax Act?
Whether the principal amounts as sustained in the realisation from
debtors under the Debtor and Creditor Ordinance are assessable as profits of the money-lending business of the assessee?'
T.C. No. 121 of 1962 raises two questions which were referred under section 66(2) of the Act. How they arise may be briefly stated. It appears that in realisation of an outstanding of 23,329 dollars, three tin mines were taken over by the assessee. This was in 1930. The first of these mines was worked by the assessee and became exhausted in 1937 and the second in 1940. During the period when these mines yielded income, that income had been submitted for assessment in all the preceding years. The last of the mines ceased to work by the end of July, 1950, during the previous year relevant to the assessment year 1951-52. The assessee claimed that it was entitled to write off the original amount advanced and purported to so write it off in this assessment year. The Tribunal took the view that the acquisition of the mines represented a capital asset yielding income and that it was not its stock-in-trade. In this regard, the question that calls for our consideration i :
'Whether on the facts and in the circumstances of the case, the decision of the Tribunal that the sum of 23,329 dollars cannot be deducted from the income of the applicant assessable under section 10 is correct in law?'
A further question was also referred. It related to certain investments made by three of the partners in their individual capacity in the firm. Interest was allowed upon there investments of deposits at 9 per cent. Before the Income-tax Officer, however, it was established that the prevailing rate of interest paid to outside depositors, that is to say, to persons who were not partners, was only 2 13/16 per cent. The Income-tax Officer disallowed the payment of interest in excess of this percentage and this disallowance was ultimately upheld by the Tribunal. The question canvassing the correctness of this disallowance i :
'Whether on the facts and in the circumstances of the case, the conclusion that there is material or evidence to hold that the payment of interest at 9 per cent. per annum on the amounts advanced by three of the partners in their individual right is not an allowable deduction is correct in law?'
Taking the first question in T.C. No. 160 of 1960, it seems to us that the interest payment on the unpaid estate duty can hardly be brought within the scope of section 10(2)(iii) as interest on borrowed capital or under section 10(2)(xv). These are the only two grounds upon which the matter was argued before us. That the estate duty payable was statutory levy and has no connection with the carrying on of any business hardly requires to be stated. Such duty is payable on the passing of property on the death of person. Whether or not such property consists of business makes no difference to the validity of the demand for estate duty. It was vaguely suggested as the reason for invoking either of these two above provisions that because the assessee firm had to sell or mortgage its business interests in order to pay the interest charge, and the existence of the charge jeopardises the carrying on of the business, the interest payment must be regarded as an item of expenditure necessary for the carrying on the business. It seems to us that this argument cannot possibly be maintained. It such an argument can be accepted, any purpose for which as assessee encumbers his business and raises a loan can then be regarded as one which affects his business and that therefore, an interest paid on such loan borrowed should be brought within the scope of either section 10(2)(iii) or section 10(2)(xv). It is undeniable that no money was borrowed as a capital, least of all for the business, which is the only head of income which is being brought to tax. Nor can it be said that a liability which did not arise out of and which was not connected with the business, should be regarded as an expenditure wholly and exclusively devoted to the carrying on of the business solely for the reason that the money required to discharge the liability was taken out of the business. Mr. Krishnamurthi, learned counsel for the assessee, apparently places some reliance upon certain observations in Ramaswami Ayyangar v. Commissioner of Income-tax. In that case also, death duty was payable on the properties left by deceased person under the Ceylon Ordinance. If such duty was not paid within a year of his death, penal interest was payable on the amount of duty. The assessee who was carrying on money-lending business, claimed that in the computation of his business income, he was entitled to deduct a certain sum representing interest paid to the Ceylon Government on the unpaid death duty. The claim was based alternatively under section 10(2)(iii) or section 10(2)(xv). The learned judges held against the claim. Satyanarayana Rao J. dealing with the applicability of section 10(2)(xv) observe :
'...... but in order to claim the deduction, the expenditure must have been wholly and exclusively incurred or expended for the purpose of such business. In the present case, the estate duty was payable not only in respect of the business, viz., money-lending business, but also in respect of other properties of the assessee in Ceylon. As was rightly contended by Mr. Ramarao Sahib on behalf of the Income-tax Commissioner, it is composite payment and such composite payment is not within the purview of the clause. The language of the clause is plain and does not admit much of an argument to see that the expenditure in this case is not an exclusive expenditure for the purpose of the business end, therefore, clause (xv) has no application.'
It was argued that in that case there were what may be called non-business properties in respect of which also estate duty was payable, while in this case the only properties were business properties; and that on the basis of these observations, if it is not a case of a composite payment including business and non-business properties, the decision would justify the allowance under section 10(2)(xv). We are not disposed to agree. Since it was clearly established that it was a composite payment in that case and the expenditure was not wholly and exclusively for the purpose of the business, the matter was dealt with from that angle. The learned judge cannot be understood as having stated that in the case of the death duty in respect of business properties alone, in interest payment on unpaid death duty would be an expenditure relevant to the business at all. This point is made would be an expenditure relevant to the business at all. This point is made clear by the observations of Viswanatha Sastri J. at page 16 :
'In the present case, this sum of Rs. 10,00,000 is not proved to have been expended or laid out wholly and exclusively for the purpose of this money-lending business. It was exigible from the entire estate of a deceased person by force of a statute. The payment of death as well as interest on the unpaid arrears of death duty is not necessitated by or connected with carrying on of the money-lending business of the assessee. The death duty is a capital charge levied on all the assets of a deceased person irrespective of the fact whether he was conducting a business or practising a profession or vocation. It is not like a licence fee which has to be paid to enable a person to conduct a particular business or follow a profession or vocation. It is levied not merely on the business assets of a person but on the entire assets consisting of land, houses and other properties. It can not be said, therefore, that the payment of death duty is an expenditure which is incurred for the purpose of the business, much less an expenditure incurred wholly and exclusively for that purpose.'
It follows, therefore, that this question has to be answered against the assessee.
Learned counsel on both sides agree that the second and third questions have to be answered in the light of the decision in Muthiah Chettiar v. Commissioner of Income-tax. The principle that is applicable is summarised in the headnote, which reads thu :
'... to the extent the Malayan Ordinance declared that there had been no valid discharge of debts, the original debts were revived, and what the Ordinance did was to restore the original to the extent that it abridged or abrogated the discharge that had been made in Japanese currency. If followed, therefore, that payments subsequently made in discharge of the debt that was thus resuscitated would have to be treated as partaking of the same character as the original debt. If the original debt revived by the Ordinance comprised only the principal, the repayment received would have to be regarded as a receipt on account of the principle. If it comprised only interest, the re-payment would have to be regarded as a receipt on account of interest. If the original debt comprised both principal and interest and was paid in full, there would have been a receipt on account of both principal and interest. But, if the re-payment was only partial, then there would be a receipt on account of principal or interest according as the amount has been lawfully appropriated to one head or the other.'
It is not denied that in view of this decision, question No. 2 has to be answered in favour of the department and question No. 3 in favour of the assessee.
T.C. No. 121 of 1962.
Learned counsel for the assessee does not press the second question. It is therefore not answered.
It is not in dispute that the assessee is a money-lending firm and in lieu of debt owed to it, it took over the three items of grants for tin mine leases on August 22, 1930. These mine leases were renewable every ten years. But the first of these mines ceased to yield in 1937 and the second in 1940. On the lapse of the lease periods of these two leases, they were accordingly not renewed by the assessee. The third mine, Grant No. 2149, was continued to be worked and it was apparently renewed in or about 1940 or 1941. It is common ground that this mine stopped working in July 1950, that is, during the previous year relevant to the assessment year 1951-52. The item of debt in lieu of which these three mines had been taken over was the amount of 23,329 dollars. The assessee claimed it was entitled to write off this amount in its return for this assessment year. The Income-tax Officer took the view that the accounts showed that the mines were being written down in value year after year and that such written down value of the mines at 2,000 dollars in the year of account indicated that there had been previous occasions of writing-off of the balance. It was pointed out by the assessee that in addition to the three mines which were taken over in lieu of the outstanding debt, the assessee purchased two more grant in 1937 and 1940, that a common account was maintained in respect of the five leases and that the sum of 2,000 dollars shown as the valuation of the mines in its account related to one of the mines which had been purchased and which was not taken in settlement of the outstanding. Though the Appellate Assistant Commissioner was not prepared to accept this contention, the Tribunal did not deny that to be the factual position. But it took the view that the assessees claim in this regard was belated as the mines were working till or in the year of account; but the Tribunal did not consider to what extent the value of the last of the mine leases, which mine ceased to work only in the year of account, could be written off.
There is no doubt that these mines must be regarded as the substituted stock-in-trade of the money-lending business. But the short question that has been debated before us is whether when two at least of the mines ceased to work in the years 1937 and 1940 respectively, the assessee should not have computed the loss and adjusted the loss in the computation of the income for those relevant years. Learned counsel for the assessee relies upon a decision of the Rangoon High Court in Commissioner of Income-tax v. A.K.A.R. Family. In that case, the assessee, a Hindu undivided family, carrying on a money-lending business, took over certain lands and a house in a settlement of a debt due to it. The lands were sold at different times and the assessee who was keeping an account of these sales claimed in the account year when the last sale took place a certain sum as loss on the whole transaction. The income-tax authorities disallowed the claim holding that in each year when a part of the property was sold, the assessee should have made in estimate of his loss on that particular sale and should have made the claim in that year. The view was, however, taken by the Rangoon High Court that until such a transaction had been completed, it could not be known what the loss would be. It is true that this decision appears to lend some colour to the argument advanced on behalf of the assessee. But we are not satisfied that it can be applied to the facts of this case. Here was an admittedly wasting which had been taken in lieu of the outstanding. The income from these tin mines was being submitted for assessment year after year and where an asset or any part of it which represented the stock-in-trade became lost, the loss is referable to that particular year in which it occurred. A Bench of this court to which one of us was a party had in T.C. No. 96/1954 occasion to refer to the case decided by the Rangoon High Court cited above and pointed out that in that case the assessee did not earn a profit at any stage of the transaction and, therefore, did not bring the transaction to the profit and loss account in any year previous to the accounting year. In yet another decision, T.C. 168 of 1961 (Kalayappa Chettiar v. Commissioner of Income-tax) to which also one of us was a party, it was held that where property was acquired by a money-lending business in lieu of outstandings and such property was sold piecemeal, unless it was a case where the profit or the loss could not be computed at the time of the sale, the assessment of the profit or the adjustment of the loss could not be postponed till after the entirety of the property was sold.
It seems to us that in the circumstances of this case where three mines leases were taken by the assessee which ceased to function on various dates, the proportionate valuation of each of these mine leases could certainly have been made on the basis of the yield from mines in the date when any one of the mines ceased to work. Undoubtedly, a portion of the stock-in-trade became lost in that year in which a particular mine ceased to work. It is impossible to accept the contention of the assessee that the entire sum of 23,000 and odd dollars was available to be written off only in that year in which the last of the three mines ceased to work. It is clear, therefore, that the assessee is not entitled to have the entirely of this amount written off in the year of assessment 1951-52, but only the proportionate value of the third mine and that leads us to be question as to the manner of determination of the proportionate value.
We are of opinion that a reasonably accurate method of estimating the value of the third mine would be to compute it on basis of the income yielded by each of the three mines during the period they worked. Admittedly such figures are available, as the assessee has returned the income from these mines during all of these years. The value of the third mine which ceased working in this year of account shall, therefore, be taken to be that proportion of the original outstanding of 23,000 and odd dollars as the total income yielded by this third mine bears to the total of the income of all three mines. This question is accordingly answered in this manner, viz., that the assessee is entitled to write off such proportionate amount as indicated above.
In the circumstances of the case, there will be no order as to costs.
Question answered accordingly.