1963 PLP 918 (PTD)

Ss. 10 (2) (xi), 12 (1) Bad debt Loan advanced not in the course of business Part of loan written off, whether allowable as revenue loss. The assessee who was carrying on timber business granted a loan to a party and the interest derived from it was assessed as "income from other sources" in the earlier years. In the accounting period, the assessee accepted part of the loan and wrote off the balance. The assessee claimed that the portion of the loan so written off should be considered as revenue loss or revenue expenditure. On reference to the High Court: Held, that a debt is allowable as revenue loss only if it arises out of and is incidental to the trade ; if it is not of that character, it will be a capital loss. Except in money lending trade, debts can be so described only if they are due from customers for goods supplied or loans to constituents or transactions of similar kind. Commissioner of Income tax v. S. M. Chitnavis (1932) 2 Comp. Cas. 464 distinguished. Commissioner of Income tax v. Abdullabhal Abdulkadar (1961) 41 I T R 545 (S C) applied. Commissioners of Inland Revenue v. Hagart and Burn Murdoch (1929) A C 386 ref. STATEMENT OF CASE By this application the assessee requires the Tribunal to refer to the High Court certain questions of law which are said to arise out of the Tribunal's order in I. T. A. No. 8052 of 1957

58. As, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up the statement of case and refer it to the High Court of Judicature at Chandigarh under section 66 (1) of the Indian Income tax Act.

2. The statement of the case relates to the assessment year 1956 57, account year ending March 31, 1956.

3. The assessee is a Hindu undivided family. The assessee bad advanced a sum of Rs. 30,000 to one Ghungarmal Batel of Simla in or about 1945. The assessee used to receive certain interest from this debtor on the loan that had been advanced and this amount of interest was being taxed in the hands of the assessee as income from other sources under section 12 of the Indian Income tax Act. During the year under consideration, the assessee received a sum of Rs. 1,500 and wrote off the balance of Rs. 20,

664. A copy of the account of the debtor is part of the cage and is Annexure "A".

4. During the assessment proceedings for the year 1956 57, the assessee claimed this amount of Rs. 20,664 as a bad debt. This claim was rejected by the Income tax Authorities and also by the Appellate Tribunal on the ground that the assessee did not carry on money lending business. The Tribunal held that since the debt was not advanced during the course of the carrying on of the money lending business, the balance which might have been due from the party and might have been a bad or a doubtful debt was not a bad debt within the meaning of section 10 (2) (xi) of the Indian Income tax Act. When the appeal was heard before the Tribunal, the assessee claimed that the interest on this loan was being taxed in the hands of the assessee under section 12 of the Indian Income tax Act and since the interest was charged under that section, the amount of Rs. 20,664 should be considered as a revenue loss or revenue expenditure. This contention was also rejected by the Tribunal. In its order dated April 20, 1959, the Tribunal observed : "This argument is fallacious. In the first place, no such ground was taken in the memo. of appeal preferred before the ,Appellate Assistant Commissioner Secondly, it is not possible to hold that the amount of Rs. 20,664 was an amount of revenue loss which could be considered under section 12 nor can it be considered as an expense which the assessee had to incur for the purpose of earning income assessable under the head `income from other sources'." Copies of the orders passed by the Income tax Officer and the Appellate Assistant Commissioner are part of the case and are Annexures "B" and "C" while a copy of the Tribunal's order is part of the case and is Annexure "D".

5. On these facts, we refer the following question of law for the opinion of their Lordships : "Whether, on a true interpretation of section 12, of the Indian Income tax Act, the deduction of Rs. 20,664 claimed by the assessee was permissible under section 12 of the Indian Income tax Act?"

6. The statement of case was placed before the parties. The assessee is absent. The Commissioner of Income tax has no suggestion to make. The statement is, therefore, finalised. S. M. Sikri and V. C. Mahajan for the Assessees. D. N. Awasthy and H. R. Mahajan for the Commissioner. JUDGMENT GOSAIN, J

This reference under section 66 (1) of the Income-tax Act has been made to this Court by the Income tax Appellate Tribunal on an application being made to it for this purpose by Messrs Lehnu Mal, Asa Ram, hereinafter called the assessees. The assessees are a Hindu undivided family and are carrying on the business of timber merchants at Yamuna Nagar. Sometime in the year 1948, they advanced a sum of Rs. 30,000 to one Ghungarmal Betal of Simla and used to receive certain amounts as interest from their debtor which were duly shown in the income tax returns and on which income tax was duly paid. In the accounting year in question, the assessees received a sum of Rs. 1,500 from the aforesaid debtor and wrote off the balance of Rs. 20,664 treating the same as a bad debt. During the assessment proceedings for the year 1956 57, they claimed this amount of Rs. 20,664 as a deduction. This claim was rejected by the Income tax Authorities and also by the Appellate Tribunal on the ground that the assessee did not carry on money lending business and the debt was, therefore, not advanced during the course of carrying on the said business and reliance for this purpose was placed by them on the provisions of section 10 (2) (xi) of the Indian Income tax Ac:. At the time of hearing of the appeal before the Appellate Tribunal, the assessees also claimed that as the interest on this loan was being taxed in the hands of the assessees under section 12 of the Act, the amount of Rs. 20,664 should be considered as a revenue loss or revenue expenditure. The Appellate Tribunal rejected this argument and observed in its order as follows : "The argument is fallacious. In the first place, aground was taken in the memo. of appeal preferred before the Appellate Assistant Commissioner. Secondly, it is not possible to hold `hat the amount of Rs. 20,664 was an amount of revenue loss which could be considered under section 12 nor can it be considered as an expense which the assessee had to incur for the purpose of earning income assessable under the head `income from other sources'." The assessees then made an application to the said Tribunal asking for a reference under section 66 (1) of the Act and the Tribunal has thereupon referred the following point of law for decision to this Court : "Whether, on a true interpretation of section 12 of the Indian Income tax Act, the deduction of Rs. 20,664 claimed by the assessee was permissible under section 12 of the Indian Income tax Act?" Now it is conceded by Mr. S. M. Sikri, learned counsel for the assessees, that his clients are not carrying on the business of money lending and also that the loan in question was not advanced in the ordinary course of such business. It is not disputed that the assessees cannot, in these circumstances, avail of the provisions of clause (xi) of subsection (2) of section 10 of the Act and the claim in question cannot obviously be allowed under the said provisions. The only contention raised by Mr. Sikri is that the case is covered by subsection (1) of section 12 of the Act inasmuch as the income on the interest of this loan was, in some previous years; taxed by the Department under the head "income from other sources," and any loss suffered in the aforesaid "other sources" must, therefore, be treated as an allowable deduction. He urges that profits and gains of the said other sources could be calculated only after allowing the loss in the same and that the amount of Rs. 20,664 claimed by the assessees in this case must be held to be such a loss. After giving our careful consideration to the matter, we regret we cannot accept this contention. It is not possible to hold that the amount of Rs. 20,664 was a revenue loss nor is it possible to find that this was an expense which the assessees had to incur for the purpose of earning income assessable under the head "income from other sources'". At the most, it could amount to a complete or partial loss of the source itself which would evidently be a capital loss. We are wholly unable to distinguish this case from the one in which an assessee merely carrying on the business of a timber merchant placed some of his spare money in a bank which ultimately failed. The assessee could not certainly claim the loss of the money as a revenue loss and it did not matter that the interest received by the assessee from the bank in some previous year had been treated by the Income-tax Authorities as income of the assessee from other sources and had on that basis been included in the assessment against the said assessee. In support of his contentions, Mr. Sikri relies on a ruling reported as Commissioner of Income tax v. S. M. Chitnavis ((1932) 2 Comp. Cas. 464), but the facts of that case are clearly distinguishable from those of the present, inasmuch as the assessees in that case were regularly carrying on the business of money lending and the bad debt in the circumstances of the said case did clearly amount to a revenue loss. In our judgment, the present case is more aptly covered by a ruling of their Lordships of the Supreme Court in Commissioner of Income tax v. Abdullabhai Abdulkadar ((1961) 41 I T R 545 551) in which a similar loss was found to be as one of capital. In the penultimate paragraph of that judgment, their Lordships observed as follows : "This contention has even less substance than the claim of deduction under section 10 (1). Under clause (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money lending trade, debts can only be so described if they are due from customers for goods supplied or loans to constituents or transactions of a similar kind. In every case the test is, was the debt due as an incident to the business ; if it is not of that character it will be a capital loss. Thus a loan advanced by a firm of solicitors to a company in the formation of which it acted as legal adviser is not deductible on its becoming irrecoverable because that is not a part of the profession of a solicitor : Commissioners of Inland Revenue v. Hagart and Burn Murdoch (1929) A C 386." We are clearly of the opinion that the loss of Rs. 20,664 claimed by the assessees in the present case is one of capital and not of revenue. We, therefore, answer the question referred to us in the negative. The assessees will pay the costs of the Commissioner of Income tax. Counsel's fee Rs.

200. TEK CHAND, J. I agree. Question answered in the negative.