1986 PLP 304 (PTD)

R.K. VIJAYWARGIYA, J.-- By this reference under section 256(1) of the Income-tax Act, 1961 (for short the Act) the Income-tax Appellate Tribunal Indore Bench, indore, has referred the following question of law for the opinion of this Court: "Whether on the facts and circumstances of the case the Tribunal was right In holding that the assessee could not be allowed the amount of Rs.20,390 as his revenue loss during the assessment year 1975-76?

2. The material facts giving rise to this reference as set out in the statement of the case are as follows:- Firm Messrs Sagarmal Fatehchand and Company consisted of several partners upto the assessment year 1971-72 i.e. the accounting year ending on Diwali 1970. Other former partners of the firm retired and the firm was reconstituted with two partners viz. Sagarmal and Jhamaklal representing the HUF of Messrs Jhamaklal Juharmal. The firm was again dissolved and all its assets and liabilities were taken over by Shri Sagarmal w.e.f. Diwali 1971. A sum of Rs.20,390 was due from the firm to the assessee Fatehchand. The outstanding closing balance of Rs.35,390 standing to the credit of the HUF of Messrs Jhamaklal Juharmal was first brought to Batau Khata. Thereafter it was shown to have come to an end in the books of the dissolved firm and oaken over by Sagarmal. The assessee continued to show these amounts due against Sagarmal Fatehchand, which were ultimately written off during the assessment year in question.

3. The I. T.O. held that this amount could not be allowed as a remission of bad debts or otherwise. According to him at the most it was a capital loss during the assessment year 1972-73 and the matter had already been settled in that year as discussed in the assessment order of the firm Messrs Sagarmal Fatehchand and Company, Ratlam. The entry in the account books of the assessee during this year was an infructuous entry. Moreover, Sagarmal was also carrying on business under the name and style of Sagarmal Fatehchand and was a solvent party. The amount had been written off earlier and was not relevant to the profit and loss account of the assessee firm. The I. T.O., therefore, added back the said amount. On appeal by the assessee the Appellate Assistant Commissioner held that the amount represented the capital contributed to the-firm as a result of which the assessee became entitled to the share of profits. It was not a loan as understood in common parlance because the lender was not entitled to any interest thereon. Therefore, if at ell, it was a loss of capital. The loss was also not covered by section 45 of the Act for the purpose of being carried forward. The Appellate Assistant' Commissioner, therefore, dismissed the appeal of the assessee. The further appeal by the assessee to the Appellate Tribunal was also dismissed. The Appellate Tribunal confirmed the finding recorded by the Appellate Assistant Commissioner. At the instance of the assessee the Tribunal has referred the aforesaid question of law for the opinion of this Court.

4. Having heard the learned counsel for the parties we have come to the conclusion that the question must be answered against the assessee. The Appellate Assistant Commissioner negatived the contention of the assessee that the amount was liable to be deducted as bad debt under section 36(2) of the Act on the ground that the said amount was not taken into account in computing the income of the assessee of that previous year or of an earlier previous year. He further negatived the contention of the assessee that the amount was lent to the firm of Messrs Sagarmal Fatehchand in the ordinary course of money lending business and held that the amount represented the capital contributed to the firm as a result of which the assessee became entitled to the share of profits and that .if at all it was a capital loss.

5. This finding recorded by the Appellate Assistant Commissioner has been confirmed by the Appellate Tribunal. On this finding the Tribunal was fully justified in holding that the assessee could not be allowed the said amount as his revenue loss during the assessment year 1975-76.

6. The learned counsel for the assessee contended that the amount was written off as irrecoverable in the accounts of the assessee for that previous year 'of the assessee and, therefore, the provisions of section 155(6) of the Act applied and the I.T.O. ought to have proceeded accordingly. This contention cannot be upheld because firstly this is beyond the scope of the question referred to us and secondly because as a fact it has been found that the amount cannot be said to be a bad debt and is not a revenue loss but a capital loss. On the finding recorded by the Appellate Tribunal we are of the opinion that it did not commit any error of law in holding that the assessee could not be allowed the amount of Rs.20,390 as revenue loss during the assessment year 1975-76.

7. As a result of the discussion aforesaid the question referred to us is answered in the affirmative and against the assessee. In the circumstances the parties shall bear their own costs of this reference. M. B. A.????????????????????????????????????????????????????????????????????? Reference answered in affirmative.