Sikri J. - (1.) The following three questions were referred under section 66(2) of the Income Tax Act, 1922 :"(1) Whether there was any material before the Tribunal for the finding that neither of the two amounts of Rs. 3,25,000 and Rs. 16,005 was a bad debt arising during the course of the money-lending business of the assessee If the answer is in the affirmative : (2) What was the true nature of the transactions and whether in view of the true nature of the transactions, the debts could still be claimed as bad debts in working out the assessable income of the assessee (3) Whether there was any material on which the Tribunal could arrive at the finding that the debts had become bad prior to the year of account in question -
(2.) The relevant facts out of which these questions arose were stated by the Tribunal in the statement of the case and are briefly as follow : The assessment year in question is 1942-43 and the relevant accounting year is Samvat year 1997-98, corresponding to October 1941. The appellant, R. B. Seth Champa Lal Ram Swarup (hereinafter referred to as the assessee), was a joint Hindu family headed by the karta, Moti Lal. During the accounting year a sum of Rs. 3,25,000 was due to the assessee from one Shanthi Lal, who carried on business as proprietor of M/s. Amolakchand Mewaram. Shanti Lal is the younger brother of Moti Lal and had been taken in adoption by a cousin of Motilal. M/s. Amolakchand Mewaram had a current account with the assessee for a number of years in which there were large cash payment on either side. This account was also credited with sales of cotton and other goods made by the assessee on behalf of M/s Amolakchand Mewaram, while the account was debited with speculation losses and differences paid by the assessee on M/s Amolakchand Mewarams account. In Samvat year 1987-88, the year ending November, 1931, advances made to M/s. Amolakchand Mewaram in this account rose up to Rs. 11 lakhs. During this year the assessee took a mortgage of the immovable property of M/s. Amolakchand Mewaram for Rs. 3 lakhs and credited the amount to the current account, the debit being given to a new account styled "Amolakchand Mewaram Mortgage account". In the next accounting year the assessee took over the interest of M/s. Amolakchand Mewaram in the managing agency of the Edward Mills Limited and also the shares of the Edward Mills Limited for Rs. 4,50,000 for which also a credit was given in the current account. In the same year on November 3, 1932, the assessee also obtained a pro-note from M/s. Amolakchand Mewaram for Rs. 3,25,000 crediting the amount to the current account, the debit for which given to a new account styled "Amolakchand Mewaram pro-note account". After these adjustments the current account was left with a debit balance of Rs. 25,626. Thereafter, there were only petty transactions and adjustments.
(3.) At the commencement of the Samvat year 1994-95, there was a debit balance of Rs. 9,017. The assessee purchased Amolakchand Mewarams card of the East India Cotton Association for a sum of Rs. 20,000 resulting in a credit balance in favour of M/s Amolakchand Mewaram of Rs. 11,253. Thereafter there was only one debit entry of Rs. 980 in Samvat year 1996-97, and in the relevant accounting year the balance was to the credit of Amolakchand Mewaram in the sum of Rs. 10,273. The two new accounts, Amolakchand Mewaram Mortgage account and Amolakchand Mewaram pro-note account had been carried forward from year to year but no interest had been charged on these accounts. In the current account, Interest had been charged up to the Samvat year 1988-89 (1931-32) only and not thereafter.;