CHAKRAVARTTI, J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act at the instance of the CIT, West Bengal, in respect of a deduction of Rs. 55,030 from the business profits of the assessee on the ground that the amount constituted a bad debt. The relevant facts are as follows:
(2.) THE assessee is a timber merchant. On the 5th Feb., 1930,he obtained a loan of Rupees one lakh from the Bank of India, Bombay, on the joint security of himself and another man called Mamraj Rambhagat. On the same day Mamraj Rambhagat obtained a loan of Rupees one lakh from the Imperial Bank of India, Bombay, on the joint security of himself and the assessee. THE assessee paid off his debt to the Bank of India in due time, but Mamraj Rambhagat failed to pay his. It appears that on the 24th March, 1930, the Imperial Bank realised from the assessee the debt owing jointly by him and Mamraj Rambhagat the amount recovered being Rupees one lakh six thousand and twenty six. Exactly a month later on the 24th April, 1930, Mamraj Rambhagat failed in his business and his estate went into the hands of Receivers. What kind of Receivers they were and in what proceedings the appointment of Receivers was made does not appear. After he had paid the debt due to the Imperial Bank of India the assessee opened a ledger account in his own books in the name of Mamraj Rambhagat and debited against him the sum of Rs. 1,06,026 which he had paid to the Bank. The assessee received dividends from the Receivers of the estate of Mamraj Rambhagat from time to time. The total amount he received was Rs. 45,596 and the last payment was made on the 17th of May, 1938. Apparently no payment was received thereafter and in the year of account 1997 R. N. relevant to the asst. yr. 1941-42, the assessee wrote off the balance of Rs. 55,030. It was this amount which he claimed in his assessment for the year 1941-42 as an allowable deduction. The ITO declined to allow the deduction claimed on the ground that the loss was a capital loss. On appeal his decision was confirmed by the AAC. On further appeal, however, the Tribunal allowed the deduction relying chiefly on the decision of the Madras High Court in the case of CIT, Madras vs. S. A. S. Ramaswamy Chettiar (1946) 14 ITR 236.
(3.) THE CIT thereupon made an application for a reference to this Court and in due course the Tribunal referred the following question of law : "Whether on the facts found the sum of Rs. 55,030 is allowable as a bad debt under the provisions of s. 10(2)(xi) of the Indian IT Act?" The ground upon which the Tribunal based its decision was that before the AAC the assessee had stated that it was the usual custom in Bombay to secure loans on joint security and the AAC had not held that such custom had not been proved. In the opinion of the Tribunal, if such a custom existed it would be sufficient to make the loss which the assessee had suffered an allowable deduction in the computation of his profits. It was said that although the Madras case had been distinguished by the AAC on the ground that the parties in that case were money-lenders whereas the assessee in the present case was a timber merchant that difference in facts did not affect the applicability of the principle laid down. " In one case " observed the Tribunal, " money was taken from the Bank to carry on a money-lending business whereas in the other case money is taken from the Bank to carry on the timber trade.";