COMMISSIONER OF INCOME TAX Vs. DHANALAKSHMI CORPORATION

JUDGEMENT

(1.) THE assessee was a registered firm engaged in dealing in timber, manufacture of oil, foundry business as well as in commission agency. In the course of its business, the assessee was making advances to certain persons engaged in the manufacture of oil, the consideration for such advances being interest as well as a commission calculated on the production of the borrower. Such advances were made to one Kathiresan Chettiar and Solaiappa Chettiar on foot of agreements entered into. These agreements are of the year 1944. It would also appear that such advances had been made even from 1942 and in fact the advances of Solaiappa Chettiar were in continuation of the earlier advances made in respect of a mill which mill was subsequently purchased by Solaiappa Chettiar. In November, 1945, due to misunderstandings and disagreement among the partners, the assessee partnership had to be dissolved. A resolution was passed by the partners to this effect It was decided on that occasion that the assessee should sell the land, buildings and machinery belonging to the business but recover the outstandings and distribute such recoveries among the members of the partnership according to their respective shares. The assessee firm was not however dissolved. Though the business of working the oil mill, etc., appears to have been stopped forthwith, the books were kept open and amounts receivable by the firm on account of interest and commission in respect of the advances made by the firm were being brought to account. After the 31st of December, 1949, the firm was finally wound up. Out of the balance of Rs. 62, 744 outstanding as against Kathiresan Chettiar, it was estimated that only Rs. 20, 000 could be realised and the balance was written off. In a similar manner, in respect of the outstanding advances to Solaiappa Chettiar, which came to Rs. 1, 24, 280, a sum of Rs. 95, 000 alone was deemed to be realisable and the balance of Rs. 30, 280 was written off. Following the settlement of accounts, the firm was dissolved with effect from 31st December, 1949. Later Kathiresan Chettiar sold his mills in 1954 for a sum of Rs. 15, 000 and this sum was handed over to Adaikappa Chettiar, one of the partners, to whom Kathiresan Chettiar's outstandings had been allotted. What happened to the outstanding of Solaiappa Chettiar is not knownFor the assessment year 1950 -51, the firm claimed to be entitled to deduct the two sums written off under section 10(2)(xi). The Income -tax Officer refused the deduction, his reason being that the advances were not made in the course of the assessee's business activities, as the partnership deed contained no provision for financing outside parties. He further held that the debts had become bad in 1945 itself and could not therefore be taken into account in the assessment for 1950 -51

(2.) THE department appealed to the Tribunal. The Tribunal took the view that the financing of the other oil mills was part and parcel of the assessee's business and that the agreement in that regard appeared to be genuine and entered into in the course of the normal trading activities of the assessee firm. The Tribunal further held that the debts had become bad only in the year immediately preceding the assessment year in question and confirmed the Appellate Assistant Commissioner's decision On the application of the Commissioner of Income -tax, the Tribunal has referred the following question for the determination of this court

(3.) THE Income -tax Officer apparently declined to accept this contention and on no material whatsoever he chose to infer that the advances must, to the knowledge of the assessee, have become incapable of recovery even in 1945, a view which had been rightly found incorrect both by the Appellate Assistant Commissioner and the Tribunal In answering the question before us, what we have to find is whether there was material before the Tribunal to justify the conclusion that it reached, viz., that the advances were made in the course of the normal trading activity of the assessee's firm. On this question, we are satisfied that the available material does support the conclusion reached by the Tribunal. If the advances made by the firm up to 1945 were in the course of its business activity, the further advances made after 1945 would not cease to be of the same character solely because the firm stopped its oil mill business. It is true that the partnership deed contains no reference to the making of advances, but that, as we have pointed out, is not necessary in the case of a firm. The regular course of conduct and the frequent advances that were made even after 1945 which is referred to by the Income -tax Officer himself show that, though the firm ceased its oil mill business, it was yet engaged in a course of profit -making by means of these advances. Of the multifarious activities which the firm engaged in, this particular activity was kept on. There is also the circumstance that the income so derived by the assessee was submitted as its business income and accepted as such in all the previous years. It follows, therefore, that the Tribunal had ample material to conclude that these transactions were entered into in the course of the normal trading activities of the firm. There is no dispute that these sums became irrecoverable in the previous year relevant to the assessment yearThe question is accordingly answered in the affirmative and against the department. The assessee will be entitled to its costs. Counsel's fee Rs. 250 Question answered in the affirmative.