COMMISSIONER OF INCOME TAX Vs. SUBRAMANYA PILLAI S R

JUDGEMENT

(1.) THE question of law that has been referred by the Appellate Tribunal is in these terms :

(2.) THE assessee, a book-seller, seeks to deduct these two sums of Rs. 658 and Rs. 5049 in the computation of his profits for the assessment year 1943-44 in the following circumstances. During a period of about 37 days ranging from 13th July 1939 to 20th August 1939 the assessee and one Lakshmana Aiyar jointly borrowed from sundry money-lenders and a Co-operative Bank, a sum of Rs. 16,200 out of which a sum of Rs. 10,450 was taken and utilised by the assessee for hi business needs and the balance of Rs. 5750 was taken by Lakshmana Ayyar. THE joint borrowing of the assessee and Lakshmana Aiyar was necessitated by the business needs of both the borrowers and by the instance of money-lenders who required the joint security of two persons for simple loans advanced by them. Lakshmana Aiyar failed in his business and the assessee had to repay the creditor the whole of the joint borrowings. He bad also to spend a sum of Rs. 658 in an unsuccessful attempt to recover the amount due from Lakshmana Aiyar in respect of his share of the joint borrowing. He had also to pay Rs. 5049 to the creditors on account of Lakshmana Aiyar's share of the joint loans.

(3.) SECTION 10 (2) (xi) was enacted by SECTION 11, Income-tax Amendment Act, 1939. Before its enactment a deduction in respect of bad and doubtful debts was allowed though the Act nowhere expressly sanctioned it, on the ground that the deductions enumerated in SECTION 10 were not exhaustive and that the deduction of bad debts was necessarily implicit in the very conception or idea of profits and gains. Except in the case of a banking or money-lending business, there could be no allowance for bad debts where the accounts of the business were kept on a cash basis. Under the mercantile accountancy system referred to in SECTION 10 (2) (xi) an entry is made on the receipt side of the account when a sale is concluded although the money on account of such sales has not been paid in. In making up the account at the end of the year such entries are treated as receipts and the tax is levied on what has some times been called as "book profits." It may later on be found that some of these "book profits" are in fact irrecoverable. They are then written off as bad debts and since such book profits have been included in the income assessed to tax, the bad debts have been allowed to be written off against the book profits in the year in which they are found to be irrecoverable. This commercial practice has taken a statutory form in the first part of SECTION 10(2) (xi) of the Act as amended in 1939. In the case of banking or money lending business whether the accounts are maintained on a cash basis or on the mercantile system allowance for bad and doubtful debts was given for the reason that all the moneys embarked in the money-lending business and lent out for interest were in the nature of the stock-in-trade of the banker or money-lender and the bad and doubtful debts represented so much loss of the stock-in-trade. Losses in respect of the stock in trade have always been regarded as trade losses and allowed to be set off against the receipts. That this is the position with reference to a banking or money lending business is recognised by the decision of the Judicial Committee in the Commissioner of Income-tax, B. & O. v. Maharaja of Dharbanga, (1942) 10 I.T.R. 214 at p. 218: (A.I.R. (29) 1942 P. C. 11). This principle is embodied now in the second part of SECTION 10 (2) (xi) of the Act as amended in the year 1939. Except in the case, therefore, of a money-lending or banking business, where the entire money invested or lent out is regarded as stock-in-trade or circulating capital, capital losses cannot be treated as bad debts and deducted from the receipts of a particular year. Where a person carries on money-lending as well as other businesses he cannot treat a capital loss sustained in his other businesses as a bad debt of the money-lending business and claim a deduction. This was ruled by the Judicial Committee in Commissioner of Income-tax, C.P. and U.P. Lucknow v. Motiram Nandram, (1940) 1 M.L.J. 180: (A. I. R. (27) 1940 P. C.. 33) and Arunachalam Chettiar v. Commissioner of Income-tax, Madras, 59 Mad. 716 : (A. I. R. (23) 1936 P. C. 133).