Kasamsetty Radhakrishnaiah Chetty v. Commissioner Of Income-Tax, A.P

Venkatesam, J.:— The question referred to this courtunder section 66(1) of the Indian Income-tax Act, 1922, is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the sum of Rs. 9,000 claimed by the assessee as a bad debt?”

2. Though the question referred was only one, it really consists of two parts, namely, (1) where a partner finances a firm of which he is a partner, it could not be treated as a money-lending business, and (2) whether, in the circumstances of the case, there was money-lending business, and the sum of Rs. 9,000 is a bad debt.

3. The facts relevant for the determination of this question may shortly be stated.

4. The assessee is an individual and the relevant accounting period is 1956-57 ending on December 31, 1956. His sources of income were property, shares in two registered firms, and other sources. The assessee maintained a set of account books in which he recorded the amounts which he borrowed from others for the purpose of advancing to the two firms of which he was a partner. The share of the income received from the firms was credited in those books and the interest payments on borrowings were debited. The method of accounting adopted by him was the mercantile basis. Excluding the amount which he got towards his share of the income, he showed a loss of Rs. 14,982 under the head “business” consisting of payments of interest, and a bad debt amounting to Rs. 9,000- The claim in respect of the bad debt was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal.

5. The assessee's case in respect of the bad debt is as follows:

He had advanced a sum of Rs. 10,000 on October 25, 1951, on a promissory note to a Hindu undivided family known as “Kotrika Venkataramiah Chetty & Bros.”, for the sake of brevity referred to as “Kotrika family”, carrying interest at the rate of 12%. For advancing this amount, the assessee borrowed moneys from third parties on interest at the rate of 9%. A ledger folio relating to the Kotrika family was opened and the amount of Rs. 10,000 was debited on October 25, 1951. No interest was debited to this account on an accrual basis in the subsequent years. The assessee received a sum of Rs. 500 on December 29, 1953, from another party on behalf of the Kotrika family, and that was credited to the debtor's account; and treated as payment towards the principal due. On September 30, 1954, the members of the family became divided, and repaid in cash the entire debt due from it, namely, Rs. 13,523-3-0, with the interest due up to that date. The amount of interest was included in the income declared by the assessee for the assessment year 1955-56, and it was also taxed. On the same day, i.e, September 30, 1954, the assessee made a fresh advance of Rs. 4,400 to each of the three brothers, who became divided, and separate ledger folios were opened. In 1955, all the three brothers filed insolvency petitions and on November 29, 1956, the assessee transferred these loans to one Venkatakrishnaiah for Rs. 1,500 each. The balance of Rs. 3,000 due from each brother was written off in the ledger as a bad debt on the same day, viz., November 29, 1956, and this amount (Rs. 9,000), which is written off in the account, is claimed as bad debt.

6. The Tribunal observed in its order as follows:

“as far as financing of the firms was concerned, it could not be treated as part of the money-lending business, as it was in the assessee's interest as a partner to find working capital for the firms and whatever interest he received from the firms was only part of his share income.”

7. The Tribunal gave some other reasons for disallowing this sum as bad debt, but there is no doubt that it was influenced in its conclusion by the view that when a partner advances money to a firm of which he is a partner, it cannot be money-lending business. But we cannot accept this view. It is not only a matter of business practice but also perhaps in the interests of a partner to advance moneys to the firm of which he is a partner, because as a person having control over the affairs of the firm, can expect a prompt repayment of the moneys.

8. Section 13 of the Partnership Act lays down thus:

“13. Subject to contract between the partners…

(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent, per annum.”

9. Thus, the Act recognises a partner advancing moneys to the firm and being entitled to interest at 6 % per annum. We do not consider it necessary to elaborate the point any further. It is sufficient to state that we cannot accept the view of the Tribunal that in no event can a partner who advances moneys to a firm of which he is a partner occupy the position of a creditor or be said to carry on the business of money-lending.

10. Having arrived at the above conclusion, the next question to be considered is whether, in the circumstances of the case, the moneys advanced by the assessee do not merely represent the capital he was bound to contribute, but constitute money-lending business. But, for answering this, there is no evidence on record.

11. The first question referred to us, viz., whether or not the advances made by a person to a firm of which he is a partner constitute money-lending business is, therefore, answered in favour of the assessee and against the department. The Tribunal will dispose of the case in the light of this answer. In the circumstances of the case, the parties will bear their own costs.

12. First question answered in favour of the assessee.