The Judgment of the Court was delivered by

Gentle, C.J:— In these three cases, referred to the Court by the Income-tax Appellate Tribunal, the facts and circumstances in many respects are the same; by agreement of learned counsel for the parties they have been heard together. The questions referred in each case are substantially of like effect but the wording in one of them is slightly different. In Referred Cases nos. 19 and 27 the question is:

“Whether on the facts and in the circumstances of this case the claim of the respondent to deduct the sum of Rs. 10,000 was allowable in law.”

2. In Referred Case No. 23 the question is:

“Whether on the facts and in the circumstances of this case the claim to deduct the sum of Rs. 10,000 as a bad debt incurred in the account year made by the respondent was legally sustainable.

3. The Tribunal, setting aside the order of the Income-tax Officer, which was upheld by the Appellate Assistant Commissioner, decided that by virtue of the provisions of Section 10(2)(xi) of the Income-tax Act, the sum of Rs. 10,000 was a bad debt and deductible in each case, when calculating the assessable income. These cases have been stated at the instance of the Commissioner of Income-tax, Madras, who challenges the correctness of the findings by the Tribunal. Formerly, five Nadar brothers, (1) Matbalai, (2) Rajaksni, (3) Sankaralingam, (4) Kandaswami and (5) Dhanushkodi carried on a joint family business, dealing in coffee and cardamom. Supplies were obtained from an agriculturist named W.P.A Marimutbu Nadar, to whom the business advanced money; by 1930 Marimuthu owed Rs. 1,32,500 to the joint family. On 3rd February, 1930 the brothers effected a partition and, thereupon they carried on the same business in partnership, the debt due from Marimuthu was treated as due to the firm. Seven months later, on nth September 1930, the partner, ship was dissolved; at that date Marimuthu's indebtedness amounted to Rs. 1,24,000; on dissolution, this sum was divided into 5 equal parts and each brother was given Rs. 24,800 of the debt due to the firm. Three separate businesses were then constituted; there were two partner-ships between (a) Muthalai and Rajakani and (b) Sankaralinga and Kandaswami; the other brother, Dhanushkodi, carried on business on his own account Each business dealt in coffee and cardamom obtaining supplies from Marimuthu by advancing moneys to him against future deliveries and he paid interest on the amount owing by him. In the two partnerships, each partner was separately credited in the books with Rs. 24,800 due from Marimutbu. In addition, some of the brothers, individually carried on a money lending business utilizing that sum as stock-in-trade; all accounts were kept on a mercantile basis; in each of the partner's accounts the amount of interest due on the sum outstanding and any credits were entered and the balance remaining was ascertained every year. Dhanushkodi carried on business with the same goods but, in his case the sum of Rs. 24,800 was entered in the accounts of his business and was not separately treated; he may have engaged in money-lending but no point in that connection was made by Mr. Subbaraya Aiyar, who appeared for all the assessees; interest on the sum due to Dhanushkodi, including any amount or the balance of the sum of Rs. 24,800 was added each year to the general accounts. In each of the five accounts, Marimutbu executed a promissory note, payable on demand, for the amount credited in 1930, and each year thereafter, a new promissory note was similarly signed by him in respect of the balance due from him. This continued until Marimuthu's death, about 1934, and, thereafter until 1937, his brother, Rathnaswami signed similar promissory notes. In these assessments for income-tax, in respect of some of the assessees as will appear hereafter more particularly, the interest upon Marimuthu's debt, was included amongst other items under Section 12 of the Income tax Act, and tax thereon was paid although, in some instances and to some extent, it had not actually been received.

4. In 1937, the amount due from Marimutha or rather from his successors, including Rathnaswami was Rs. 1,66,000. That indebtedness was reduced to the sum of Rs. 1 lakh by means of payments totalling Rs. 66,000 by way of sales of property and shares belonging to Marimuthn and a cash payment of Rs. 6000. On 24th September, 1937, a deed of mortgage was executed by Marimuthu's brother and other legal representatives or successors in favour of the five brothers to secure payment of that sum of Rs. 1 lakh at 6 per cent, per annum. Thereafter, until 1940, the brothers' accounts were each debited with Rs. 20,000 but with no interest. In 1941 the mortgagors threatened to cry in aid the provisions of the Madras Agriculturists' Relief Act and claimed that, by virtue of those provisions, the actual indebtedness was much less or was non-existent. On 1st April 1941, the total outstanding of Rs. 1 lakh—Rs. 20,000 in respect of each brother — was settled at a sum of Rs. 60,000 and in each account Rs. 10,000 was credited and the balance of Rs. 10,000 was written off. It is the sum written off, that the assessees claimed should be allowed as a bad debt in the income-tax assessment and which was allowed by the Tribunal.

5. It is accepted that Marimuthu's debt was rightly considered as good in 1930, when the partition took place and when each separated brother took a one-fifth portion upon the dissolution of the subsequent partnership at the end of 1930 and, also, that the debt remained good until the legal representatives or successors of the debtor threatened in 1941, to rely upon the provisions of the Madras Agriculturists' Relief Act. Further, it is not questioned, that the acceptance of Rs. 60,000 in full satisfaction of the aggregated debts amounting to Rs. 1,00,000 and that the writing off of Rs. 10,000 by each brother were correct and that the indebtedness was bad to that extent.

6. Referred cases nos. 19, 23 and 27 respectively relate to the assessment of Dharmaraja (son of Dhanushkodi, now deceased), it being convenient to treat Dhanushkodi as the assessee; Mathalai, who was a partner of his brother Rajakani; and Randaswami, a partner of his brother Sankaralina. The Tribunal held that the sum of Rs. 1,24,000 was a debt due to the joint family business and of the partnership between all the brothers which existed for a few months in 1930, and it was an asset of each business. It was also held that: (a) Dhanushkodi brought his debt into his coffee and cardamom business, he dealt with the debtor as a customer and the debt became part and parcel of the trading assets of the business and any loss in the trade was an allowable deduction; (b) Mathalai, in partnership with Rajakani, conducted a coffee and cardamom business; in addition be carried on a money-lending business and the debt of Rs. 21,800 formed part of the floating assets of that business; (c) as regards Kandaswami, who was in partnership with Sankaralinga, he was assessed up to 1934-1935 on income from money-lending and later, interest, if any, on Marimuthu's debt was assessed under S. 12 the sum of Rs. 10,000, was a part of the amount on which tax had been paid as interest accrued for which Kandaswami was not entitled at the respective time of such accrual and, as the amount given up was interest over-collected, it was not any part of the capital due and he was entitled to have that sum deducted. In each of the referred cases, the sum of Rs. 10,000 was allowed against the profits of the year as a bad debt and deductible as such from the total income for the year.

7. As to Referred Case No. 19. — When Dhanushkodi started his coffee and cardamom business in 1930, as stated previously, his one-fifth portion of the debt of Rs. 1,24,000 was credited as an asset in his business accounts for which Marimuthu signed a promissory note for Rs. 24,800 payable on demand, and, whereby that amount became a debt due to Dhanushkodi. By August 1934, probably it was earlier, the amounts credited in the accounts for goods supplied by Marimuthu to Dhanushkodi exceeded the amount of the debt and interest. The accounts were kept on a mercantile basis. Whilst advances were made to Marimuthu, nevertheless, the sums credited in respect of goods supplied cm be treated as payments by him and such payments can be, and they are, appropriated by Dhanushkodi towards the earliest debts, in the absence of any appropriation by his debtor. By August 1934, at the latest, the aggregate of the sums credited to Marimuthu was more than sufficient to liquidate the debt of Rs. 24,800 and interest. Thereafter, any sum reflected by the accounts due to Dhanushkodi were solely in respect, and arose out of business transactions with Marimuthu and, after 1934, with his legal representatives or successors; they increased or decreased, from time to time, according to payments made and goods supplied, in the ordinary course of business. These were trading debts and, in 1937, they aggregated over Rs. 30,000. In that year payments were made by crediting the prices of, or proceeds from, sales of land and shares, and by cash, resulting in a reduction of the indebtedness to Rs. 20,000. In 1941, Rs. 10,000 was accepted in full discharge, leaving a sum of Rs. 10,000, which was written off. That transaction of complete liquidation of the indebtedness is not challenged as being incorrect; it resulted in the balance of Rs. 10,000 being irrecoverable. That amount was, in my view, a bad debt of the trading business and the order of the Appellate Tribunal for its deduction, as such, from the amount of the profits for the year was correct.

8. As to Referred Case No. 23.— Throughput the period from 1930 to 1941 Mathalai carried on a money-lending business, in addition to his partnership business with Rajakani in coffee and cardamom; the profits derived from money lending were returned and assessed under S. 10 as business profits and they included, until 1937, interest due from Marimuthu on his debt of Rs. 24,800; after 1937, interest was not charged against him. The promissory note executed by Marimuthu in 1930, constituted him as Mathalai's debtor for Rs. 24,800. That sum was incorporated as stock in the money-lending business. Mr. Rama Rao Sahib, for the Commissioner, conceded that, if, in 1930, Marimuthu became Mathalai's debtor for the above sum of Rs. 24,800 since Mathalai has throughout carried on a money-lending business, the sum of Rs. 10,000 was a bad debt of the business and deductible from the amount of the profit, for the year. It is beyond doubt that Marimuthu became Mathalai's debtor and from 1930 to 1941 the latter carried on a money lending business. It follows that the sum of Rs. 10,000 is allowable as a bad debt.

9. As to Referred Case No. 27.— As in the other two cases, and in the same way, Marimuthu became Kandaswami's debtor for Rs. 24,800. Any money-lending business carried on by Kandaswami, which could have been only to a limited extent, was terminated by 1933; in respect of that year, the year of assessment was 1934-1985 an assessment last included profit from money-lending. In the assessments of subsequent years there was no item under S. 10 of income, profits or gains from money-lending, but under the heading “other sources” S. 12 income from Mari, muthu's debt, when it was assessed, is included with interest on investments. It is manifest that in these assessments, undoubtedly made upon the assessee's income-tax returns, the debt due from Marimuthu was treated as an investment of capital and not as a business or trading asset.

10. Mr. Subbaraya Aiyar, for the assesses, contended that, whilst the several allowances, by way of deduction, contained in cls. (i) to (xv) of sub-s. (2) of S. 10 are not included in S. 12, save to the limited extent as specified therein, nevertheless the principles of those allowances are applicable to the latter section. Section 12 relates to income, profits and gains from other sources not included under, inter alia, S. 10, business. In support of this contention reference was made to the decision of the Judicial Committee in Commissioner of Income-tax, C.P & Berar v. Sir S.M Chitnavis, 69 I.A 290 : (A.I.R (19) 1932 P.C 178) which was pronounced before the clauses in sub-s. (2) formed part of S. 10. At pages 296 and 297 of the judgment it was observed by their Lordships that:

“Although the Act nowhere in terms authorizes the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year, account must necessarily be taken of all losses incurred….”

11. Emphasis must be placed upon the words “business” and the effect of the observations of the Board is restricted to bad debts in that connection which, alone, are deductible. The loss of income or of capital or acceptance of a smaller sum in settlement of a larger amount, e.g, of mortgage interest, when arising from investments, and not in connection with business assets, is not a bad debt falling within cl. (xi) of sub-s. (2) of S. 10.

12. Mr. Subbaraya Aiyar also placed reliance upon the method of accounting being on a mercantile basis, as an argument in favour of the deduction of Rs. 10,000, the sum written off against Marimuthu's indebtedness. I am unable to see that, because an owner of investments keeps his accounts on that basis, it can either make his ownership a business or affect, in any way, a loss arising from the extinction or depreciation of investment capital or income.

13. As pointed out, some of the clauses in sub-s. (2) of S. 10 are incorporated in S. 12, bub cl. (xi) is not one of them. Had it been the intention of the Legislature that a loss, by way of a bad debt, in respect of an item or income falling within S. 12, should be deductible, then clause (xi) would have been one of the incorporated clauses. The debt due from Marimuthu was clearly converted, if it was not already, into a capital asset and it was not a trading asset or part of the stock in trade of the business at the time when the balance of the indebtedness of Rs. 20,000 was extinguished by a payment of Rs. 10,000. The sum of Rs. 10,000 which was written off, was not a bad debt of a business and was not deductible from the profits of the year.

14. Mr. Rama Rao Sahib sought to place reliance upon the joining of the five brothers in one mortgage deed and aggregating the amount of their debts, each of Rs. 20,000, into a total of Rs. 1,00,000 as extinguishing the separate liability to each brother and creating a new entire debt to all of them. The creation of the mortgage deed, in the form which it took, was merely one of convenience but, thereafter, each brother continued the separate indebtedness of Marimuthu in his books for the amount due to him. There is no significance or inference arising from the creation of the mortgage.

15. In my opinion the answer to the question in Referred cases Nos. 19 and 23 should be in the affirmative and to the question in Referred Case No. 27 the answer should be in the negative.

16. The respective assessees are entitled to their costs in the first two referred cases and the Commissioner in the third referred case, Rs. 230 in each instance.

17. Yahya Ali, J.:— I agree.

C.R.K/R.G.D

18. Reference answered.