Amarchand Sobachand vs The Commissioner of Income Tax

S. Ramachandra Ayyar, C.J.—This reference arises out of the assessment for the year 1953-54 of Messrs. Amarchand Sobachand, a

partnership concern carrying on business at Madras as chemists and druggists. They did business in camphor, mercury and other products and in

making forward contracts in artificial silk yarn. Another branch of the firm''s activity was in money-lending. The accounts of the business were kept

on the mercantile basis. For the assessment year 1953-54, the year of account was the previous Samwat Year 2008, which ended on 18th

October 1952. During that year, the Assessee wrote off a sum of Rs. 2,68,385 as a bad debt in its money-lending business. This sum represented

the entire balance due in respect of its dealings with another firm at Bombay, Bojaji Sobachand. The Assessee claimed a deduction in respect of

the amount aforesaid in the course of the assessment for the year referred to above. To appreciate the justification for the claim a few more facts

have to be mentioned.

The Assessee firm, at the material time, consisted of two major partners and two minors, who had been admitted to the benefits of the

partnership. One of the major partners and the two minors are the sons of one S. Amarchand, and all of them put together have a 11/16 share in

the Assessee firm. S. Amarchand, was a partner in Messrs. Bojaji Sobachand, to be referred hereafter as the Bombay Firm ; his share in that firm

was sixteen per cent.

The Bombay firm was acting as the Adathia for the Assessee for a considerable time. They cleared the goods indented by the Assessee from

foreign parts. They also ordered for goods on behalf of the Assessee and paid for them. They represented the Assessee in the speculative

transactions entered into by them in their forward dealings in art silk yarn. Moneys were sent by the Assessee to the Bombay firm for the purposes

aforesaid; there were also advances to the firm. There were occasions when the Bombay firm had advanced sums of money to the Assessee. The

account between them was a single running account, where the balance shifted in favour of one party or the other. The manner of keeping the

accounts does indicate that there must have been some financial arrangement between the two firms. Interest was charged in the accounts on the

outstanding balances during the Samwat years 2004 and 2005. But no interest was charged for the next two years. At the end of Samwat year

2007 (18th October 1951) the account showed a debit balance against the Bombay firm to the extent of Rs. 2,02,823-12-3, which was carried

forward to the next year. In arriving at this figure, the Assessee had included a sum of Rs. 2,03,147-8-0, which was the loss sustained in certain

yarn forward contracts entered into on its behalf-The Assessee claimed that the amount was a loss in its business during the year of assessment

1952-53. Although this claim was not accepted by the income tax officer, it was ultimately allowed on appeal by the Appellate Assistant

Commissioner.

The transactions during Samwat year 2008 did not last long. Even during the previous year the Bombay firm began to sustain heavy losses and it

ultimately crashed during the second quarter of the Samwat year 2008. The firm was wound up and a receiver was appointed by the Court in

Bombay.

From 8th November 1951 to 16th March 1952, the Assessee advanced various sums of money to the Bombay firm, amounting in all to Rs.

1,04,522-5-9. This amount added to the amount carried forward from the previous year, resulted in a total debit of Rs. 3,02,358-8-6 for that

year. During the same period, there were some credits in favour of that firm. After deducting those credits, it was found that a sum of Rs.

2,68,386-1-3 remained as the balance. The Assessee purported on 18th October 1952, to write off this amount as a bad debt. As we said this

amount represented the net debit against the Bombay firm in respect of all the transactions which the Assessee firm had with that firm, namely, (i)

advances to the Bombay firm as their agent, (ii) losses sustained in the speculative transactions, and (iii) monetary advances. Therefore, the amount

sought to be written off cannot entirely represent a bad debt in a money-lending transaction. If it is proved that the amount is irrecoverable, it will

be a loss in all the businesses carried by the Assessee with the Bombay firm. The circumstance that during Samwat years 2005 and 2006 interest

was debited on the outstanding amount, cannot have much significance in the case, for, the balance represented not merely moneys which could

legitimately be stated to have been advanced as, loans, but also several sums advanced to the Bombay firm as the agent of the Assessee firm.

The income tax officer disallowed the claim of the Assessee to write off Rs. 2,68,385-1-3 on the ground that the advances to the Bombay firm

were only in the nature of accommodation and had no connection with the business which the Assessee firm had with it. In coming to that

conclusion the officer was influenced by the fact that S. Amarchand, whose sons had a substantial interest in the Assessee firm, was himself a

partner in the Bombay firm, and that, therefore, it was more likely that the remittances to the Bombay firm were made with a view to save the

clashing firm rather than as advances for carrying on the Assessee''s business with it. An appeal to the Appellate Assistant Commissioner was

unsuccessful. He held that the advances were made only as an accommodation by reason of the longstanding relationship between the two firms.

He referred to the fact that no interest was charged for the outstanding balance as against the Bombay firm during the last two years. The Assessee

then filed an appeal before the Appellate Tribunal, which confirmed this part of the assessment. The Tribunal stated:

It is stated that the Bombay firm was acting as tie Adathia of the Assessee for a longtime past and that the balance had arisen only in the course

thereof. It is also stated that the Assessee had received interest on the account for a number of years in the past except for S.Y. 2007 so that it

must be regarded as a money-lending account. We are unable to accept this contention-The account is purely an accommodation account to

enable the Bombay firm to get over the financial crisis that was threatening it in S.Y. 2007. The fact that interest was charged cannot make it a

money-lending account. The transactions in this account are totally unconnected with the normal business of the Assessee.

The Tribunal was then directed to refer the following question u/s 66(2) of the Act:

Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the debt of Ks. 2,68,385 was not one

incurred in the course of money-lending business of the Assessee?

From what we have stated above, it will be clear that the sum of Rs. 2,68,385 which was purported to be written off in the Assessee''s accounts

on 18th October 1952, did not represent solely the loss in the money-lending part of the Assessee''s business.

In order to entitle the Assessee to claim a deduction for a bad and doubtful debt in its money-lending business, the conditions prescribed in

Section 10(2)(xi) must be satisfied, namely, that it should represent a loss incurred in the course of the business which at the time when it was a

good debt, went to swell the assets of his business; in other words, the debt should be one which would have come into the balance-sheet as a

trading debt in the business or trade that is in question. The contention of Mr. Padmanabhan, who appeared on behalf of the Assessee is that

notwithstanding the fact that moneys were advanced to the Bombay firm in respect of various business aforesaid, it should still be regarded as a

debt incurred in the course of the money-lending business. Support for that contention was sought from the decision of the Allahabad High Court in

Gaya Prasad Chhotey Lal v. Commissioner of income tax (1934) ILR 57 All. 740. There, an Assessee entered into an agreement to finance a

litigant, stipulating for payment, in the event of success, of a sum of Rs. 21,000 in addition to the litigation expenses to be advanced by the

Assessee. But if the case were to be lost, the Assessee was to receive nothing. The case was won and the Assessee obtained a sum of Rs. 15,000

in addition to the return of the sums he had expended. The former sum was sought to be assessed to tax. The Allahabad High Court held that the

sum of Rs. 15,000 was assessable as profits from business. Niamatullah J., observed:

In the case before us there can be little doubt that the Assessee embarked upon a transaction of loan in which unusual conditions were stipulated.

He agreed to advance such sums as were needed by Kanhaiya Lal for the prosecution of his appeal and stipulated for its return together with profit

on the sums advanced. The profits were not calculated at a given rate of interest, but in a lump-sum. It may be, as the learned advocate for the

Assessee argues, that there was an element of speculation in the transaction. At the same time, it cannot be gainsaid that the transaction was one of

loan from which the lender expected to derive considerable pecuniary profit.

Relying on this observation, Mr. Padmanabhan argues that whenever a sum of money is advanced under an agreement, it should be regarded

as a loan and if the creditor happens to be a money-lender, any loss sustained by the non-receipt of such advances should be regarded as a bad

debt in the money-lending business. But, we are by no means sure that the agreement in the Allahabad case can be said to evidence the case of a

loan. A loan generally implies that there is a condition express or implied for return or repayment. In that case the express stipulation in the

agreement was that the debtor was not bound to return the sum advanced if he were not to succeed in the litigation. The money received by the

Assessee in that case can, therefore, be only be regarded as profits earned in the course of business, if the Assessee had made it his business to

finance litigation ; it may also be one made in the course of an adventure in the nature of a trade if the activity was not a part of his regular business.

Learned Counsel next referred to the decision of the Patna High Court in DEONITI PRASAD SINGH Vs. COMMISSIONER OF Income

Tax BIHAR AND ORISSA., where the Assessee, a zamindar, who took promissory notes from his tenants, in lieu of arrears of rent, was held

entitled to claim a deduction for such of the debts represented by the promissory notes as had become bad and irrecoverable. It was found in that

case that during the previous years the department had treated bonds and promissory notes taken by the zamindar for arrears of rent from his

tenants, as investments in the Assessee''s money-lending business. They, therefore, became the stock-in-trade, as it were, in such business and the

Assessee was held entitled to claim a deduction u/s 10(2)(xi). That was a plain case of a money-lender writing off a bad debt.

The decision in The Commissioner of Income Tax Vs. The Mysore Sugar Co., Ltd., where the manufacturer of sugar could not recover the

advances made to the sugar-cane growers against future supply of sugar-cane, was concerned with the question whether it was a capital or a

revenue expenditure.

It may be that where an Assessee has several lines of business and a loss is sustained in them such loss might become a trade loss, which he

would be entitled to claim as deduction in computing the assessable profits. Such a case will be slightly different from the case of a money-lender

writing off a bad and irrecoverable debt.

In Reid''s Brewery Co. Ltd. v. Male (1891) 13 I.T.C. 279, 285 a brewery company made loans to its customers on making security. When

the security was found insufficient to cover the loan, the Assessee proceeded to write off the loan as a bad debt; it was held that they were entitled

to do so, as in arriving at the profit, for purposes of assessment to income tax, the Assessee would be entitled to deduct the amount of such losses

or bad debts. Pollock B. holding that the moneys lent were capital investments in the business, observed:

What it is is this. It is capital used by the Appellants, but used only in the sense that all money which is laid out by persons who are traders,

whether it be in the purchase of goods be they traders alone, whether it be in the purchase of raw material be they manufacturers, or in the case of

money-lenders, be they pawnbrokers or money-lenders, whether it be money lent in the course of their trade, it is used and it comes out of capital,

but it is not an investment in the ordinary sense of the word.

The money-lending in that business being found to be an adjunct to the business in brewery, the losses on the advances made were regarded

as loss in the business.

In the case of a banking or money-lending business, whether the accounts are maintained on the cash basis or mercantile system, allowance for

bad and doubtful debts is given on the principle that moneys embarked in such business for the purpose of lending out to earn interest, are in the

nature of stock-in-trade of the person doing that business and a bad debt in such business would be in the nature of loss in the stock-in-trade. The

Assessee in the present case has not been able to show that the entire sum of Rs. 2,68,385 claimed by him as a loss in respect of money advanced

by it to the Bombay firm, is of such a nature. As the Supreme Court has observed in A. Vs. THOMAS AND CO. LTD. v. COMMISSIONER

OF Income Tax., 75 a question u/s 10(2)(xi) can only arise if there is a bad or doubtful debt. After citing with approval the definition of a debt by

Rowlatt J. in Curtis v. J. and GOld field Limited (1925) 9 T.C. 319 830 the Supreme Court observed:

A debt in such oases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a

thing which that person has failed to return even though no purchase was made. In the section a debt means something more than a mere advance.

It means something which is related to business or results from it. To be claimable as a bad or doubtful debt it must first be shown as a proper

debt.

In the case before us^ we have already found that part at least of the advances made by the Assessee to the Bombay firm must have been

moneys sent to its agent for discharging its own obligations to third parties. They can, by no stretch of imagination, be said to be money lent. We

are, therefore, unable to regard the sum involved in this reference as a bad and doubtful debt which the Assessee would fee entitled to write off as

one incurred in its money-lending business.

Mr. Padmanabhan then contended that from the materials now available, it will be easy to disassociate the moneys sent to the Bombay firm by

the Assessee for business purposes and those lent, and that the Tribunal should be directed to find out which part of the sum now claimed really

represented advances made in the course of the money-lending transactions of the Assessee. It is, however, unnecessary to consider whether this

could be done at this stage, as we are of opinion that the learned Counsel is well-founded in his contention that the question referred to us must be

re-framed to include within its ambit, trade or business loss as well. While it is undoubted law that the High Court can dispose of u/s 66 only those

questions which are referred to it and that it cannot raise and answer new questions which have not been so referred, it can, without raising a new

and different question, re-frame the question once formulated so as to bring out the real controversy between the department and the Assessee, on

the materials disclosed. In the present case it is plain that the Assessee claimed the deduction as loss in his entire business it had with the Bombay

firm. Paragraph 5 of the statement of the case submitted by the Tribunal refers to this when it states:

The Applicant submitted that they were having business transactions over several years with the Bombay firm, that the debts^ owed by the

Bombay firm was a consolidated debt arising out of running account and not in respect of any individual transaction of business and neither the

Applicant nor the Bombay firm maintained any account under separate heads of business.

The materials on record also show that the Assessee though claimed the deduction as a bad debt, intended to claim it as a trade loss as well.

But even if we were to re-frame the question so as to include within its ambit, a trade loss, the position of the Assessee, in the present case,

cannot in any way be better. In order to entitle any Assessee to get deduction for a trade loss, one has to see whether the loss was incidental to the

carrying on of the business. There is also another fact to be taken into account. A substantial part of the sum now claimed was already allowed in

the previous year as a trade loss. The rest of the moneys were advanced during Samwat year 2008 for the purpose of saving the Bombay firm,

which was fast declining. Such advances were made, presumably, at the instance of S. Amarchand who was interested in saving the Bombay firm.

One of the partners of the Assessee in his statement before the income tax officer admitted that the Bombay firm started sustaining losses even in

Samwat year 2007. He no doubt stated that it started making some profits during the beginning of the next year. But by April or May 1952, that

firm crashed without any hope of being retrieved. Admittedly, interest was not charged on the outstanding balance during Samwat years 2007 and

2008; the reason given was that the firm was not in good circumstances.

The officers of the department found that the advances were not made in the regular course of the Assessee''s business with the Bombay firm

but with a view to save that firm from its financial collapse. It was certainly not the Assessee''s business to save crashing firms. Its advances during

the latter part of Samwat year 2007 and during Samwat year 2008 cannot, therefore, be regarded as either moneys lent or advances made in the

course of a business. If the recovery of such moneys becomes impossible, they cannot be trated as a business or trade loss.

Learned Counsel would, however, contend that as the Bombay firm was making some profits at the beginning of Samwat year 2008, the

advances must be regarded as one made in the course of business to finance the latter firm. But no attempt has been made by the Assessee to

show the exact position of the Bombay firm during Samwat years 2007 and 2008. Its accounts were not produced before the income tax

authorities. The mere fact that the firm started making some profits in the beginning of Samwat year 2008 cannot necessarily mean that it was not

declining and that the Assessee advanced the moneys knowing it was so declining but hoping that it might, by reason of the financial help, recover.

The Tribunal has found that the advances made by the Assessee were purely by way of accommodation. It is, however, unfortunate that the

Tribunal should have used this expression as the word accommodation sometimes connotes an idea of a loan. Learned Counsel for the Assessee

was not slow to take advantage of the use of this expression by the Tribunal and he contended that as the Tribunal has found that the moneys were

given by way of accommodation they should be regarded as accepting the advances as loans. We are, however, unable to accept that contention.

The word accommodation in the context can only mean that the moneys were given as a favour or with a view to oblige the Bombay firm and not

in the course of the regular business of the Assessee or as a part of the financial arrangement between the two firms. That this must be so, is plain

from the order of the income tax officer as well is the Appellate Assistant Commissioner.

We are, therefore, of opinion that the Assessee has not been able to show that the sum of Rs. 2,68,385 was either a bad or doubtful debt in its

money-lending business or one representing a loss sustained in the course of its business. The question referred to us will, therefore, be answered

in the affirmative and against the Assessee who will pay the costs of this reference.