Commissioner of Income Tax vs Harjasmal Mehra

D.K. Mahajan, J.—This is a reference u/s 66(2) of the Indian Income Tax Act, 1922. The assessee, Harjasmal Mehra (Harjasrai Mehra), is assessed as an individual In the assessment year 1954-55, his sources of income were from property as well as his share of profits from certain firms oi which be was a partner, one of them being M/s. Hakam Chand Raj Kumar, Amritsar. The main business of this firm was money-lending. Its partners were Harjasmal (assessee), M/s. Yograj Dev Raj and Smt. Indira Vati. A Surat firm known as M/s. Harjas Rai and Co. were debtors of Messrs. Hukam Cband Raj Kumar, the Amritsar firm. Their debt liability to this firm was to the tune of Rs. 1,50,705. The firm was dissolved on 20th March, 1954. The assets and liabilities of the Amritsar firm were taken over by the assessee, Harjasrai Mehra, on Chet Bedi, 2010. In an award, as a result of arbitration proceedings, the liability of the Surat firm was liquidated on payment of Rs. 40,000. In the assessment year 1954-55, relating to the financial year 1953-54, the assessee claimed a sum of Rs. 1,10,705 as bad debt, in view of the award, whereby am payment of Rs. 40,000, the debt lability of the Surat firm amounting to Rs. 1,50,703 had come to an end. The Income Tax Officer rejected this claim on three grounds:

This is a debt of the dissolved firm of M/s. Hukam Chand Raj Kumar and is, therefore, a capital loss. The assessee was in the know of this loss when he took over the firm.

The assessee has not done any business in the name of M/s. Hukam Chand Raj Kumar and is not a trade debt at all. It cannot, therefore, be considered here.

The assessee has surrendered the amount himself for considerations best known to him. It is a case of voluntary surrender and not of bad debt.

Against the order of the Income Tax Officer an appeal was taken to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order of the Income Tax Officer in the following terms :

"I find that the main source of the appellant during the relevant previous year was his share in various firms, one of them being M/s. Hukam Chand Raj Kumar. During the relevant previous year the appellant''s share income in this firm was taken at Rs. 4,226. Some time towards the close of the previous year the business of this firm was wound up. The firm of M/s. Hukam Chand Harjas Rai also had at one time decided to take over the assets and liabilities of M/s. Harjas Rai and Co., Surat. The Surat business owed a sum of Rs. 1,50,704 to the firm which later on was taken over by the appellant. The appellant recovered a sum of Rs. 40,000 only and the balance of Rs. 1,10,704 was claimed as a business loss. The loss in question is definitely not a business loss. It is a capital loss. The amount claimed as a loss did not accrue or arise to the appellant during the course of his day to day business activities. It is not all kinds of losses that are to be considered for set-off. The Income Tax Officer rightly disallowed the claim of the appellant. "

Against this decision the assessee took up the matter to the Income Tax Appellate Tribunal, Delhi Bench. The Appellate Tribunal came to the conclusion that a remand report was called for. The reasons for this remand are to be found in the following order of the Tribunal:

" It was contended before us that the firm, M/s. Hukam Chand Raj Kumar, was carrying on money-lending business and the debt due from M/s. Harjas Rai and Co., Surat, was a debt pertaining to the money-lending business of that firm. It was the assessee''s case before us that, since the assessee took over the firm as a going concern, the debt of the money-lending business in the hands of the firm, M/s. Hukam Chand Raj Kumar, became a debt of the money-lending business in the hands of the assessee and the assessee was entitled to write it off as a bad debt as and when the debt became bad and doubtful. The authorities below have not given adequate consideration to the contention of the assessee that the firm, M/s. Hukam Chand Raj Kumar, was, in fact, carrying on money-lending business. The departmental representative contended before us that in the absence of any such finding it cannot be held that the debt due from M/s. Harjas Rai and Co., Surat, was a debt of the money-lending business and if it were not a debt of the money-lending business, then the assessee could not claim it as a bad debt. It appears that the respective contentions ought to be examined more closely by the Appellate Assistant Commissioner. This the Appellate Assistant Commissioner will now do. The Appellate Assistant Commissioner will examine the books of the firm, M/s. Hukam Chand Raj Kumar, and ascertain whether the debt due from the debtor pertained to the money-lending business. The Appellate Assistant Commissioner will permit the assessee to lead whatever evidence he likes in support of his contentions. The Appellate Assistant Commissioner after recording the evidence in this case should submit the remand report within three months from the date of receipt of this order. "

The Appellate Assistant Commissioner in his report observed :

" By the time the appellant took over the assets and liabilities of the money-lending business of the firm, it had already been closed and that the appellant thereafter did not carry on any money-lending business. He merely confined his activities to the realization of sundry debtors and payments to sundry creditors. Any loss resulting out of it purely was a capital gain or loss. It may be mentioned that the appellant himself was never a money-lender. "

This remand report was considered by the Tribunal in its order, dated 2nd November, 1960, and the appeal of the assessee was allowed. The relevant paragraph of this order is quoted below for facility of reference:

"...... the Appellate Assistant Commissioner has conceded that the firm, M/s. Hukam Chand Raj Kumar, was indeed carrying on money-lending business. Further, during the arguments, the learned counsel for the assessee pointed out that even in subsequent years the interest from money-lending business has been charged to tax as shown below :

Assessment year

Interest

Rs.

1955-56

6,354

1956-57

5,092

1957-58

13,861

He further contended that fresh investments were also made by the assessee. It is, therefore, clear that the assessee not only took over the money-lending business but himself carried it on. The ratio laid down in the case of Commissioner of Income Tax and Excess Profits Tax, Madras Vs. Sri R.S.A. Sankara Ayyar, therefore, applies, and the bad debt claimed is admissible."

The department was dissatisfied with this order and applied to the Tribunal u/s 66(1) of the Act for a reference to this court for stating certain questions of law for the opinion of this court. This application was declined by the Tribunal on the ground that no questions of law arose out of its order dated 2nd November, 1960. This led the department to move this court by an application u/s 66(2) of the Act. This court allowed the application and directed the Tribunal to refer the following two questions of law for its opinion along with the statement of the case:

"1. Whether, on the facts and circumstances of the case, there was any material on the record to hold that the assessee carried on money-lending business during the year of account ? and

Whether, on the facts and circumstances of the case, the amount of Rs. 1,10,705 was not rightly allowed as bad debt in computing the income of the assessee ? "

So far as the statement of the case is concerned, reference need only be made to paragraph 6 which is reproduced below :

" The Tribunal decided the case finally on 2nd November, 1960, The Tribunal came to the conclusion that the assessee, viz., Harjasmal Mehra, the individual, was carrying on money-lending business because :

M/s. Hukam Chand Raj Kumar was carrying on money-lending business.

Interest from money-lending business was earned by the assessee in the assessment years 1955-56, 1956-57 and 1957-58 as under :

Assessment year

Interest

Rs.

1955-56

6,354

1956-57

5,092

1957-58

13,861

The interest shown above was assessed as income from business. The Tribunal thereupon came to the conclusion that, prima facie, the assessee was carrying on money-lending business and this fact was also accepted by the department when interest was assessed as business income in subsequent years. In the absence of any materials to the contrary they did not accept the contention of the revenue that the business of money-lending was closed."

The learned counsel for the department has vehemently contended that the order of the Tribunal is merely based on conjectures and is not based on any evidence, whereas the contention of the learned counsel for the assessee is that the order of the Tribunal is based on evidence. The learned counsel for the assessee particularly lays stress on paragraph 6 of the statement of the case. Two facts have not been disputed before us, namely, that M/s. Hukam Chand Raj Kumar, the Amritsar firm, were carrying on money-lending business and that the assessee, Harjasmal Mehra was not carrying on any money-lending business. The main dispute, accord ing to the assessee''s counsel, is that Harjasmal Mehra started carrying on the money-lending business as soon as he took over the assets and liabilities of the Amritsar firm on its dissolution on the 20th March, 1954, whereas, according to the counsel for the department, there is no evidence that the assessee carried on the money-lending business of the Amritsar firm after its dissolution. The department''s case throughout has been that the money- lending business came to an end with the dissolution of the Amritsar firm and what the assessee was doing was merely realising the assets and paying off the liabilities of that business. It will be apparent from the order of the Tribunal, out of which the present reference has arisen, that it gives no reasons for coming to the conclusion that the assessee was carrying on the money-lending business or he was advancing fresh loans. All that has been done is to notice the contentions of the assessee''s counsel. It can be said that those contentions were possibly accepted, but it is not indicated on what basis they were accepted. It is not even said that those contentions were based on the books of accounts of the assessee. In this situation it appears to us that the case strictly falls within the decision of the Supreme Court in Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, . In this case the explanation of the assessee in relation to an opening cash balance of Rs. 1,85,000 on July 1, 1949, was rejected by the Income Tax Officer. The Income Tax Officer brought to tax the sum of Rs. 1,35,000 as income from undisclosed sources for the assessment year 1950-51. The Income Tax Officer''s order was confirmed by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal, after holding that the assessee was unable to explain the source of the amount satisfactorily, came to the conclusion that it was not unlikely that the assessee had some cash in hand from profits in trade from jaggery and from assets received on partition of the joint family of which the assessee was a member, thereby estimating the income from undisclosed sources at Rs. 50,000 relying merely upon the offer made by the counsel for the assessee. On a reference, the High Court held that the judgment of the Tribunal was based on no reasoning and was on that account speculative. On appeal to the Supreme Court it was held:

"... that the method adopted by the Appellate Tribunal was an unsatisfactory way of disposing of the appeal before it and the order passed by the Tribunal without recording any reasons in support of its estimate could not be sustained. "

After recording this finding, certain directions were given by their Lordships to the Tribunal to dispose of the appeal on the merits after hearing both the parties. These observations fully apply to the facts of the present case. The order of the Tribunal is so cryptic that it is not possible for us to come to a firm conclusion that it is based on evidence. It may be that the Tribunal accepted the contentions of the counsel on examining evidence and it is equally possible that there was no evidence before the Tribunal and it merely proceeded to hold in favour of the assessee merely on conjectures. We, therefore, answer the first question in favour of the department, that is, that the decision of the Tribunal in holding that the assessee was carrying on the money-lending business during the assessment year 1954-55, is not based on any material. The answer to the second question depends on the findings recorded by the Tribunal when it deals with the matter afresh on merits. Therefore, we record no answer to the second question. We would like to draw the attention of the Tribunal to the observations of their Lordships of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Walchand and Co. Private Ltd., as to what has to be done by it in view of our answers to the questions referred to us. To the same effect are the observations at page 482 of Esthuri Aswathiah v. Commissioner of Income Tax. In the circumstances of this case, there will be no order as to costs.

S. S. Sandhawalia , J.

I agree.