Dr. Sir Kameshwar Singh vs Commissioner of Income Tax

Manohar Lall, J.—u/s 66(1) Income Tax Act, the appellate Tribunal has referred to us three questions for our decision:

(a) Whether, even if it be taken that the sum of Rs. 1, 62, 260 or any portion thereof was a loss of the jute mill business, it is allowable as a'' bad debt in the assessment year 1941-42?

(In the alternative, if the above question is answered in the negative).

(b) whether, in the circumstances of the case, the irrecoverable debt covered by the degree against Watt Brothers &, Co. or any portion thereof, can be said to be a bad debt of the assessee''s money-lending business and as such, allowable as an admissible deduction u/s 10(2)(xi) of the Act?

Whether in the circumstances of the case, the irrecoverable debt covered by the promissory note passed by Shyam Lal Das can be considered a bad debt Of the assessee''s money-lending business and, as such, allowable as an admissible deduction u/s 10(2)(xi) of the Act.

Whether interest on arrears of rent relating to agricultural lands is agricultural income within the meaning of Section 2(1) of the Act, and, as such, exempt from-tax u/s 4(3)(viii).

It is convenient to set out the facts regarding each question separately.

[2] Question No. 1: The assessment proceedings relate to the year of assessment 1941-42, the accounting period of the assessee being the Fasli year 1937, that is to say 29-9-1989 to 16-9-1940. The assessee''s father purchased the Belliaghatta Jute Mills at Calcutta for a sum of Rupees 6,000,00/- in October or November, 1912. The mill was placed in charge of James Luke and Sons, who were to look after it as managing agents on a remuneration of Rs. 500 a month and a commission at the rate, of five per cent on the net profits of the Mill. In order to supply the managing agents with funds to carry on the business of the Jute Mill, substantial sums were advanced by the assessee''s father in 1912, 1913 and 1915. In the last year the amount actually placed in the hands of the managing agents amounted'' to Rs. 2,50,000. James Luke and Sons executed hand notes for the relevant amounts in favour of the assessee''s father--the rate of interest was fixed at 6 per cent per annum. The business was carried on till the date of death of the assessee''s father, and after the assessee succeeded to the business on the death of his father on 3-7-1929, the same arrangement was continued with the managing agents. On the 1-4-1932, the running of the Mill was stopped and the assessee sold it to Seth Hukumchand on 21-12-1932 for a sum of Rupees 145,000 reserving to himself the right to realise the outstanding dues to the Mill from the customers and debtors up to the date of the sale. James Luke and Sons in the course of their management of the Mill had lent large sums to Watt Brothers Limited without the permission or knowledge of the assessee. The largest shareholder in the company was James Luke himself. When the accounts were audited it was found that on 15-12-1932 a sum of 154,433 rupees was due from Watt Brothers Limited.

In the assessment year 1933-34, the assessee showed in his return a sum of Rs. 7,500 as having been realised as interest from James Luke and Sons on the aforesaid sum of Rupees 2,60,000 this was added in the assessable income of the assessee for that yea The assessee at that time also claimed Rs. 1,49,649-0-6 as being a bad and irrecoverable loan due from Watt Brothers Limited. This claim was made under the heading, Bellighatta Jute Mill business. The claim to set off this bad debt was disallowed by the Income Tax Officer by his order dated 23-8-1934, (Ext. T-N) on the ground that he was not satisfied that this debt had become irrecoverable in the previous year. He observed at page 34 that the company, that is to say, Watt Brothers Limited

used to get advances from the Mills and supply raw jute since several years ago. The transactions terminated in the year ended September, 1931 (1338 FS) resulting in a balance of Rs. 1,49,649-0-6 due against the company. No action has been taken to realise the sum and as it is a due of 1338 FS it is certainly not time barred. In claiming deduction for bad debt this year (1339 FS) the assessee depends upon it letter from Steward & Co (Stock and Share Brokers) date 18-12-1983 in which they simply state that they made enquiries, and learnt that watt Brothers Ltd., was practically solely owned by one Mr. Luke who had no finance and therefore the dues cannot be realised it is not dear what enquiries were made and why a Limited company which is working should not be proceeded; against for the dues. Further, Mr. Luke the alleged owner of Watt Brothers Ltd. is none else than Messrs James Luke and Sons, the managing agents of the assessee. It is not dear how the dues became irrecoverable from the assessees own managing agents.

The auditors, Messrs Lovelock and Lewes have not pointed out the amount as a bad debt, and it is hard to believe that they have purposely omitted to do so to shield Messrs James Luke & Sons. The bid debt is not proved.

On the 25-8-1934, the assessee instituted suit No. 1507, of that year on the original side of the Calcutta High Court against James Luke and Sons in which he claimed a decree for Rs. 43, 883 as having been wrongfully spent by the managing agents and also Rs. 1,68,522 as having been lent by them to Watt Brothers Limited instead of buying jute in the market for cash; this figure is arrived at by adding, some costs to the figure l, 54, 438 referred to already (this I find from para. 46, of the judgment of the Appellate Assistant Commissioner). The plaint in this suit was not on the record, but the written statement filed by James Luke and Sons is printed at page 29. In order to clear up the position, it was necessary to have before us the plaint in that suit, and accordingly we called upon the r lessee to produce a copy of the plaint. The learned Standing Counsel very rightly did not object to this document being produced before us for the use of the Court and marked by us Ex. 1.

On 24-7-1985, the assessee instituted Suit No. 1404 of that year on the original side of the Calcutta High Court against Watt Brothers Limited claiming from them Rs. 1,58,522 together with interest thereon making a total of: Rs. 185,108. It is stated in para. 4 of the plaint (which is exhibit T-I at page 28) that James. Luke and Sons, managing agents of the Mill.

used to lend out of the funds of the Mill large sums of money to the defendant on interest at the rate of Rs. 6 per cent per annum for the alleged purpose of buying jute.

The written statement by Watt act Brothers is not on the record, and we are informed- that they did not contest the suit. An exparte decree was pronounced by the High Court on 18-12-1985 in favour of the assessee for Rs. 1,85,108 plus future interest and costs. In suit No. 1507 of 1934, a compromise decree was passed in June 1987, for a sum of Rs. 43,883, and the assessee abandoned the claim of Rs. 1,58,522 against James Luke and Sons on the grounds that he had already obtained a, decree for that amount against Watt Brothers, Limited. In the mean time, the assessee took steps to realise his decree from Watt Brothers Limited. By suit No. 508 of 1936 Mr. S.K. Sen was appointed as the official liquidator to wind up Watt Brothers, Limited on the application made, by the assessee as a creditor on the 21-12-1936, but the liquidator was able to give the assessee only Rs. 10-9-0 out of the sum realised by sale of the properties of the Company on 21-6-1940. The assessee, therefore, has claimed the balance which he could not recover as a bad debt.

How has the assessee treated this advance of Rs 2,50,000 (to James Luke and Sons) in his account books and how has he represented this transaction to the High Court at Calcutta and to the Income Tax authorities in several years ? Exhibit T-I is an extract from list of loans for 1839 Fasli filed along with the return made u/s 22, Income tax Act by the assessee for 1933 assessment It gives a tabular list of a number of debtors for the period 1-4-1931 to 80-9-1932. In the third column the balance of the sum advanced at the end of 1838 Fasli is shown. In the fifth column is given the figure for any part of the principal sum realised in 1339 Fasli and in the sixth column the interest on the loan realised in 1339 Fasli is shown and at (the close of 1389 Fasli the balance of the principal is shown. The fifth debtor is James Luke and Sons. At the end of 1388 Fasli Rs 2,50,00 is shown as advanced to them, but in the fifth column the whole of this Rs. 2,50,000 is shown as having been realised, and in the sixth column the interest realised is shown at Rs. 7, 500 in 1839 Fasli, and, as was to be expected, the seventh column shows that the balance at the close of 1339 Fasli was nil. This shows conclusively to my mind that the assessee accepted the position that Rs. 2,50,000 which had been advanced by him to James Luke and Sons had been repaid by them in 1839 Fasli and was then treated as having been spent by the managing agents in the course of and for the jute business. After 1889 Fasli, the assessee has never shown any interest as having been realised or due from James Luke and Sons on the whole or any part of this Rs. 2,50,000. It is important to remember that the year 1339 Fasli ends on 30-9-1932 and this is the very year in which the Mill was closed down in April.

In the assessment proceeding for 1933-34 the assessee did not claim this amount as a bad debt in his money lending business but as a bad debt of Beliaghatta Jute Mills, Calcutta (see page 34 of the paper book) I have already drawn attention to this. In appeal from that assessment the assessee maintained the same position (see page 35 para 53). In the plaint of the suit against Watt Brothers Limited, I have already pointed out that the assessee clearly stated in para 4 that Rs. 158,622 was lent by the Managing Agents out of the funds of the Mill. The plaint of the suit against James Luke and; Sons does not proceed on the basis that a certain sum out of Rs. 250,000/- a still remins unpaid but proceeds on the allegation that James Luke and sons acted fraudulently and negligently in lending out Rs. 1,58,522 odd to Watt Brothers.

In the face of these clear facts it must be held that Rs. 1,58,522 was not a money, lending debt but was a debt due to the Belliaghatta Jute Mills which was closed in April 1982. It must also be held that this amount became a bad debt in the year 1940. Learned Counsel for the assessee complained bitterly that the Income Tax department have treated the assessee unfairly. He points out that in the year 1933-34 the income tax department would not allow this sum as a bad debt of that year on the ground that it had not yet become irrecoverable and that the assessee should take some steps to realise this sum. Accepting that order as correct, argued the learned Counsel, the assessee proceeded to take steps to realise this sum in the Calcutta High Court and as I have already observed he realised only Rs. 10 in the year 1940. It is, therefore, argued that it is not open to the Income Tax department to refuse to allow this as a bad debt in the year in which it has really become bad. In my opinion, it is impossible to give any relief to the assessee. The matter can be looked at only from two points of view. Either the Income Tax department were right in holding that the debt had not become bad in 1934 or they were wrong in so holding. If the Income Tax department were right in holding that the debt had not become bad in 1934 the assessee can have no grievance if he agreed with the income tax department and treated the debt as if it were a good debt in that year. The jute mill business having been closed down in 1932 the assessee can, not claim to set off the loss in that business in his account for the year 1940, as it then became a capital loss. In the course of the argument I put to learned Counsel the question that if the debt of the Jute Mill business was actually a good debt not only in the view of the Income Tax department but also having regard to the financial position of the debtor how could the assessee claim this as a bad debt of the Jute mill business some years later after the jute mill business had been closed. The answer must fee against the assesee in such a contingency. This is exactly what has happened in the present case. The assessee accepted the decision of the Income Tax Officer as correct and, therefore, he cannot complain.

The other alternative is that the decision of the Income Tax Officer was wrong and that the debt should have been treated as a bad debt in 1934. The remedy of the assessee was to appeal against the order as he did, but he failed before the Appellate Assistant Commissioner on 21-5-1936. The assessee should have then moved the Commissioner u/s 33 of the Act which was then in operation and should have also asked for a reference to the High Court u/s 66. Not having taken recourse to these proceedings, the assessee now must face the position that a good debt of the Beliaghatta Jute Mill which was closed in 1932 has now become irrecoverable in 1940.

For these reasons the answer to question No. 1(a) must, in my opinion, be in the negative. Learned Counsel, however, also argued that this should be treated as a bad debt of the assessee''s money lending business, He relies principally on the fact that Rupees 2,50,000 was admittedly advanced to James Luke and Sons, that the assessee realised Rs. 7,500 as interest in 1839 Fasli and. that that amount was included in his taxable income of that year. The difficulty, however, in accepting this argument as correct is that the assessee has not shown that Rupees 1,58,522 remained due to the assessee as a part of the sum advanced to James Luke and Sons. I have already shown that in the plaint of the suit against James Luke and Sons no such claim was made nor is such a claim consistent with the allegation in the plaint of the suit against Watt Brothers Limited. I have also shown that in the list of loans for 1839 Pasli the assessee is shown to have received the whole of this Rupees 2,50,000. Again no claim was ever advanced before the Income Tax authorities that this Rupees 1,58,522 is a bad debt of the money-lending business.

Learned Counsel for the assessee relies strongly upon the decision of this Court pronounced by me sitting on the Division Bench in the case of the present assessee reported in Commr. of Income Tax, Bihar and Orissa v. Maharaja of Darbhanga AIR 1944 Pat. 107. But in that case the facts found were entirely different I am quoting from page 126:

The Maharaja entered into money-lending business by advancing Rs. 32,00,000 to Kunwar Ganesh Singh. That business fell into bad ways and the business was wound up, the Maharaja taking over all the assets of the business including the debts due from the customers to Kunwar Ganesh Singh who was the agent of the business.

In the present case the facts are otherwise, viz., the assessee has been repaid the sum of Rs. 2,50,000 which he advanced to James Luke and Sons in the manner indicated above. I have, therefore, come to the conclusion that the answer to question 1(b) must also be in the negative.

Question No. 2: Shamlal Das was an employee under the assessee and acted a Patwari in has zemindari. On taking the account it was discovered that Shamlal Das had misappropriated some money out of the zemindary income. As a result of settlement of accounts, Shamlal Das executed a promissory note in respect of the fund which he had embezzled in September, 1934. The assessee instituted a suit to recover the sums due on the handnote and on 31-10-1938, he obtained a decree but nothing could be realised from the Patwari. The assessee claims that this amount should be treated as irrecoverable loan and allowed to him as a loss in his money-lending business. It is found as a fact by the Income Tax authorities that this debt was not a true debt lent on in the ordinary course of the moneylending business. They have pointed out that

It has not been shown even before us that the promissory note in question was treated as part of, the money-lending transaction of the appellant. The appeallant unquestionably is a big money-lender and keeps account of his money-lending transactions but this promissory note was obtained not for any money advanced to him but in consideration of the amount due on account of zamindary collections embezzled.

Section 10(2)(xi) of the Act provides that in the case of an assessee carrying on a banking or money-lending business

such sum in respect of loans made in the ordinary course of such business as the Income Tax Officer may estimate to be irrecoverable....

should be allowed as a deduction. On the facts found this loan was not made in the ordinary course of moneylending business and, therefore, this bad debt cannot be allowed to the assessee.

Reliance was placed upon the oft-cited case in Rajagopala Venkata Narasimha v. Commr. of Income Tax, Madras AIR 1932 Mad. 436. In that case, however, the question was not whether any bad debt should be allowed as an admissible deduction but whether the interest which was received by an assessee due to him on promissory notes executed in his favour by the defaulting tenants was assessable. Ramasam J. who delivered the judgment observed that

In this case by a fresh contract between the zemnidar and the ryots the actual character of the liability has been changed into a loan. It has ceased to be rent and has become merely a loan.

The assessee''s argument was not accepted that this interest which was received by him should be treated as agricultural income. This decision is of no help to the assesses on the facts found in the present case. For these reasons, the answer to question No. 2 is in the negative.

Question No. 3: It is unnecessary, to give the facts as it is agreed that the answer to this question is in the affirmative on the authority of the decision pronounced by this Court in SRIMATI LAKSHMI DAIJI Vs. COMMISSIONER OF Income Tax, BIHAR and ORISSA., . The sum involved is Rs. 1,67,603.

As the assesses has failed with regard to his claim for Rupees 1,58,522 and also with regard to the claim for Rs. 796 but has succeeded with regard to his claim for Rs 1,67,603, each party will bear his own costs of the hearing in this Court.

Meredith, J.

I agree. Upon question No. 1, it seems to me impossible to hold that the loss was in the asaessee''s money lending business. Neither the suit against James Luke and Sons nor that against Watt Brothers was a suit upon a loan or framed as such. It was a loss in his jute business incurred through the misfeasance of his managing agents. It is no doubt bard that the assesaee should be first put out as being premature and then as too late. But if the Income Tax Officer wrongly took the view in 1933-34 that the sum outstanding (which he refused to regard as irrecoverable then) was a money-lending debt, and the assessee accepted that instead of taking the matter to the highest tribunal, that it seems to me can give him no claim to have the mistake repeated in 1940 in his favour. The money may have become irrecoverable in 1940, but it can then only be regarded as a capital loss of a defunct business. It cannot possibly be treated as a trading loss of the assessment year.