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of <h1>Court allows deductions for irrecoverable loans in money-lending business. Consistency in tax treatment emphasized.</h1> <h3>Deoniti Prasad Singh Versus Commissioner of Income-Tax, Bihar and Orissa</h3> Deoniti Prasad Singh Versus Commissioner of Income-Tax, Bihar and Orissa - [1947] 15 ITR 165 Issues:1. Interpretation of Section 10(2)(xi) of the Income-tax Act regarding loans made in the ordinary course of money-lending business.2. Tax treatment of bonds and promissory notes taken in lieu of arrear agricultural rents by a zamindar who is also a money-lender.3. Claim for irrecoverable amounts in computing assessable income.Analysis:The judgment by the Patna High Court, delivered by Justices Manohar Lall and Meredith, dealt with a reference by the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act. The central question was whether bonds and promissory notes taken by a zamindar in lieu of arrear agricultural rents, who is also a money-lender, could be considered as loans made in the ordinary course of money-lending business under Section 10(2)(xi) of the Income-tax Act. The case involved assessment proceedings for the years 1942-43 and 1943-44. The assessee, engaged in money-lending business and owning a zamindary, obtained handnotes and mortgage bonds from tenants instead of suing them for arrears of agricultural rent. The Income-tax department treated these handnotes and mortgage bonds as investments in the money-lending business of the assessee, taxing accrued interest on them in previous assessments.In the assessment year 1942-43, the assessee claimed a sum as irrecoverable from investments with agricultural tenants. The Income-tax Officer disallowed the claim, stating that some debts were unrecoverable due to prior property transactions by debtors, making them bad debts. The Appellate Assistant Commissioner upheld this decision, noting that the debts did not arise from money-lending transactions and were outside the business. The Appellate Tribunal, however, disagreed with the department's stance and referred the matter to the High Court.The High Court held that the department had consistently treated these investments as part of the money-lending business in previous assessments, taxing accrued interest accordingly. The court emphasized that the department could not selectively treat these transactions as money-lending when taxing interest income but deny the same classification when considering irrecoverable loans. Therefore, the court ruled in favor of the assessee, allowing the deduction for irrecoverable loans as part of the money-lending business. The judgment highlighted the need for consistency in tax treatment and upheld the assessee's claim for deductions on irrecoverable loans.In conclusion, the High Court answered the reference in the affirmative, granting the assessee deductions for bad and irrecoverable loans during the assessment years 1942-43 and 1943-44. The court also awarded costs to the assessee and directed the return of the deposited fee. Justice Meredith concurred with the decision, and the reference was resolved accordingly.
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