1965 (4) TMI 120 - HC - Income Tax

Deduction allowed for bad debt under tax law; partial success in money-lending business case

C.T. Narayanan Chettiar Versus Commissioner of Income-Tax, Madras

C.T. Narayanan Chettiar Versus Commissioner of Income-Tax, Madras - [1966] 60 ITR 690 Issues Involved:1. Whether the sum of Rs. 78,974 can be allowed as a bad debt deduction.2. Whether the sum of Rs. 26,600 can be allowed as a bad debt deduction.3. Whether the sum of Rs. 12,000 can be allowed as a bad debt deduction.Issue-wise Detailed Analysis:1. Whether the sum of Rs. 78,974 can be allowed as a bad debt deduction:The assessee, a Hindu undivided family, carried on a money-lending business and was a partner in a firm. The firm was dissolved with a credit of Rs. 2,77,421 in favor of the assessee, representing advances made by the assessee to the firm. The current account showed a debit of Rs. 1,98,447, resulting in a net credit balance of Rs. 78,974. The assessee claimed this amount as a bad debt deduction. The Income-tax Officer treated it as a capital loss, but the Appellate Assistant Commissioner allowed it as a bad debt. The Tribunal reversed this, considering the advances as additional capital. The court noted that the advances were consistently treated as loans in previous years and not as additional capital. The partnership deed distinguished between capital and further advances, which bore interest. The court held that the Tribunal erred in law, and the sum of Rs. 78,974 should be allowed as a deduction under section 10(2)(xi) of the Act.2. Whether the sum of Rs. 26,600 can be allowed as a bad debt deduction:This amount was a liability of the firm allotted to the assessee upon dissolution. The court agreed with the Tribunals below that this represented a capital loss and not a money-lending outstanding that became irrecoverable. Therefore, the sum of Rs. 26,600 could not be allowed as a bad debt deduction.3. Whether the sum of Rs. 12,000 can be allowed as a bad debt deduction:The assessee was to receive Rs. 23,500 from a partner, out of which Rs. 12,000 was not recovered. The assessee claimed this as a bad debt. The court distinguished this from a similar case where the debt was a money-lending debt from inception. Here, the amount arose from a partnership dissolution, and the mere fact that the assessee was a money-lender was insufficient to convert this into a money-lending debt. The court concluded that the sum of Rs. 12,000 could not be allowed as a bad debt deduction.Conclusion:The assessee succeeded in respect of the first item (Rs. 78,974) and failed in regard to the other two items (Rs. 26,600 and Rs. 12,000). The question was answered accordingly, with no order as to costs given the partial success of the assessee.