1955 (1) TMI 44 - HC - Income Tax

Court disallows Jaipur loss & litigation expenses. Realization of debts post partition taxable income. Assessee granted costs.

The court held that the loss incurred in Jaipur was not allowable under the proviso to Section 24(1) of the Income-tax Act. Litigation expenses were also ... - Issues Involved:1. Allowability of loss under proviso to Section 24(1) of the Income-tax Act.2. Admissibility of litigation expenses as business expenditure under Section 10(2)(xii) (now xv) of the Income-tax Act.3. Continuation of money-lending business post partial partition in a Hindu undivided family.4. Taxability of the amount received in excess of the original debt as income.Detailed Analysis:1. Allowability of Loss under Proviso to Section 24(1) of the Income-tax ActThe first issue was whether the loss of Rs. 4,483 incurred in the speculation business at Jaipur was an allowable loss under the proviso to Section 24(1) of the Income-tax Act. The proviso stipulates that losses sustained in an Indian State, which would otherwise be exempt from tax under Section 14(2)(c), cannot be set off against profits or gains accruing or arising within British India.The court noted that Section 24(1) allows for the set-off of losses against income under any other head, but the proviso restricts this if the loss is from an Indian State and would be exempt under Section 14(2)(c). Section 14(2)(c) exempts income accruing or arising within an Indian State unless it is received or deemed to be received in British India.The court held that the loss incurred in Jaipur could not be set off against the income in British India, as per the plain reading of Section 24(1) and Section 14(2)(c). The court also referenced previous judgments, including Mishrimal Gulabchand [1950] 18 I.T.R. 75, which supported this view.2. Admissibility of Litigation Expenses as Business Expenditure under Section 10(2)(xii) (now xv) of the Income-tax ActThe second issue was whether litigation expenses amounting to Rs. 6,338 were admissible as business expenditure under Section 10(2)(xii) (now xv) of the Income-tax Act. The court noted that the expenditure was incurred by the assessee in a suit against certain partners for rendition of accounts.The Tribunal had held that the expenditure was not for the business activities but to enforce a right against a partner, which was not allowable as business expenditure. The court agreed with this finding, referencing the decision in Shrimati Indermani Jatia v. Commissioner of Income-tax, U.P., Lucknow [1951] 19 I.T.R. 342, which stated that expenses must be incidental to the business and laid out wholly and exclusively for the purpose of the business to be deductible.3. Continuation of Money-lending Business Post Partial Partition in a Hindu Undivided FamilyThe third issue was whether, after the partial partition of the Hindu undivided family, the two members Ram Sarup and Radhey Lal continued to carry on the money-lending business, even though no fresh loans were advanced, and they only took steps to realize the existing loans.The court noted that the five mortgage loans were kept joint, and the brothers agreed to divide the realized amounts equally. However, the court held that the mere realization of outstanding debts did not constitute carrying on a money-lending business. The inherited mortgage debts became capital in the hands of the sons, and any interest realized was income from other sources.4. Taxability of the Amount Received in Excess of the Original Debt as IncomeThe fourth issue was whether the amount of Rs. 15,612 received in excess of the original debt was taxable income. The court held that the excess amount realized over the original debt was taxable income. The inherited mortgage debts were capital, and any interest accrued or realized was taxable income.The court referenced Bennett v. Ogston [1930] 15 Tax Cas. 374, which held that interest earned on capital after the death of the original lender was taxable. The court concluded that the amount in excess of the original debt was taxable income from other sources.Conclusion:- The loss of Rs. 4,483 incurred in Jaipur was not an allowable loss under the proviso to Section 24(1) of the Income-tax Act.- The litigation expenses of Rs. 6,338 were not admissible as business expenditure under Section 10(2)(xii) (now xv) of the Income-tax Act.- The realization of outstanding debts did not constitute carrying on a money-lending business post partial partition.- The amount of Rs. 15,612 received in excess of the original debt was taxable income.The reference was answered accordingly, and the assessee was entitled to costs assessed at Rs. 500.