Commissioner Of Income-Tax And Excess... vs Sri R.S.A. Sankara Ayyar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 1 October, 1951

Coram: Mahajan, J.

In this case the matter was titled Commissioner of Income-Tax and Excess … versus Sri R.S.A. Sankara Ayyar and was heard on 1 October 1951 before the Supreme Court of India. The judgment was authored by Chief Justice Mahajan, J., and the bench was headed by the Chief Justice. The appeal arose from a judgment and order of the High Court of Judicature at Madras dated 26 August 1948, which had been issued on a reference made to it by the Income-Tax Appellate Tribunal under section 66(1) of the Income-Tax Act, 1922 (Act 21 of 1922).

The respondent, who acted as manager of a Hindu undivided family, had previously been engaged in a money-lending business in partnership with one Kasi Ayyar. Prior to 1931 the partnership’s business consisted mainly of discounting loans, except when the purpose was to realise outstanding amounts. One such outstanding was a debt owed by the firm of Kadir Pillai Marakayar on a mortgage. A final decree against that firm was obtained in 1940, and execution of the decree led to the sale of certain lands belonging to the debtor. By 11 September 1942 a sum of Rs 16,395-14-10 remained due under the decree, and the two partners decided to close the partnership accounts, dividing the outstanding between them. On 12 September 1942 the respondent recorded a sum of Rs 8,197, representing one-half of the decree debt, in the books of his separate money-lending enterprise that he maintained as manager of the family. A distinct account was opened in these books in the name of the debtor. During the subsequent accounting period the debtor made several payments, and the total amount realised after 12 September 1942 amounted to Rs 4,664. The respondent credited half of this realised amount, that is Rs 2,332, to his own account as his share. On 5 October 1943 the respondent wrote off the balance of Rs 5,880, which remained due to him out of the original Rs 8,197, treating it as irrecoverable. In the assessment year 1944-45 (accounting year 1943-44) the respondent claimed a deduction for the Rs 5,880 as a bad debt under section 10(2)(xi) of the Act. The Income-Tax Officer disallowed the claim. On appeal, the Appellate Assistant Commissioner allowed the deduction, holding that the bad debt had been taken over by the respondent as part of his money-lending business and that the loss was incurred in the separate business he carried on. The Income-Tax Appellate Tribunal affirmed that decision. Upon an application, the Tribunal referred two questions to the High Court: (1) whether there was material to support the Tribunal’s finding that the Rs 5,880 bad debt arose from a loan made in the ordinary course of the respondent’s money-lending business within the meaning of section 10(2)(xi); and (2) whether, on the facts and circumstances, the respondent’s claim to write off the Rs 5,880 as his share of the irrecoverable portion of the decree debt in the assessment year was admissible under the same provision.

In the proceedings before the High Court, two questions were posed for determination. The first question asked whether the expression “loans made in the ordinary course of his money-lending business” fell within the meaning of Section 10(2)(xi) of the Income-Tax Act. The second question inquired whether, on the basis of the facts and circumstances of the case, the assessee could lawfully write off the sum of Rs 5,880 as his share of the irrecoverable portion of the decree debt in the assessment year, and thereby claim a deduction under the same statutory provision. The High Court answered both questions affirmatively and, while doing so, issued a certificate permitting an appeal to the Supreme Court.

The sole issue that remained for the Supreme Court to consider was whether the treatment of the amount of Rs 8,197 by the respondent, in the specific facts and circumstances of the case, constituted a permissible deduction from his income under Section 10(2)(xi) of the Income-Tax Act for the assessment year in question. In arriving at its conclusion, the High Court examined the partnership’s accounts together with the respondent’s individual accounts. It observed that the debt had matured into a decree in favour of both partners and that there was no basis for any novation after the decree was issued. The Court noted that no authority supported the Revenue Department’s contention that a novation or a further act by the debtor was required before the old loans, even though they were treated as part of the stock-in-trade of the new business, could be deemed loans made in the ordinary course of the new business.

When granting leave to appeal, the learned judges emphasized the importance of the construction of the words “loans made in the ordinary course of such business.” They highlighted that, in the province, a prevalent practice among Nattukottai Chettis involved the partition of family money-lending firms, whereby debts due to the undivided family were allocated among coparceners. After partition, each coparcener would establish an independent money-lending enterprise and treat the allocated debts as obligations of the new business.

The learned Attorney-General argued that, after the partnership’s dissolution, the outstanding debt assumed by the respondent should be regarded as a capital asset of his new business and therefore could not be classified as a loan made in the ordinary course of that business. The Court was unable to accept this contention. It noted that the Tribunal, after reviewing the entries in the partnership books and the respondent’s books, had concluded that the respondent had treated his share of the outstanding decree debt as part of his money-lending business, effectively recording it as a loan extended by his business to the debtor. The Attorney-General vigorously maintained that the accounting entries could not support the Tribunal’s conclusion and that there was no material to justify such a finding. The Court disagreed with that view, finding that the entries were fully capable of supporting the construction adopted by the Assistant Commissioner and the Income-Tax Appellate Tribunal. Consequently, the Court affirmed the High Court’s finding that the amount in question represented a loan of the respondent’s money-lending business and was therefore an admissible deduction under Section 10(2)(xi) of the Act.

The Court could not accept the finding that the entries in the books could not support the Tribunal’s view, and it held that the entries were fully capable of being understood in the manner placed on them by the Assistant Commissioner and the Income-Tax Appellate Tribunal. The factual background was that on 12 September 1942 a division was effected among the partners, after which the partnership’s books were formally closed. Subsequently an account for the debtor was opened in the family books, and the debtor’s name was debited with an amount of Rs 8,197, which indicated that the debtor had become liable to the newly formed partnership and that the outstanding sum was treated as a loan advanced by the assessee’s money-lending business to that debtor.

Later, when the debtor made payments, those payments were credited to the same account maintained with the respondent, and the debtor would have received a discharge receipt from the respondent for each such repayment. Consequently, the debtor was recognised as a debtor of the new firm, and the sum in question was characterised as a loan belonging to the respondent’s money-lending business. Accordingly, the Court held that the deduction claimed for that amount was admissible under Section 10(2)(xi) of the Income-Tax Act. In the Court’s opinion, the decision of the High Court was correct, and therefore the appeal was dismissed with costs, and the appeal was finally dismissed.