Patna High Court
Sir Kameshwar Singh vs Commissioner Of Income-Tax, Bihar And ... on 10 January, 1947
Equivalent citations: [1947]15ITR246(PATNA), AIR 1948 PATNA 1
JUDGMENT
MANOHAR LALL, J. - Under Section 66 (1) of the Indian Income-tax Act the Appellate Tribunal have referred to us three questions for our decision :-
1. (a) Whether, even if it 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 decree against Watt Brothers and Co., or any portion there of, can be said to be a bad debt of the assessees money-lending business and, as such, allowable as an admissible deduction under Section 10 (2) (xi) of the Act ?
2. 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 assessees money-lending business and, as such, allowable as an admissible deduction under Section 10 (2) (xi), of the Act ?
3. 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 under Section 4 (3) (viii) ?
It is convenient to set out the facts regarding each question separately.
Question No. 1. - The assessment proceedings relate to the year of assessment 1941-42, the accounting period of the assessee being the Fasli year 1347, that is to say 29th September, 1939, to 16th September, 1940. The assessees father purchased the Belliaghatta Jute Mills at Calcutta for a sum of Rs. 6,00,000 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 assessees 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 handnotes for the relevant amounts in favour of the assessees father and the rate of interest was fixed at 6 percent per annum. The business was carried on till the date of the death of the assessees father, and after the assessee succeeded to the business on the death of his father on the 3rd of July, 1929, the same arrangement was continued with the managing agents. On the 1st of April, 1932, the running of the mill was stopped and the assessee sold it to Seth Hukumchand on the 21st of December, 1932, for a sum of Rs. 1,45,000 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 Ltd., without the permission or knowledge of the assessee. The largest shareholder in this company was James Luke Sons himself. When the accounts were audited, it was found that on the 15th of December, 1932, a sum of Rs. 1,54,433 was due from Watt Brothers Ltd.
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 Rs. 2,50,000 - this was added in the assessable income of the assessee for that year. The assessee at that time also claimed Rs. 1,49,649-0-6 as being a bad and irrecoverable loan due from Watt Brothers Ltd. This claim was made under the heading Belliaghatta Jute Mills business. The claim to set off this bad debt was disallowed by the Income-tax Officer by his order dated the 23rd March, 1934 (Ext. T-N), on the ground that the 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 Ltd., "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 Fasli) resulting in 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 Fasli it is certainly not time barred. In claiming deduction for bad debt this year (1339 Fasli) the assessee depends upon a letter from Stewart and Co. (stock and share brokers) dated 18th December, 1933, 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 clear 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 clear how the dues become 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 and Sons.
The bad debt is not proved.
On the 25th of the August, 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. 1,58,522 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 1,54,433 referred to already (this I find from paragraph 46 of the judgment of the Appellant 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 assessee 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 as Exhibit 1. On the 24th of July, 1935, 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. 1,85,108. It is stated in paragraph 4 of the plaint (which is Exhibit T-1 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 the 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 Brothers is not on the record, and we are informed that they did not contest the Suit. An ex parte decree was pronounced by the High Court on the 18th of December, 1935, 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 1937 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 ground that he had already obtained a decree for that amount against Watt Brothers Limited. In the meantime 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 official liquidator to wind up Watt Brothers Limited on the application made by the assessee as a creditor on the 21st of December, 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 the 21st of June, 1940. The assessee, therefore, has claimed the balance, which he could be 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-L (page 31) is an extract from list of loans for 1339 Fasli filed along with the return made under Section 22 of the Income-tax Act by the assessee for 1933 assessment. It gives a tabular list of a number of debtors for the periods 1st of April, 1931, to 30th of September, 1932. In the third column the balance of the sum advanced at the end of 1338 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 1339 Fasli the balance of the principal is shown. The fifth debtor is James Luke and Sons. At the end of 1338 Fasli Rs. 2,50,000 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 as Rs. 7,500 in 1339 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 1339 Fasli and was then treated as having been spent be the managing agents in the course of and for the jute business. After, 1339 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 the 30th of September, 1932, and this is the very year in which the mill was closed down in April.
In the assessment proceedings for the 1933-34 the assessee did not claim this amount as a bad debt in his money-lending business but as bad debt of Belliaghatta 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, paragraph 53). In the plaint of the suit against Watt Brothers Limited I have already pointed out that the assessee clearly stated in paragraph 4 that Rs. 1,58,522 was lent by the managing agents out of the funds of the mills. The plaint of the suit against James Luke and Sons also not proceed on the basis that a certain sum out of Rs. 2,50,000 still remains unpaid but proceeds on the allegations that James Luke and Sons acted fraudulently and negligently in lending out Rs. 1,58,522 and 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 to the Belliaghatta Jute Mills which was closed in April 1932. 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, argues 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 is 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 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 all the financial position of the debtor, how could the assessee claim this is as a bad debt of the jute mill business some years later after the jute mill business had been closed ? The answer must be against the assessee in the 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 claim.
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 that order as he did, but he failed before the Appellate Assistant Commissioner on the 21st of May, 1936. The assessee should have been then moved the Commissioner under Section 33 of the Act which was then in operation and should have also asked for a reference to the High Court under Section 66. Not having taken recourse to these proceedings, the assessee now must face the position that a good debt of the Belliaghatta Jute Mills 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 assessees money-lending business. He relies principally on the fact that Rs. 2,50,000 was admittedly advanced to James Luke and Sons that the assessee realised Rs. 7,500 as interest in 1339 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 Rs. 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 is such a claim consistent with the allegation in the plaint of the suit against Watt Brothers Limited. I have also shown that the in the list of loans for 1339 Fasli the assessee is shown to have received the whole of this Rs. 2,50,000. Again, no claim was ever advanced before the Income-tax authorities that this Rs. 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 [1944] (12 I. T. R. 116) (Commissioner of Income-tax, Bihar and Orissa v. Maharaja of Darbhanga). 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 No. 1 (b) must also be in the negative.
Question No. 2. - Shyam Lal Das was an employee under the assessee and acted as patwari in his zamindari. On taking the account it was discovered that Shyam Lal Das had misappropriated some money out of the zamindari income. As a result of settlement of accounts, Shyam Lal 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 the 31st October, 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 out in the ordinary course of the money-lending 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 appellant 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 zamindari 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 is 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 money-lending business and, therefore, this bad debt cannot be allowed to the assessee.
Reliance was placed upon the oft-cited case of Rajah Inuganti Rajagopala Venkata Narasimha Rayanim Bahadur Varu v. Commissioner of Income-tax, Madras. 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. Ramesam, J., who delivered the judgment observed that "in this case by a fresh contract between the zamindar 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 assessees 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 assessee 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 Smt. Lakshmi Daiji v. Commissioner of the Income-tax, Bihar and Orissa. The sum involved is Rs. 1,67,603.
As the assessee has failed with regard to his claim for Rs. 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 assessees money-lending business. Neither the suit against James Luke and Sons not 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 hard that the assessees claim should be first put off as being premature and them 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.
Reference answered accordingly.