SMT. T. SEETHA v. INCOME TAX OFFICER
[Citation -1985-LL-1017]

Citation 1985-LL-1017
Appellant Name SMT. T. SEETHA
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 17/10/1985
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags business of money-lending • capital contribution • commercial practice • accumulated profit • capital investment • interest payment • current account • share of profit • capital account • interest earned • credit balance • capital nature • business loss • share capital • interest paid • capital loss • legal entity • written off • minor child • bad debt
Bot Summary: The basis for claiming the same as a bad debt or as a business loss was that the firm had become defunct and the assessee was not able to recover the amount due to her from the firm. The assessee being a money-lender herself, the amount standing to her credit in the current account of the firm consisting of periodical credits of the share of profit from the firm and interest thereon, which she has failed to recover from the firm, should be treated as a business loss under ordinary commercial principles of accounting. The amounts credited to the current account of the partner in the books of the firm being her share of profit due from the firm at different points of time, her inability to recover the same would not confer a right upon her to claim it as a business loss. In the present case relationship with the firm was that of a partner and she was entitled to her share of profits as and when the accounts of the firm were finalized at the end of each accounting period. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with the firm; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulations profits as deposits. The Madras High Court in Misrinul Succor's case, while dealing with a similar question, has followed the decision of the Supreme Court and observed as under : 'The cases when interest is earned on a deposit or a loan differ from a case of the type before us where interest was earned on amounts of which the minor permitted the use by the firm, because they were their accumulated profits arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership. In the present case what has happened is a passive allowance of the share of profits to remain in the firm's books without any attempt on the part of the assessee to make a conscious advance of the same to the firm in the light of the criteria of these authorities, we cannot agree with the assessee, that the accumulated balance in the current account would be tantamount to a money- lending advance, which could be claimed as a bad debt by virtue of its non- recovery.


G.R. RAGHAVAN, A.M.: ORDER In this appeal by assessee against order of AAC, Trichy, in his IT Appeal No. 208 (Trichy) of 1982-83 dt. 9th April, 1984 relating to asst. yr. 1980-81 interesting question has come up for our consideration. question is whether sum of Rs. 25,593 being cumulative credit balance in current account of assessee in books of Kaviram & Co. Madurai, of which she is partner, written off by assessee and claimed as bad debt, or as business loss in alternative, is admissible as such. Before considering inherent merits of this claim, brief recapitulation of facts in this regard is quite germane to issue. 2. assessee had been partner of Kaviram & Co. since long time. Her share in partnership profits is one-fifth and her contribution towards capital of company is Rs. 5,000. Besides capital account, her share of profits in firm has been credited year after year to current account. Interest has also been credited on balances to credit of account periodically. As on 12th April, 1980, being last date of previous year relevant for assessment year under consideration, amount due to assessee by way of share capital and accumulation to credit of current account amounting to in all Rs. 25,593 was written off as irrecoverable and claimed as bad debt or business loss in assessment relating to 1980-81. To be precise, accumulation to credit of assessee in current account was Rs. 20,593 and capital contribution was Rs. 5,000. basis for claiming same as bad debt or as business loss was that firm had become defunct and assessee was not able to recover amount due to her from firm. ITO disallowed claim stating that, in absence of latest final accounts of firm, it was not possible to decide whether claim had become dead loss and also held that in any case consequent loss as result of failure of assessee to recover amount would be of capital in nature. He, therefore, disallowed claim. 3 . submissions and arguments before AAC on appeal filed in this regard by assessee, may be summarized briefly as under : assessee is partner of Kaviram & Co. firm carried on money-lending business. She had invested sum of Rs. 5,000 by way of her capital contribution to firm. share of profit due to her thereafter was credited to current account in her name in books of firm and interest was also being credited on balances periodically. In other words, accumulated balance to her credit in current account as on 12th April, 1980 represented share of profit from firm for number of years preceding 12th April, 1980 and interest credited to account on credit balances periodically. Since appellant was not able to recover both capital as well as accumulated credit balance in current account, she had thought fit to write off same and claim it as business loss, or bad debt in alternative. It was further submitted that firm had become dormant and ceased to function after 1975-76. In view of intervening gap of time during which firm had remained dormant, it was claimed that there was no possibility of recovery of balance in question. Since accumulated balance in current account represented share of profits credited to account periodically and interest thereon, it was submitted that same should be treated as advance made to firm by partner in course of her money-lending business and, therefore, allowed as bad debt, or as business loss in view of her inability to recover same. distinction was sought to be made between capital sum of Rs. 5,000 separately advanced and accumulated credit balance in current account, in that, it was submission of assessee that whereas former was of capital nature, latter was advance made during ordinary course of business. Reliance was placed on decision of Tribunal, Hyderabad Bench 'B' (SMC) in Kolli Nagaraja Setty vs. ITO (IT Appeal No. 1111 (Hyd.) of 1981 dt. 20th May, 1982) relating to asst. yr. 1979-80. 4 . AAC disagreed with this view. According to him, accumulated credit balance in current account consisting of share of profits over period of years and interest credited thereon could not be termed as advances made by partner to firm in course of her money-lending business. He was of view that there was no difference between this amount and capital investment of Rs. 5,000 by partner. As to argument that assessee was assessed on share of profits as also interest on accumulated balances, he held that this would be of no significance, inasmuch as, assessments were necessitated by fact that she was partner of firm and, therefore, her share of profit from firm had to be subjected to assessment in her hands. In fine, he held that there was no conscious act on part of assessee in advancing any monies to appellant-firm specifically in course of money-lending business. He also found that firm had not still been dissolved, as it was only in dormant state and assessee still continued to be partner of same. In conclusion he held, that claim of assessee for allowance of same as bad debt was untenable firstly on ground, that sum in question was not lent to firm by assessee in course of her money-lending business and secondly, that she failed to establish that amount had become bad and irrecoverable. He distinguished facts of case from those of decision of Tribunal cited above. Aggrieved, assessee is in appeal before us. 5 . submission made on behalf of appellant by learned Representative for assessee, Shri K. Srinivasan, may be summarised as under : At outset Shri K. Srinivasan gave up claim for allowance of capital sum of Rs. 5,000 and confined his arguments to balance of Rs. 20,593 being accumulated credit balance in current account of assessee as on 12th April, 1980. His submissions were two-fold : Firstly, in support of claim for allowance of amount as business loss and, secondly, in alternative, for its allowance as bad debt. According to him, principles enunciated by Supreme Court in Badri Das Daga vs. CIT (1958) 34 ITR 10 (SC) would be equally applicable to facts of this case, in that item of loss or expenditure not falling within expression 'deductions' may be allowed for it is deductible on ordinary principles of commercial accounting. assessee being money-lender herself, amount standing to her credit in current account of firm consisting of periodical credits of share of profit from firm and interest thereon, which she has failed to recover from firm, should be treated as business loss under ordinary commercial principles of accounting. Alternatively, he submitted that assessee being principles of accounting. Alternatively, he submitted that assessee being money-lender, amount standing to her credit in current account of firm should be treated as money-lending debt and since same is not capable of recovery, it should be allowed as bad debt since other requirements specified in this behalf under s. 36(2) of IT Act, 1961 ('the Act') are satisfied. He invited our attention to decision of Madras High Court in Godavari Bai vs. CED (1971) 86 ITR 533 (Mad) to effect that though firm has no legal entity, partner would be entitled to file suit and claim repayment of money advanced by him to firm and such claim could also be enforced in Court of law. In other words, according to him, this decision lays down proposition that partner is allowed to recover all debts due to him from firm and, therefore, his failure to recover amount would entitle him to claim same as bad debt. He also invited our attention to para 3 of partnership deed wherein following narration is fund : "3. capital of partnership shall be Rs. 25,000 having been contributed and recorded in partnership books of accounts in names of respective partners as follows : Rs. 1. KR. Rukmani Achi 5,000 1/5 share 2. RM Chintamani Achi 5,000 1/5 share 3. M. Sakuntala Achi 5,000 1/5 share 4. T. Seetha 5,000 1/5 share 5. M. Rohini 5,000 1/5 share share capital may be increased or decreased as may be agreed upon by all partners. Any other monies contributed by partners shall be credited to their respective current accounts. No interest will be credited to capital accounts of partners. Partners' current accounts shall bear interest which will be adjusted to their accounts at end of each year on closing of accounts at rates of interest that may be fixed by all partners from time to time." With reference to above he submitted, that any monies contributed by partners, over and above their capital contribution mentioned earlier, would be entitled to interest and credit of partner's share of income periodically in her current account would, without partner exercising her right of withdrawal, would amount to partner having voluntarily advanced amounts in question at interest. His further submission in this regard was, that, since partner was also separately carrying on her own money-lending business, these periodical credits to her current account should be considered to be advances made by her voluntarily to firm on interest and, therefore, her inability to recover same would entitle her to claim same as bad debt, amount in question having been written off by her as irrecoverable. 6 . submissions made on behalf of Department by learned Departmental Representative are summarized briefly as under : As regards claim for allowance of amount as business loss, learned Departmental Representative submitted, that this was no loss sustained by assessee in ordinary course of her business. amounts credited to current account of partner in books of firm being her share of profit due from firm at different points of time, her inability to recover same would not confer right upon her to claim it as business loss. loss, if any, could at best be capital loss and nothing else. Developing this argument, Departmental Representative submitted, that loss could not be considered to be incidental to business activities of assessee. Even according to principles of commercial practice such loss could not be considered to be revenue loss. As to alternative argument that same should be allowed as bad debt, Departmental Representative submitted that none of essential ingredients necessary for treating same as bad debt as spelt out in sub-s. (2) of s. 36 are present in this case. periodical credits of share of profit to current account of assessee cannot, according to him, be considered to be amounts advanced during ordinary course of business of money-lending by assessee. accumulations in current account cannot by any alchemy be altered into money-lending advances which at no stage they were or could be. Even if assessee was money-lender, for any amounts advanced by her to be considered to be money- lending debts, she should have consciously advanced same to firm. In lending debts, she should have consciously advanced same to firm. In present case relationship with firm was that of partner and she was entitled to her share of profits as and when accounts of firm were finalized at end of each accounting period. Instead of enforcing claim for withdrawal of share of profits, she had allowed them to accumulate in current account. By this process she could not claim, that she had made corresponding advance of monies to firm as money-lending debt, or during ordinary course of her business of money-lending. Our attention was invited to decision in S. Srinivasan vs. CIT (1967) 63 ITR 273 (SC), Addl. CIT vs. Misrimul Sowcar (1979) 13 CTR (Mad) 308 : (1979) 119 ITR 123 (Mad) and CIT vs. United India Roller Flour Mills Ltd. (1985) 48 CTR (Mad) 15 7 : (1985) 15 5 ITR 358 (Mad). 7. In S. Srinivasan's case (supra) question for consideration was with reference to following facts : firm consisted of husband and wife and stranger as partners and his two minor sons were admitted to benefits of partnership. As per one of clause of partnership deed firm could receive advances from partners in case of necessity and pay interest thereon. For number of years shares of profit of wife and minor sons were allowed to accumulate in their current accounts in firm's books. From particular date interest at 9 per cent was allowed thereon. question was whether interest so allowed was assessable in hands of husband under s. 16(3) (a) (i) and (ii) of Indian IT Act, 1922. Supreme Court held that it was so assessable. While coming to this conclusion Supreme Court held that accumulated profits of wife and minors with firm could on no account be equated to deposits made or loans advanced. They specifically held that there was no suggestion that either wife or monor sons, or anyone on their behalf, purported to enter into arrangement with firm to keep accumulated profits as deposits. They also held that there was no contract between partners and firm which could convert these accumulations into loans advanced by these persons. They found that facts indicated that wife and minor sons had earned profits because of their membership of firm and having earned profits in that capacity, they allowed use of their profits to firm without any specific arrangement as would naturally have been entered into, if these funds had belonged to stranger. following passage from judgment of Supreme Court is quite relevant in this context and, therefore, reproduced here under : "... argument was that accumulated profits belonging to wife and minor sons should be held to be in nature of deposits made by them, with firm, or in nature of loans advanced by them to firm, and interest earned on such deposits or loans can have no relationship with membership of firm of wife or admission to benefits of partnership of minor sons. It appears to us that these accumulated profits remaining in hands of firm cannot, on any principle, be equated with deposits made or loans advanced. profits accumulated to credit of wife and minor sons, because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with firm; but there is no suggestion at all that, at that stage, either wife or minor sons, or anyone on their behalf, purported to enter into arrangement with firm to keep these accumulations profits as deposits. Similarly, there was no such contract which could convert those accumulations into loans advanced to firm by these persons. facts and circumstances indicate that wife and minor sons had earned these profits because of their membership of firm or because of their admission to benefits of firm, and having earned these profits in that capacity, they allowed use of their profits to firm without any specific arrangement as would naturally have been entered into if these funds had belonged to stranger. They let firm use funds of theirs, because they had interest in profits of firm. facts also show that use of these money was allowed to firm without asking for any interest, and it was only at later stage that three partners of firm decided to give interest on these amounts. When decision was taken to give interest, nature of funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to partner or persons admitted to benefits of partnership and allowed to be used by firm. interest also appears to have been allowed by firm simply because these funds belonged either to partner or to minors who had been admitted to benefits of partnership. It is thus clear that interest at least indirectly across and accrued to wife and minor sons because of their capacity mentioned in s. 16(3) (a) (i) and (ii) in IT Act." (p. 276) Madras High Court in Misrinul Succor's case (supra), while dealing with similar question, has followed decision of Supreme Court and observed as under : "'The cases when interest is earned on deposit or loan differ from case of type before us where interest was earned on amounts of which minor permitted use by firm, because they were their accumulated profits arising from firm itself and because of their interest in firm as persons admitted to benefits of partnership.' Learned counsel for assessee sought to distinguish this decision by contending that in present case contract of partnership had itself provided that amount lying to credit of any partner is to be treated as loan deposit and should bear interest as may be mutually agreed upon having regard to rate prevailing in market. contract itself, according to learned counsel, provided conversion of what was accumulated profits into loan or deposits. We are unable to accept this submission. contract between parties is not effective to bring about legal fiction, just as Parliament could do. Let us take position as on closing date of accounting year of firm like this. On that date, what is arrived at and credited to account of minor is only accumulated profit. Merely because partnership deed declares that this amount should be, treated as loan its character is not altered. provisions in partnership deed do not have such powers of alchemy. In present case, accumulated profits alone are subject-matter under consideration. It is not stated that there was any other amount provided by minors on which interest has been paid. As amounts represented accumulated profits and as mere provision in partnership deed is not effective to convert it into loan or deposit, we consider that decision of Supreme Court would directly apply to this case. It was pointed out by Supreme Court that profits accumulated to credit of wife and minor child in that case because they did not draw their share of profits after distribution of profits took place. They merely allowed those profits to remain with firm. It was further added that there was no suggestion in that case that either wife or minor sons or any one on their behalf purported to enter into arrangement with firm to keep these accumulated profits as deposits. relevant passage is found at p. 276. principle of Supreme Court decision is that in cases where there was subsequent arrangement between partners or persons who are competent to enter into any arrangement on behalf of minors and firm, so as to pay interest by conversion of amount into deposit or loan, then position would be different. This is because it is open to partners to invest their further funds in firm making it clear that they are doing so in same manner as if they are stranger. If with reference to strangers interest paid would not be construed as interest payment arising out of terms of partnership, similarly in case of partners also, interest would not be traceable to membership in firm. Learned counsel for assessee sought to equate cl. 3 of present case with such position. As envisaged by Supreme Court agreement must be subsequent to crediting of share of profits. In present case, treatment of accumulated profit as loan is almost simultaneous with its credit. Therefore, there is no scope or basis for any subsequent agreement in relation to it. exception contemplated by Supreme Court in passage at p. 276, in case of subsequent agreement would not, therefore, apply to this case." (p. 128) In United India Roller Flour Mills Ltd.'s case (supra), which is case relating to Companies (Profits) Surtax Act, 1964 Madras High Court has held that borrowing carries positive act of lending by one coupled with acceptance by other as money loaned. They further held that amount to be treated as borrowal its origin as borrowing should be there and, according to their Lordships, if in its origin amount in question was not borrowing in sense that relationship of borrower and lender did not exist, between assessee and person advancing money, then no subsequent act or deed by way of guarantee, can convert what otherwise was not borrowing into borrowing. Though these observations were with reference to claim under Companies (Profits) Surtax Act, their significance cannot be lost sight of in present context. Therefore, learned Departmental Representative submitted, that, even though assessee might be doing money-lending business, there was no relationship creditor and debtor as regards accumulated credit balance in current account of assessee in sense that amounts in question were consciously advanced by assessee to firm in course of her money-lending business. It was further submitted that there was also no subsequent contract converting balances into money- lending advances. In this connection learned Departmental Representative submitted that narration in para 3 of partnership deed does not have effect of conferring that status of money-lending creditor on assessee with reference to share of profits credited in current account. 8 . We have carefully considered rival submission and also authorities referred to earlier. We are inclined to agree with submissions made on behalf of Department. On balance of consideration of various factors referred to earlier, we are of opinion, that neither at stage of credit of share of profits into current account of assessee nor subsequently by any contract, implied or otherwise, assessee has assumed status of money-lender with reference to share of profits credited in accounts. Paragraph 3 of partnership deed only makes reference to fact that partners' current account shall bear interest. Periodical credit of share of profit in current account does not ipso facto convert each instalment of such credit into money-lending advance, merely because, assessee also happens to be money-lender. In normal circumstances share of profit credited to current account of partner in books of firm would be liable to withdrawal by partner. fortuitous circumstance of same not being withdrawn over period of years would not confer upon credit balance status of money-lending advance so as to enable assessee to claim same as bad debt. Sub-s. (2) of s. 36 clearly lays down that debt should represent money lent in ordinary course of business of money-lending. This qualification is absent in present case with reference to credits in current account. In this context observations of Supreme Court in S. Srinivasan's case (supra) are quite relevant and also very significant. We have already extracted them earlier. Their Lordships made distinction between accumulated profits remaining in firm and conscious deposit or advance made of same by partner. Their Lordships have observed that for converting them into deposit or money-lending advance there should be separate agreement with firm to keep accumulated profits as deposits. In absence of such contract Hon'ble Supreme Court was of opinion that accumulations could not be converted into loans advanced to firm by persons concerned. very same observations have also been adverted to by Madras High Court in Misrimul Sowcar's case (supra) at p. 128. general observations regarding borrowal made by Madras High Court in United India Roller Flour Mills Ltd.' case (supra) are also quite significant in this context. In this decision it has been categorically stated that borrowing carries positive act of lending by one coupled with acceptance by other as money lent. In present case what has happened is passive allowance of share of profits to remain in firm's books without any attempt on part of assessee to make conscious advance of same to firm in light of criteria of these authorities, we cannot agree with assessee, that accumulated balance in current account would be tantamount to money- lending advance, which could be claimed as bad debt by virtue of its non- recovery. At best, it is only capital loss. decisions relied upon by learned Representative for assessee are not of much help in this context. We are, therefore, unable to agree with claim for deduction as bad debt, even though it has been written off by assessee. mere fact that these amounts have also been assessed in hands of assessee does not confer any extra right on assessee to claim same as bad debt so long as amount was not advanced during ordinary course of money-lending business of assessee. 9. As regards claim for allowance of same as business loss, proposition has simply to be stated to be rejected, inasmuch as, by same token, as in other case, loan cannot be considered to have arisen during course of business of assessee or incidental to business of assessee. Under no commercial principles of accounting loss of this nature could be considered to be revenue loss. Here again it can only be classified as loss of capital. 1 0 . Coming to decision of Tribunal relied upon by learned Representative for assessee, we find that we are unable to agree with view expressed therein, in view of fact, that salient aspects of issue referred to by us earlier, have not been considered by Bench in that case. At any rate, decision of Supreme Court and later decision of Madras High Court are binding on this Bench and, we are, therefore, unable to agree with view expressed in Tribunal's decision. Even otherwise, we are of opinion that, decision proceeded on basis that ITO had come to wrong conclusion that partner could not independently make money-lending advances to firm of which he is partner. Since this view as not correct in light of Andhra Pradesh High Court decision, referred to in decision of Tribunal, Tribunal came to different conclusion in that case. Accordingly, we also hold, that on facts, decision is distinguishable. 11. We, therefore, negative claim for deduction of amount either as bad debt or as business loss. appeal is dismissed. *** SMT. T. SEETHA v. INCOME TAX OFFICER
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