T SEETHA Vs. INCOME-TAX OFFICER

JUDGEMENT

(1.) In this appeal by the assessee against the order of the AAC, Trichy, in his IT Appeal No. 208 (Trichy) of 1982-83 dated 9-4-1984 relating to the assessment year 1980-81 an interesting question has come up for our consideration. The question is whether the sum of Rs. 25,593 being the cumulative credit balance in the current account of the assessee in the books of Kaviram and Co. Madurai, of which she is a partner, written off by the assessee and claimed as a bad debt, or as business loss in the alternative, is admissible as such. Before considering the inherent merits of this claim, a brief recapitulation of the facts in this regard is quite germane to the issue.

(2.) The assessee had been a partner of Kaviram and Co. since a long time. Her share in the partnership profits in one-fifth and her contribution towards the capital of the company is Rs. 5,000. Besides the capital account, her share of profits in the firm has been credited year after year to a current account. Interest has also been credited on the balances to the credit of the account periodically. As on 12-4-1980, being the last date of the previous year relevant for the assessment year under consideration, the amount due to the assessee by way of share capital and accumulation to the credit of the current account amounting to in all Rs. 25,593 was written off as irrecoverable and claimed as a bad debt or business loss in the assessment relating to 1980-81. To be precise, the accumulation to the credit of the assessee in the current account was Rs. 20,593 and the capital contribution was Rs. 5,000. 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 ITO disallowed the claim stating that, in the absence of the latest final accounts of the firm, it was not possible to decide whether the claim had become a dead loss and also held that in any case the consequent loss as a result of the failure of the assessee to recover the amount would be of capital in nature. He, therefore, disallowed the claim.

(3.) The submissions and arguments before the AAC on an appeal filed in this regard by the assessee, may be summarized briefly as under : The assessee is a partner of Kaviram and Co. The firm carried on money-lending business. She had invested a sum of Rs. 5,000 by way of her capital contribution to the firm. The share of profit due to her thereafter was credited to a current account in her name in the books of the firm and interest was also being credited on the balances periodically. In other words, the accumulated balance to her credit in the current account as on 12-4-1980 represented share of profit from the firm for a number of years preceding 12-4-1980 and the interest credited to the account on the credit balances periodically. Since the appellant was not able to recover both the capital as well as the accumulated credit balance in the current account, she had though fit to write off the same and claim it as a business loss, or bad debt in the alternative. It was further submitted that the firm had become dormant and ceased to function after 1975-76. In view of the intervening gap of time during which the firm had remained dormant, it was claimed that there was no possibility of recovery of the balance in question. Since the accumulated balance in the current account represented share of profits credited to the account periodically and interest thereon, it was submitted that the same should be treated as an advance made to the firm by the partner in the course of her money-lending business and, therefore, allowed as a bad debt, or as a business loss in view of her inability to recover the same. A distinction was sought to be made between the capital sum of Rs. 5,000 separately advanced and the accumulated credit balance in the current account, in that, it was the submission of the assessee that whereas the former was of a capital nature, the latter was an advance made during the ordinary course of business. Reliance was placed on a decision of the Tribunal, Hyderabad Bench B (SMC) in Kolli Nagaraja Setty v. ITO [IT Appeal No. 1111 (Hyd.) of 1981 dated 20-5-1982] relating to the assessment year 1979-80.