T SEETHA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee the Appellate Tribunal has referred the following" question of law for our consideration under Section 256(1) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act") :

(2.) THE question that arises in the tax case is whether the sum of Rs. 20,593 being the 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 can be claimed either as a bad debt, or in the alternative as a business loss and is an admissible deduction in the computation of income of the assessee, for the assessment year 1980-81. THE assessee was a partner in Kaviram and Co., with l/5th share in the partnership for the profits and her capital contribution was Rs. 5,000. Besides the capital account, her share of profits in the firm has been credited year after year to a current account and the interest has also been credited on the balances to the credit of the account periodically. THE amount due by way of share capital and accumulation to the credit of the assessee in the current account amounted to Rs. 25,593 and the assessee has written off the entire sum as irrecoverable and claimed the same as bad debt or business loss in the assessment proceedings relating to the assessment year 1980-81. THE Income-tax Officer disallowed the claim which was confirmed by the Appellate Assistant Commissioner. In the appeal preferred by the assessee before the Appellate Tribunal, the assessee did not press her claim for allowance of the loss which arose on the loss of the capital of a sum of Rs. 5,000 and the claim was confined only to the allowance of Rs. 20,593 being the balance of accumulated profits in the current account of the assessee as on April 12, 1980. THE Appellate Tribunal held that there was no relationship of creditor and debtor, though the assessee might be doing money-lending business and the amount shown at a credit balance in the current account of the assessee was only an accumulated share of profits. THE Tribunal held that the amount was not advanced by the assessee to the firm in the course of her money-lending business and there was no subsequent contract converting the balance of the money in the current account as advance. THE Tribunal, therefore, held that neither at the stage of the credit of the share of profits into the current account of the assessee nor subsequently by any contract, implied or otherwise, the assessee has assumed the status of a money-lender with reference to the share of profits credited in the accounts. THE Tribunal, therefore, held that there was no positive act of lending by the assessee coupled with acceptance by the firm as a lender and there was no conscious advance of the money to the firm and the assessee was not entitled to claim the same as a bad debt, as the amount was not advanced during the course of money-lending business of the assessee. THE Tribunal also rejected the claim of the assessee that the allowance should be made as a business loss as the loss cannot be said to have arisen during the course of the money-lending business of the assessee. THE Tribunal, in this view of the matter, confirmed the order of the Appellate Assistant Commissioner and dismissed the appeal preferred by the assessee, and it is this order of the Appellate Tribunal that is the subject-matter of the tax case reference.

(3.) WE have carefully considered the submissions of learned counsel. The clear finding of the Appellate Tribunal is that there was no contract, either express or implied, either at the time of crediting of the share of profit in the current account or subsequently to convert the share of profits into a debt and in the absence of any finding to show that the share of profit credited to the current account was treated as an advance by the assessee to the firm, that too, in the course of money-lending business, it is not open to the assessee to claim the same as a bad debt when it becomes irrecoverable. There is a vital distinction between the amount in the current account and the amount treated as a loan or a debt and the distinction is that where some amount is credited to the current account, it is open to a partner to withdraw the amounts as of right and as his own money, but in the case of a debt or a loan, it can be recovered only on the basis of the demand and when the borrower repays the same. The legal relationship between the parties will also change from that of a partner to that of a debtor-creditor, in the event the share of profit credited to the current account is treated as a debt or a loan. The assessee has not stated anywhere that there was a conversion of the share of profit to a debt, much less, there is any evidence to show that it was an advance which arose in the course of money-lending business and in the absence of any evidence, we are of the opinion, the accumulated profit credited to the account of the assessee continues to be the accumulated profit and has not shed its character as accumulated profit and been converted into a loan or advance to the firm.