COMMISSIONER OF INCOME-TAX Vs. SRI TMMDHARMARAJA NADAR

JUDGEMENT

(1.) In these three cases, referred to the Court by the Income-tax Appellate Tribunal, the facts and circumstances in many respects are the same; by agreement of learned Counsel for the parties they have been heard together. The questions referred in each case are substantially of like effect but the wording in one of them is slightly different. In Referred Cases Nos. 19 and 27 the question is: Whether on the facts and in the circumstances of this case the claim of the respondent to deduct the sum of Rs. 10,000 was allowable in law. In Referred Case No. 23 the question is: Whether on the facts and in the circumstances of this case the claim to deduct the sum of Rs. 10,000 as a bad debt incurred in the account year made by the respondent was legally sustainable.

(2.) The Tribunal, setting aside the order of the Income-tax Officer, which was upheld by the Appellate Assistant Commissioner, decided that by virtue of the provisions of Section 10(2)(xi) of the Indian Income-tax Act, the sum of Rs. 10,000 was a bad debt and deductible in each case when calculating the assessable income. These cases have been stated at the instance of the Commissioner of Income-tax, Madras, who challenges the correctness of the findings by the Tribunal.

(3.) Formerly, five Nadar brothers (1) Mathalai, (2) Rajakani, (3) Sankaralingam (4) Kandaswami and (5) Dhanushkodi carried on a joint family business, dealing in coffee and cardamom. Supplies were obtained from an agriculturist named W.P.A. Marimuthu Nadar, to whom the business advanced money; by 1930 Marimuthu owed Rs. 1,32,500 to the joint family. On February 3, 1930, the brothers effected a partition and, thereupon they carried on the same" business in partnership; the debt due from Marimuthu was treated as due to the firm. Seven months later, on September 11, 1930, the partnership was dissolved; at that date Marimuthu's indebtedness amounted to Rs. 1,24,000; on dissolution, this sum was divided into 5 equal parts and each brother was given Rs. 24,800 of the debt due to the firm. Three separate businesses were then constituted; there were two partnerships, between (a) Mathalai and Rajakani and (b) Sankaralinga and Kandaswami; the other brother, Dhanushkodi, carried on business on his own account. Each business dealt in coffee and cardamom obtaining supplies from Marimuthu by advancing moneys to him against future deliveries and he paid interest on the amount owing by him. In the two partnerships, each partner was separately credited in the books with Rs. 24,800 due from Marimuthu. In addition, some of the brothers, individually carried on a money-lending business utilising that sum as stock-in-trade; all accounts were kept on a mercantile basis; in each of the partner's accounts the amount of interest due on the sum outstanding and any credits were entered and the balance remaining was ascertained every year. Dhanushkodi carried on business with the same goods but, in his case, the sum of Rs. 24,800 was entered in the accounts of his business and was not separately treated; he may have engaged in money-lending but no point in that connection was made by Mr. Subbaraya Aiyar, who appeared for all the assessees; interest on the sum due to Dhanushkodi, including any amount or the balance of the sum of Rs. 24,800 was added each year to the general accounts. In each of the five accounts, Marimuthu executed a promissory note, payable on demand, for the amount credited in 1930, and each year thereafter, a new promissory note was similarly signed by him in respect of the balance due from him. This continued until Marimuthu's death, about 1934, and thereafter, until 1937, his brother, Rathnaswami signed similar promissory notes. In the assessments for income-tax, in respect of some of the assessees, as will appear hereafter more particularly, the interest upon Marimuthu's debt, was included amongst other items under Section 12 of the Indian Income-tax Act and tax thereon was paid although, in some instances and to some extent, it had not actually been received.