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PETITIONER: AMARCHAND SOBHACHAND

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT: 29/07/1969

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. (CJ) GROVER, A.N.

CITATION:  1971 AIR  720            1971 SCR  (3) 469  1971 SCC  (1) 458

ACT: Income  tax Act. 1922, s. 10(2) (vi), s. 66(1)-Bad debt  May relate  to  money  lending business  of  assessee  or  other business-Question  referred by tribunal to High  Court  must cover  both  businesses  when the claim can  be  related  to either-Statement of case must contain Tribunal’s findings on the  facts of the case-Must not be mere resume of facts  and arguments. Supreme Court Practice-Appeal by special leave against, High Court’s judgment in Income-tax Reference-Supreme Court  will not interfere with finding of fact given by Tribunal on  the evidence recorded in the case.

HEADNOTE:  The  appellants we’re a registered partnership firm  engaged  in  money  lending business as well as business  in  certain  chemical  goods, and silk yarn.  Another firm had a  current  account  with the appellants between the samvat  years  2003  and  2008.  At the end of the latter year the  said  account  had  a  debit balance of Rs. 268385-1-3.  In the  return  of  income  for  the  assessment  year  1953-54  the  appellants  claimed  allowance for the said sum of Rs. 268385 as  a  bad  debt written off as irrecoverable.  The claim was disallowed  by  the  authorities under the Income-tax  Act,  1922.   The  Tribunal  referred to the High Court under s. 66(2)  of  the  Income-tax  Act, 192Z the question whether on the facts  and  circumstances  of the case the Tribunal’s finding  that  the  sum  in  question did not relate to  the  appellants  money-  lending  business was correct.  The High Court answered  the  question  in the affirmative against the  appellants.   This  Court  in appeal by special leave re-framed the question  to  be  answered  by the Tribunal so as to cover  not  only  the  money-lending  business  of  the  appellants  but  also  the  business in chemicals etc.  The Court directed the  Tribunal  to   submit   a  supplementary  statement  of   case.    The  supplementary  statement of case submitted by  the  Tribunal  was however found unsatisfactory in as much as it  contained  a  summary  of arguments on both sides but  no  findings  on  the,facts  of  the case.  Hence supplementary  statement  on  ’facts  was called for.  The findings given by the  Tribunal

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were  against  the appellants.  On the contention  that  the  conclusion  reached  by the Tribunal was  not  supported  by  proper discussion of the materials before it,  HELD : The findings reached by the Tribunal were findings of  fact  and those findings were supported by the  evidence  on  record.  The Tribunal had found that the loans were not made  in the course of money-lending business of the assessee  nor  in  respect  of any other business of  the  assessee.   This  finding covered the entire amount sought to be deducted.  In  view  of this finding- which was binding on this Court,  the  answer to the question re-framed had to be in favour of  the  department. [423 B]  Also held : (i) The Tribunal in submitting its  statement,of  case  must  give  not  only the facts of  the  case  or  the  arguments of parties but also its own findings on the, facts  and evidence. [410 D]  (ii) When  the assessee had money-lending as well  as  other  business,  its claim for a bad debt under s. 10 (2) (xi)  of  the  Act  must  be  considered  in  relation  to  both   the  businesses  and the question submitted by the Tribunal  must  cover the claim in both its aspects. [418 F-419 A]  416

JUDGMENT:  CIVIL APPELLATE JURISDICTION: Civil Appeal No. 949 of 1966.  Appeal  by special leave from the judgment and  order  dated  September 11, 1964 of the Madras High Court in Tax Case  No.  181 of 1962.  M.   C. Chagla and B. R. Agarwala, for the appellant.  S.   T.  Desai,  R. N. Sachthey and B. D.  Sharma,  for  the  respondent.  [The  appeal was originally heard by J. C. Shah, Ag.   C.J.,  V.  Ramaswami and A. N. Grover, JJ.  The case was twice  re-  manded  to  the  Tribunal.  The first  Order  of  the  Court  remanding the case to the Tribunal was delivered by]  Shah, Ag.  C. J. M/s Amarchand Sobhachand’a firm  registered  under the Indian Income-tax- Act, 1922, carried on  business  at Madras in drugs, chemicals, mercury, camphor and silk yam  and  as money lenders.  There were two partners of the  firm  Mohanlal  Sagmal and Seshmal Sobhachand, and  Ramniklal  and  Lakshmichand  minors  were admitted to the benefits  of  the  partnership,  each  with  7/32 share in  the  profits.   The  appellants  had  for a long time business relations  with  a  firm  styled  "Bhojaji Sobhachand" carrying on  business  at  Bombay as importers of yam and also as agents and  adathias.  Sobhachand,  one of the partners of Bhojaji Sobhachand  with  16%  share in the profit and loss is the father of  Seshmal,  Ramniklal and Lakshmichand, partners of the appellants.  In  the books of account of the appellants which were  main-  tained  according  to  the mercantile, system  there  was  a  current sarafi account in respect of their transactions with  the Bombay firm in which were credited the funds transmitted  from  Bombay  in  respect of  their  business  transactions.  Entries  relating  to interest were posted till the  end  of  Samvat  Year  2006 in the account on the amount due  at  the  foot  of the account.  The following is a table showing  the  balances at the end of the Samvat years 2003       Amount    Interest  At the end of the Samvat Year 2003 Cr.16,951 00----                   2004 Dr.1,02,188-4-5Dr. 2633-9-3                   2005 Cr.27,815-0-0Dr. 483-1-9                   2006 Cr.11,975-0-0Cr. 1008-7-3                   2007 Dr.2,02,823-12-3----

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                 2008 Dr.2,68,385-1-3  In  the assessment for income-tax of the appellants for  the  assessment year 1952-53 relevant to the account year Samvat  417  2007  all item of Rs. 2,03,147-8-O in the, account  of  the,  Bombay  was  disallowed by the Income-tax  Officer,  but  in  appeal the amount was allowed.  in the return of income for the assessment year 1953-54  the  appellants claimed allowance for Rs. 2,68,385/- due from the  Bombay  firm at the foot of their running account as  a  bad  debt  written off as irrecoverable.  The Income-tax  Officer  disallowed their claim holding that :  "these transactions were mere accommodations which can  have  no  bearing  to  the  regular business  carried  on  by  the  assessee."  The Appellate Assistant Commissioner agreed with the Income-  tax Officer.  He held that the debt . did not arise, in  the  course of the appellants’ business as chemists and druggists  nor  in  the course of their  money-lending  business.   The  Income-tax  Appellate  Tribunal  accordingly  confirmed  the  order of the Appellate Assistant Commissioner.  The assessee firm then applied to the Tribunal to refer  the  following question to the High Court of Madras  "Whether  on the facts and in the circumstances of the  case  the disallowance of the bad debt of Rs. 2,68,385 is right in  law ?"  The  Tribunal rejected the application, but pursuant  to  an  order  made  by  the High Court of, Madras  under  s.  66(2)  submitted a statement of the case on the following question  "Whether on the facts and in the circumstances of the  case,  the  Tribunal was right in law in holding that the  debt  of  Rs.  2,68,385/- was not one incurred in the course of  money  lending business of the assessee ?"  In the opinion of the High Court the debt of Rs.  2,68,385/-  due to the appellants was not a bad and doubtful debt in its  money   lending  business  not  a  debt  representing   loss  sustained in the other business.  The question referred was,  therefore,  answered  in  the affirmative  and  against  the  appellants.  Section 10(2) (xi) of the Indian Income-tax Act, 1922, as in  force at the relevant time provided :  "(2)  Such profits or gains shall be computed  after  making  the following allowances, namely :  (xi) When the assessee’s accounts in respect of any part  of  his  business,  profession or vocation are not kept  on  the  cash basis, such sum, in respect of bad and doubtful  debts,  due to the assessee in  807SupCI/71  418  respect  of  that  part  of  his  business,  profession   or  vocation,  and  in  the case of an assessee  carrying  on  a  banking  or money-lending business, such sum in  respect  of  loans  made in the ordinary course of such business  as  the  Income-tax Officer may estimate to be irrecoverable but  not  exceeding  the amount actually written off as  irrecoverable  in the books of the assessee,  Provided.........................."  Clause  (xi) was in two parts.  A bad and doubtful debt  due  to  the taxpayer, written off as irrecoverable in the  books  of  account was properly allowable in computing the  taxable  profits   from  business,  profession  or  vocation,   where  accounts were not kept on the cash basis, if the debt was in  respect  of  a  loan made in the course  of  the  taxpayer’s  business  as a banker or money-lender, or when the  taxpayer  was  carrying on any other business the debt was in  respect

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of that other business.  debt written off relying upon both the branches of s. 10 (2)  (xi) and by the application under s. 66(1) of the Income-tax  Act a question covering both the branches of the section was  also  sought  to be raised.  But the question on  which  the  Tribunal  was  called  upon to state the case  was  in  form  imprecise and in import somewhat vague.  A bad and  doubtful  debt  due  to an assessee in respect of  banking  or  money-  lending  business is allowable under s. 10(2) (xi) if it  is  in  respect  of loans made in the ordinary  course  of  such  business.  A bad and doubtful debt in respect of a  business  other than banking or money-lending is allowable even if  it  is not in respect of loan : but a debt due in the course  of  the  business of a money-lending is not allowable unless  it  is, in    respect  of loans made in the ordinary  course  of  his business. We    are of the view that the question should  have been referred in    the    form   suggested   by    the  appellants in their application under s.     66(1)      with  appropriate variations.  In the interest of justice, we direct  that the question be reframed as follows :  "Whether  on the facts and in the circumstances of the  case  the Tribunal erred in disallowing the debt of Rs. 2,68,385/-  written  off  by the assessee in their books of  account  as  irrecoverable."  The  two  branches  of the question  as  reframed  then  are  (1)  Whether the debt or any part thereof is in  respect  of  loans made  419  in  the  ordinary course of money-lending  business  of  the  appellants; and (2) whether the debt or any part thereof  is  in respect of the other business of the appellants.  We are of the view that before the question may be answered,  it is necessary to call for a supplementary statement of the  case from the Tribunal.  The Tribunal’s order is very  brief  :  it gives no reasons in support of the  conclusions.   The  argument  based on the first part of s. 10(2) (xi) that  the  debts were due in respect of the business of the  appellants  other than money-lending was not considered at all, and  the  Tribunal  disposed of the second part of the case by  merely  observing  that it was an "accommodation" account to  enable  the  Bombay  firm  to  tide  over  the  "financial   crisis"  threatening  it  in Samvat Year 2007, and  that  the  trans-  actions  in  the account were totally unconnected  with  the  normal  business  of  the  appellants.   An  "accommodation"  advance is a neutral expression : it may be of the nature of  a  loan  advanced in the ordinary course of  business  by  a  money  lender;  it may be an advance  the  money-lending  or  other  business of the assessee but not in the nature  of  a  loan;  or it may be wholly unrelated to the business of  the  tax-payer.  The statement submitted by the Tribunal is also  inadequate.  It  contains  only  a  summary  of  the  business  relations  between. the appellants and the Bombay firm, a statement  as  to  the amounts due at the end of each year at the  foot  of  the  account, the interest if any charged and a  summary  of  the  orders  made by the Income-tax Officer,  the  Appellate  Assistant  Commissioner and the Tribunal.  The statement  of  the  case does not analyse the evidence and throws no  light  upon  the  two branches of the argument  raised  before  the  Tribunal  and which, in our view, arose out of the  question  on  which  they were required to submit a statement  of  the  case.  Counsel  for the Revenue, however, contended that there  are  three important circumstances which appear from the order of  the  Appellate  Assistant Commissioner  and  the  Income-tax

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Officer from which it may be inferred that the advances made  by the appellants to the Bombay firm were not in respect  of  loans  in  the  ordinary  course  of  the  business  of  the  appellants, nor in respect of their other business.  Counsel  said  that (1) Sobhagchand Amarchand partner of  the  Bombay  firm  is  the father of Seshmal one of the partners  of  the  appellants and of the minors Ramniklal and Lakshmichand  who  are admitted to the benefits of partnership; (2) that  large  amounts  of  money were advanced shortly before  the  Bombay  firm  closed  its  business;  and  (3)  that  there  was   a  consistant practice for paying or receiving interest on the  420  amounts due at the, foot of the account, but no interest was  charged by the appellants in respect of the dues at the foot  of  the account at the end of Samvat Years 2007  and  2008.  But  the  Tribunal has not raised any inference  from  these  circumstances  and  has  merely observed  that  charging  of  interest cannot make it a money lending account.  We, therefore, direct that the Income-tax Appellate Tribunal  do  submit  a supplementary statement of the  case  on  the,  question  reframed, on both the branches of s. 10(2)(xi)  of  the  Indian  Income-tax Act, 1922.  The Tribunal  will  give  opportunity  to  both the parties of being heard,  but  will  restrict  themselves  to the ,evidence on the  record.   The  supplementary statement to be submitted within three  months  from the date the papers reach the Tribunal.  [After  receipt of the supplementary statement of case  from  the Tribunal the appeal was heard by J. C. Shah, K. S. Hegde  and A.    N.  Grover,  JJ.   The  order  of  the  Court  was  delivered  by]  Shah, J. By our order dated July 29, 1969 we called for  the  light of the two branches of s. 10(2) (xi) of the Indian In-  come-tax  Act,  1922.  We have now received a  statement  of  case  from the Tribunal.  The Tribunal has set out in  great  detail the arguments advanced before it by the assessee  and  by the Revenue but it has not set out the facts found by  it  from  the  evidence  on  the record  in  the  light  of  the  arguments advanced.  The statement of case is intended to be  a  finding  on facts and not a catalogue  of  the  arguments  advanced  at the Bar.  Since the Tribunal has not found  the  facts we are constrained to send back the case again to  the  Tribunal  for  submitting  to  this  Court  a  supplementary  statement on facts found by the Tribunal.  The Tribunal will  submit  the statement within three months from the  date  on  which the papers reach the Tribunal.  [After receipt of the second supplementary statement of case  from  the  Tribunal the appeal was finally heard  by  J.  C.  Shah, C.J., K. S. Hegde and A. N. Grover, JJ.  The  Judgment  of the Court was    delivered ’by]  Hegde, J. The appellant firm (which will hereinafter be  referred to as the "assessee") carried on business in drugs,  chemicals,  mercury,  camphor and art silk yam  as  also  in  money-lending, over a number of years.  The accounting  year  with  which we are concerned in this appeal is  Samvat  year  2008 commencing from October 31, 1951 and ending on Oct. 18,  1952.  The firm  421  consisted  of  two partners, Mohanlal  Baginal  and  Sashmal  Sobha   Chand.    Two  minors,  Ramniklal   Sobhachand   and  Lakshmichand Sobhachand were admitted to the benefits of the  partnership.   The assessee had dealings for  several  years  with a firm known as "Bhojaji Sobhachand" (to be hereinafter  referred  to as the Bombay firm).  Sobhachand  Amarchand,  a  partner  of  the  Bombay firm, is  the  father  of  Seshmal,  Ramaniklal  and  Lakshmichand  and  he  was  having  sixteen

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percent  share  in  the  Bombay  firm.   That  firm   became  insolvent  in  April  1952.  The Bombay  firm  owed  certain  amount to the assessee.  In the assessment of income-tax  of  the  appellant for the assessment year 1952-53, relevant  to  the  account  year  Samvat  2008,  the  assessee  claimed  a  deduction of Rs. 2,68,385/- as bad debt due from the  Bombay  firm,  incurred  by  that firm in  the  course  of  business  transactions.   The Incometax Officer disallowed that  claim  holding  that "these transactions were  mere  accommodations  which can have no bearing to the regular business carried on  by  the  assessee.   In,  appeal  the  Appellate   Assistant  Commissioner  agreed with the Income-tax Officer.   He  held  that the debt did not arise in the course of the  assessee’s  business  as  Chemists and Druggists nor in  the  course  of  their money-lending business.  On a further appeal taken by,  the  assessee  to  the Income-tax  Appellate  Tribunal,  the  tribunal  confirmed  the order of  the  Appellate  Assistant  Commissioner.   ’The  assessee  thereafter  applied  to  the  tribunal  under s. 66(1) of the Indian Income-tax Act,  1922  to submit a statement of the case with the question "whether  on  the  facts  and in the circumstances  of  the  case  the  disallowance  of the bad debt of Rs. 2,68,385/- is right  in  law"  to  the  High Court of Madras for  its  opinion.   The  tribunal rejected that application but pursuant to an order  of  the High Court under s. 66(2), the tribunal submitted  a  statement of the case on the following question  "Whether on the facts and in the circumstances of the  case,  the  Tribunal was right in law in holding that the  debt  of  Rs. 2,68,385/- was not one incurred in the course of  money-  lending business of the assessee."  The  High Court opined that the debt in question was  not  a  bad  and  doubtful  debt in  the  assessee’s  money  lending  business nor a debt representing loss sustained in the other  business.  The question referred was, therefore, answered in  the  affirmative and against the asses-see.  Thereafter  the  present  appeal  was brought after obtaining  special  leave  from  this Court.  At the hearing of the appeal  this  Court  found  that the tribunal’s order was very brief and that  it  gave  no  reasons in support of its  conclusions.   It  also  found  that the statement submitted by the tribunal was  in-  adequate. This Court took the view that the question framed  at  422  the  instance of the High Court did not bring out  the  real  question  arising for decision.  It accordingly  .  reframed  the question as follows  "Whether  on the facts and in the circumstances of the  case  the  Appellate  Tribunal erred in disallowing a sum  of  Rs.  2,68,385/-  written  off by the assessee in their  books  of  accounts as irrecoverable ?"  By its order dated July 29, 1969 this Court called upon  the  Tribunal to submit a supplementary statement of case on  the  reframed  question.   The tribunal accordingly  submitted  a  fresh  statement of the case on the question referred.   But  that  statement merely catalogued the arguments advanced  at  the  bar.   The tribunal did not give any  findings  on  the  points arising for decision.  Hence by its order dated April  7,  1970,  this  Court directed the  tribunal  to  submit  a  further statement.  The tribunal has accordingly submitted a  further statement.  The  facts found by the tribunal are found in paragraphs  11  ;and 12 of the statement.  They read :  "  11.  We  have  taken  into  consideration  the  available  materials  and  the rival submissions.  The  only  facts  in  favour  of  the  assessee are that  incidental  charges  are

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debited  to  the  Bombay  firm in respect  of  some  of  the  remittances and there is a flow of moneys to the Bombay firm  up to 10-3-1952 when the last of the remittances was sent to  it  before the firm collapsed in about April 1952.   On  the  other  hand, the narrations in the entries, as  they  stand,  the failure to adjust interest in the account of the  Bombay  firm at the stage at which it became a debtor in Samvat year  2007, the manner in which the partner of the  appellant-firm  tried  to explain the position in March, 1954 and the  stand  of the firm itself at all earlier stages support the case of  the Department."  "12.   Having considered all the circumstances of the  case,  we  are of the opinion that the sums in question were  not  sent to the Bombay firm as loans made in the ordinary course  of the money-lending business of the assessee nor in respect  of  any  other  business of the assessee.  As  this  is  the  finding  with  regard  to the whole of  the  amount  of  Rs.  2,68,385/-  there is no question of ,#locating  any  portion  thereof as between the business of money lending or for  any  other purpose as preferred to para 7 above."  423  It  is true as contended by the learned  Counsel  for  the  asstssee  that the conclusions reached by the  tribunal  are  not  supported by proper discussion of the  material  before  it.   It is also true that the tribunal  after  catalogueing  the  arguments  advanced  at the bar, has  come  to  certain  abrupt  conclusions,  but all the tame it cannot  be  denied  that  the findings reached by the tribunal are  findings  of  fact  and  those findings are supported by the  evidence  on  record.  The tribunal has found that the monies sent by  the  assessee  to  the  Bombay firm were not loans  made  in  the  ordinary  course  of  its  money-lending  business,  nor  in  respect of any other business of the assessee.- This finding  covers the entire amount sought to be deducted.  In view  of  this finding, which is binding on this Court, our answer to  the  question  reframed  has to be in the  negative  and  in  favour   of  the  Department.   The  appeal  fails  and   is  dismissed.  No costs.  G.C.                                                  Appeal  dismissed.  424