Judgement

Appeal (No. 29 of 1935) from a judgment of the High Court (May 1, 1934) upon a reference made by the Income-tax Commissioner under s.66, sub-s.2, of the Indian Income-tax Act, 1922.

The appellant, who carried on business as a money-lender, was also, from 1926-27 until March 31, 1930, a partner in a cotton business, he having a five-eighths share and his partner a three-eighths share in the profits and losses of the partnership. The business was carried on at a loss, and the partner was unable to meet his share of the losses. On April 1, 1930, the debit against him in the partnership books was transferred to the account of the appellants money-lending business, the appellant taking from his partner a promissory note for the sum due. The debt, Rs.36,638, due by the partner was reduced by Rs.500 only, and on March 31, 1931, the appellant wrote off the amount as being irrecoverable in the books of his money-lending business.

The question referred was "Whether the ex-partners share of the loss in the cotton trade which the petitioner [the appellant] had to bear by reason of the ex-partner being unable to meet his share of loss in the partnership business can be set off against the petitioners other income, profits or gains as a loss of profits or gains within the meaning of s. 24 of the Indian Income-tax Act.

The facts appear from the judgment of the Judicial Committee.

The High Court (Beasley C.J., Ramesam and Chetti JJ.) answered the question in the negative.

Jan. 14. J. E. Godfrey for the appellant. The material sections of the Indian Income-tax Act are s.2, sub-s.4; s.3; s. 6, sub-s.4; s.10, sub-ss.1, 2, 9; ss.23 and 24. The cotton business was financed by the appellant in the ordinary course of his money-lending business. It was not for the purpose of securing a

Law. Rep. 63 Ind. App. 233 ( 1935- 1936) Rm. Ar. Ar. Rm. Arunachalam v. Commnr. of I.T. Madras

41

fresh asset, but for bringing in an ordinary return. Money was due by P. to the appellant in the ordinary course of the appellants money-lending business, and that debt was properly recorded in the books of his money-lending business. The appellant himself was obliged to pay P.s share of the loss from the funds of his money-lending business, and P. thereafter became a debtor of the appellant in his money-lending business. The appellants five-eighths share in the losses had been allowed to be set off on assessments, so why should he not also be allowed to set off P.s three-eighths when ascertained. The cotton business was closed on March 31," 1930, and P.s total indebtedness then ascertained. Previous to that, P.s liability was only an existing liability to account. On winding-up the partnership P.s indebtedness was ascertained. It was found to be irrecoverable and was written off in the accounting year. The loss suffered by the appellant in respect of Pillais share of the loss in the cotton business was not a capital loss, or expenditure in the nature of capital it was in origin a business loss, and nothing could change its nature as a "business loss."

Gavin Simonds K.C. and Wallach for the respondent. There are really two questions involved in the appeal. (1) What is a deductible loss in determining the profits or gains of a business? (2) what losses under s. 24, sub-s. 1, can be set off against profits or gains under every head? Those two questions are quite different. The appellants claim was in respect of his money-lending business. The Income-tax Officer found that there was no irrecoverable loan. The loss in question cannot be treated as an irrecoverable loan. The loss claimed by the assessee to be deducted from his income for the year of assessment 1931-32 was admittedly sustained before the year of account. The money-lending business of the appellant did not advance any loan to P. The question is whether this loss is to be deducted from losses in the money-lending business, and whether the appellant is entitled to set off a loss which he sustained by reas