Claim for deduction as bad debts in respect of the sums by assessee.

SRINIVASAN J.

The assessee is a Hindu undivided family carrying on a money-lending business at Madras and at Muar in the Federated Malay States. Through its karta, the assessee was a partner in a firm, each of the partners of which had, under the terms of the partnership deed, to contribute a capital of Rs. 10, 000. The partnership deed further provided that the partners could advance moneys to the partnership to the extent necessary, which was to bear interest at 6 per cent. per annum. The money-lending business at Muar was remitting moneys from time to time by bank drafts. These drafts were endorsed in favour of the partnership firm, and the amounts were credited to the loan account of the assessee. These were treated as advances to the partnership. In respect of these advances the partnership firm paid interest, and this quantum of interest was taxed as income from the money-lending business of the assessee in the earlier assessment years The assessee had another account, a current account, with the firm. In this account were recorded amounts borrowed by the assessee. The firm, in its turn, charged interest on such borrowals, and the payment of this interest by the assessee to the firm, being in respect of moneys borrowed for the purposes of the business of the assessee, was allowed as deductions in the computation of the assessee's income. The assessee also maintained a separate account in respect of the profits of the partnership

The firm was dissolved with effect from July 15, 1954. On the date of the dissolution, there was a credit of Rs. 2, 77, 421 in favour of the assessee, representing amounts advanced by the assessee to the firm. The current account referred to showed a debit against the assessee of Rs. 1, 98, 447, being the total of withdrawals by the assessee, together with interest. The net credit balance in favour of the assessee was thus Rs. 78, 974As part of the arrangement of dissolution, the assessee became entitled to certain amounts. Certain liabilities were also allotted to it. One of these liabilities was a sum of Rs. 26, 600 which the assessee had to discharge. In the deed of dissolution, it was agreed that one of the other partners, Thyagarajan Chettiar, had to pay a sum of Rs. 23, 500 to the assessee. Out of this amount, the assessee realised a sum of Rs. 11, 500 and the balance of Rs. 12, 000 was not recovered

The three sums referred to, Rs. 78, 974, Rs. 26, 600 and Rs. 12, 000, werely claimed as bad debts in the return of the income of the assessee for the assessment year 1956-57. The Income-tax Officer held these to be capital losses arising out of the dissolution of the firm. On appeal, the Appellate Assistant Commissioner took the view that the first of these items really represented unrealisable advances made by the assessee in the course of its money-lending business. He pointed out that in all the previous years, such advances had been treated separately from the profits arising from the partnership. He was satisfied that the sum of Rs. 78, 974 could be allowed as a bad debt. The other two items were, however, disallowed, the appellate authority agreeing with the view of the Income-tax Officer that they represented capital losses

There were appeals both by the department and the assessee before the Income-tax Appellate Tribunal. The Tribunal accepted the contention of the department that the advances represented by moneys received from the Muar money-lending business and transferred to the firm's accounts as loans were not accompanied by any suitable money-lending instruments and that the acceptance of the claim of the assessee in earlier years that it advanced moneys as a money-lender or the assessment to tax of the interest income in respect of these advances was not relevant. The Tribunal accordingly took the view that the advances only represented an increase of the capital put in by the assessee into the partnership. The result was that the allowance of Rs. 78, 974 granted by the