Payment of interest under statute for default in payment of estate duty in time to be allowed as a deduction either u/s 10(2)(iii) or 10(2) (xii).

Satyanarayana Rao, J.-Two questions were referred to us by the Appellate Tribunal under section 66(1) of the Income-tax Act. They are:

" (a) Whether on the facts of the case the sum of Rs. 453 being overdrawings of an employee against his salary should be treated as an irrecoverable loan of the applicants’ money-lending business.

within the meaning of section 10(2)(xi) of the Income-tax Act, when that amount was not realisable after the death of such employee?

(i) Whether the sum of Rs. 84,388 paid by the applicants to the Ceylon Government as interest under section 46 of the Ceylon Ordinance No. I of 1938 for default of paying Estate duty is allowable as a deduction either under section 10(2)(iii) or 10(2)(xii) of the Income tax Act?"

[Note.-Section 10 (2) (xii) in the question has now been enacted as 10(2) (xv) by section 3 of the Indian Income-tax Amendment Act, 1946.]

The sum of Rs. 453 referred to in the first question represents an amount of over-drawings by one of the employees of the assessee one Veerabahu Pillai. He was employed at the headquarters and while he was in service he took advances from time to time and left service. On 7th July, 1938, a promissory note was taken from him for the amount due together with interest and before the expiry of the period of limitation an endorsement of payment of eight annas was made on the promissory note. During the accounting period ending 13th April, 1943, this sum was written off as a bad debt. The deduction claimed was not allowed by the Income-tax authorities and the Appellate Tribunal. It was claimed that the assessee was entitled to deduct this amount under section 10(2)(xi) of the Act. Under that clause bad and doubtful debts are allowable deductions provided in the case of banking or money-lending business the amount represents a loan made in the ordinary course of such business. At its inception the amount was merely an overdrawing and was not a loan made in the ordinary course of money-lending business. There is no doubt no prohibition under the Act for a moneylender to lend his money in the course of his business to his servants or employees. But in order to enable the money-lender to write off a debt as a bad or irrecoverable debt, he must in the first instance show that it was even from the very beginning a loan and not an advance or overdrawing of an employee or servant. The facts clearly establish that the view taken by the Appellate Tribunal on this point is correct. All that was argued on behalf of the assessee was that when the promissory not was obtained from the employee on 7th July, 1938, it was converted into a loan by the assessee to the employee and that therefore the claim is within the clause. The language of the clause leaves no room for doubt that it is not the conversion of a liability into a loan, that would enable the assessee to claim the deduction as a permissible one. The language employed is that it is in respect of " loans made in the ordinary course of such business" that the assessee would be entitled to have the deduction if he proves that they are irrecoverable debts. The fact that subsequently a promissory note was taken would not affect the nature of the transaction at its inception and would not enable the assessee to rely upon clause (xi) of section 10(2). The contention therefore urged on behalf of the assessee cannot be accepted.

The second of the two questions does not present much difficulty. One Arunachalam Chettiar died on 23rd February, 1948, and the assessee had to pay estate duty to the Ceylon Government amounting to nearly 10 lakhs. The duty is leviable under section 26(1) of the Ceylon Ordinance No. I of 1938 and the duty is also made a charge on the estate under that section. It is to be paid within a year of the death of the last owner of the estate and in default under section 46 of the Ordinance simple interest at the rate of four per cent, per annum is payable on the amount of the duty. Under the proviso to section