Commissioner of Income Tax vs R.M.A.R. Arunachalam Chettiar and Another

Beasley, C.J.—The question referred is: ""Whether the ex-partner''s share of the loss in the cotton trade which the petitioner 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 petitioner''s other income,

profits or gains as a loss of profits or gains within the meaning of Section 24 of the Act."" The petitioner is the sole owner of a money lending

business at Perambalur and he was the capitalist partner in partnership with one Somasundaram Pillai in a cotton business, the petitioner''s share in

that business being five-eighths and Somasundaram Pillai''s share being three-eighths. The cotton business did not prosper and at the end of March

1930, after which it did no further business, Somasundaram Pillai was shown to be a debtor to that business in a certain sum of money, the amount

of indebtedness being ascertained on 31st March 1930. Subsequent to that, Somasundaram Pillai being a man of straw, the assessee became, as a

partner of Somasundaram Pillai, liable to discharge the debts owing by the cotton business, and this he did.

The effect of this, it is contended by the assessee, was to make himself liable by reason of his taking over the indebtedness of Somasundaram

Pillai for the whole of the loss sustained by the cotton business. He sought to set off against his profits and gains in the year of account; of the

money lending firm the loss which he said he had sustained by reason of his having to take over the indebtedness of Somasundaram Pillai. This

claim was rejected by the Income Tax authorities and that rejection raises the question which has been now referred to us. It of course is clear that

where an assessee carries on more business than one he is entitled to set off losses sustained by him in his other business against the profits and

gains made in another business, the losses of course arising in the same year of account as the profits and gains of the business against which the

losses are sought to be set off. Another way of getting the profits of a business diminished is by getting together a number of bad debts and setting

those off against the profits and gains.

It is of course clear that a bad debt is always allowed to be set off against the profits and gains of a business. Otherwise the profits of a business

have not been properly ascertained. With regard to the former method of getting relief, it is quite clear that during the last year of the cotton

business''s life the books, viz., the separate ledger folio of Somasundaram Pillai, show that there was a loss in the firm and what Somasundaram

Pillai''s share of the loss was. There is nothing whatever in those books to show that the loss was the assessee''s loss. His own loss is separately

shown and we are told that he has been allowed to have that loss set off against the profits and gains of the money lending business. Therefore, up

to 3lst March 1930, there is nothing to show that the assessee had made any other or further loss in the cotton business than that which has been

allowed in the course of his assessment. After the business is closed down by reason of the relation, ship between himself and Somasundaram Pillai

he becomes liable for Somasundaram Pillai''s indebtedness. It is claimed that there is therefore a bad debt owing by Somasundaram Pillai to the

assessee''s business of money lending at Perambalur. That is a contention which can not be upheld.

There is no bad debt owing by Somasundaram Pillai to the money lending business. The money lending business never lent any money to

Somasundaram Pillai. If it had lent money to Somasundaram Pillai and that had proved to be a bad loan, then the asseseee''s money lending

business could quite rightly have claimed to be allowed to set it off against the profits and gains of the money lending business. In fact this was

nothing more than a lending by the money lending business of money to the cotton business and not to Somasundaram Pillai. What has happened

since the business closed down is that Somasundaram Pillai has become a debtor of the assessee and a bad debtor of the assessee. He is not and

never was a debtor of the money lending business at Perambalur. For these reasons the question referred to us must be answered in the negative.

Costs to the Commissioner of Income Tax, Rs. 250.

Ramesam, J.

I agree.

Sundaram Chetty, J.

I agree.