Commissioner of Income Tax vs Rm.Ar.Rm. Arunachalam Chettiar and Son

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 the 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 businesses 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 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 book, viz., the separate ledger folio of

Somasundaram Pillai, shows 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 that 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 31st 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 relationship 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 Piliai to the assessee''s business at Perambalur. That is a

contention which cannot 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 bad loan, then the

assessee''s money-lending business could quite rightly have claimed 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 had

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,

Sir Vepa Ramesam, J.

I agree.

Sundaram Chetty, J.

I agree.