Commissioner of Income Tax, Madras vs Dhanalakshmi Corporation

Srinivasan, J.—The assessee was a registered firm engaged in dealing in timber, manufacture of oil, foundry business as well as in

commission agency. In the course of its business, the assessee was making advances to certain persons engaged in the manufacture of oil, the

consideration for such advances being interest as well as commission calculated on the production of the borrower. Such advances were made to

one Kathiresan Chettiar and Solaiappa Chettiar on foot of agreements entered into. These agreements are of the year 1944. It would also appear

that such advances had been made even from 1942 and in fact the advances of Solaiappa Chettiar were in continuation of the earlier advances

made in respect of a mill which mill was subsequently purchased by Solaiappa Chettiar. In November, 1945, due to misunderstandings and

disagreement among the partners, the assessee partnership had to be dissolved. A resolution was passed by the partners to this effect. It was

decided on that occasion that the assessee should sell the land, buildings and machinery belonging to the business but recover the outstandings and

distribute such recoveries among the members of the partnership according to their respective shares. The assessee firm was not however

dissolved. Though the business of working the oil mill, etc., appears to have been stopped forthwith, the books were kept open and amounts

receivable by the firm on account of interest and commission in respect of the advances made by the firm were being brought to account. After the

31st of December, 1949, the firm was finally wound up. Out of the balance of Rs. 62,744 outstanding as against Kathiresan Chettiar, it was

estimated that only Rs. 20,000 could be realised and the balance was written off. In a similar manner, in respect of the outstanding advances to

Solaiappa Chettiar, which came to Rs. 1,24,280, a sum of Rs. 95,000 alone was deemed to be realisable and the balance of Rs. 30,280 was

written off. Following the settlement of accounts, the firm was dissolved with effect from 31st December, 1949. Later Kathiresan Chettiar sold his

mills in 1954 for a sum of Rs. 15,000 and this sum was handed over the Adaikappa Chettiar, one of the partners, to whom Kathiresan Chettiars

outstandings had been allotted. What happened to the outstanding of Solaiappa Chettiar is not known.

For the assessment year 1950-51, the firm claimed to be entitled to deduct the two sums written off u/s 10(2)(xi). The Income Tax Officer

refused the deduction, his reason being that the advances were not made in the course of the assessees business activities, as the partnership dead

contained no provision for financing outside parties. He further held that the debts had become bad in 1945 itself and could not therefore be taken

into account in the assessment for 1950-51.

An appeal was taken to the Appellate Assistant Commissioner who differed from the Income Tax Officer and held that the advances were in the

course of the assessees business, that the write-off was genuine and that the debts bad not become had except in the previous year relevant to the

assessment year. The deduction was accordingly allowed.

The department appealed to the Tribunal. The Tribunal took the view that the financing of the other oil mills was part and parcel of the assessees

business and that the agreement in that regard appeared to be genuine and entered into in the course of the normal trading activities of the assessee

firm. The Tribunal further held that the debts had become bad only in the year immediately preceding the assessment year in question and

confirmed the Appellate Assistant Commissioners decision.

On the application of the Commissioner of Income Tax, the Tribunal has referred the following question for the determination of this court :

Whether the aforesaid debts of Rs. 42,744 and Rs. 30,280 are liable as deductions u/s 10(2)(ix) from the assessment of 1950-51 ?

On the consideration of the facts relevant, we are of the view that the conclusion reached by the Tribunal is amply justified by the material on

record. The learned counsel for the department contends, however, that financing of third parties was no part of the trading activities of the firm. In

support of this argument, he refers to the deed of partnership. Clause 6 of the partnership deed set out in the statement of the case outlines the

scope of the business of the partnership. It no doubt does not specifically refer to making advances to other mills.

But it contains the clause : ""This business may be enlarged upon from time to time as the partners mutually agree among themselves."" In

appreciating the scope of the argument advanced on this head, we cannot ignore the fact that this was a partnership. It was not a company

governed by memorandum or articles of association which generally sets a limit to the scope of the activities of the company. For a partnership to

carry on business, it is not generally necessary that there should be a deed setting out the scope of the business. It is open to the members of the

partnership to embark upon any line of activity and so long as that line of activity is of such a nature that it can be regarded as business as generally

understood, it cannot be said that the activity is not part of the business of the partnership. We have already referred to the fact that the system of

making advances to other mills were commenced even in 1942. By virtue of this line of activity, the assessee was getting not only interest on the

outstanding advances but a commission on the quantity of the oil produced by those mills. The Tribunal also records that such income realised

these transactions was brought into the accounts of the assessee. It is not denied that such income was submitted as income from the business and

assessed as such in the previous years. What is more important is that even if the firm ceased to do active business on and after the 18th

November, 1945, the amounts received by way of interest and commission on those outstanding advances were being brought into account.

Learned counsel for the department is not able to state before us that, notwithstanding the stoppage of general business in 1945, the firm was not

assessed on its business income received or receivable during the calendar years 1946 to 1949 in respect of the advances. It is further seen from

the order of the Income Tax Officer that, even after the stoppage of the general business, the assessee was in the habit of advancing sundry cash

practically on each and every day till the end"". Broadly stated, what constitutes a business is a regular mode of dealing with a view to earn an

income. It cannot be denied that the circumstances of the case established that in so far as the advances were concerned, they must be deemed to

have constituted a part of the business of the assessee which did not come to an end on and after November, 1945.

The Income Tax Officer seems to have doubted the propriety or wisdom of the partnership in making further advances after it stopped its

general business. Both in the representations made to the Income Tax Officer and in the appeal to the Appellate Assistant Commissioner, the

assessee pointed out that it was impossible to call in the advances at short notice and that, if the firm was to recover the amounts, it had to keep the

borrowers going in business. It was, therefore, necessary to make further advances which the firm did as part of its activity. The Income Tax

Officer apparently declined to accept this contention and on no material whatsoever he chose to infer that the advances must, to the knowledge of

the assessee, have become incapable of recovery even in 1945, a view which had been rightly found incorrect both by the Appellate Assistant

Commissioner and the Tribunal.

In answering the question before us, what we have to find is whether there was material before the Tribunal to justify the conclusion that it

reached, viz., that the advances were made in the course of the normal trading activity of the assessees firm. On this question, we are satisfied that

the available material does support the conclusion reached by the Tribunal. If the advances made by the firm up to 1945 were in the course of its

business activity, the further advances made after 1945 would not cease to be of the same character solely because the firm stopped its oil mill

business. It is true that the partnership deed contains no reference to the making of advances, but that, as we have pointed out, is not necessary in

the case of a firm. The regular course of conduct and the frequent advances that were made even after 1945 which is referred to by the Income

Tax Officer himself show that, though the firm ceased its oil mill business, it was yet engaged in a course of profit-making by means of these

advances. Of the multifarious activities which the firm engaged in, this particular activity was kept on. There is also the circumstance that the income

so derived by the assessee was submitted as its business income and accepted as such in all the previous years. It follows, therefore, that the

Tribunal had ample material to conclude that these transactions were entered into in the course of the normal trading activities of the firm. There is

no dispute that the sums became irrecoverable in the previous year relevant to the assessment year. The question is accordingly answered in the

affirmative and against the department. The assessee will be entitled to its costs. Counsels fee Rs. 250.