JUDGMENT
MANOHAR LALL, J. – This is a reference by the Appellate Tribunal under Section 66 (1) of the Indian Income-tax Act for the opinion of the Court upon the following question :-
“Where bonds and promissory notes have been taken in lieu of arrear agricultural rents by a zamindar, who is also a money-lender, can the amounts of such bonds and promissory notes be said to be loans made in the ordinary course of money-lending business as contemplated in Section 10 (2) (xi) of the Income-tax Act, so that when such amount became irrecoverable, claim for such irrecoverable amounts may be admissible in computing the assessable income of the assessee.”
The question formulated arose out of assessment proceedings of the assessee for the years 1942-43 and 1943-44, and although a single reference has been made, it is necessary to state the facts for the year 1942-43 assessment first.
The assessee carries on business as a money-lender and also has a large zamindary. When the tenants of the assessee fell in arrears in paying his agricultural rent, he instead of suing them in the civil Courts obtained handnotes and mortgage bonds from a large number of his tenants. Although no handnote or mortgage bond has been produced before us or is to be found in the record, it is admitted that the handnotes and the mortgage bonds carry interest at varying sums according to the circumstances of the particular borrower or executant rather.
The assessment proceedings for the year 1938-39 are printed as Exhibits 12 and 13. The order of the Income-tax Officer (Exhibit 12) shows that the assessee was found not to have given a complete and exhaustive list of investments including the investments on the handnotes and the mortgage bonds taken from the agricultural tenants, and, therefore, a sum of Rs. 24,000 was added to his income under the head “money-lending.” This assessment was made on the 27th of February, 1939. In appeal, the Appellate Assistant Commissioner by his order dated the 27th May, 1940, reduced this sum of Rs. 24,000 to Rs. 12,645. His reasoning is to be found at page 45 and may be conveniently quoted here :-
“The assessee obtained handnotes and mortgage bonds from a large number of tenants in lieu of arrear agricultural dues. Interest of Rs. 139 was realised on such documents. These documents were not shown as it was thought that these were not taxable. The total amount of such documents obtained in lieu of arrear rent is admitted to be Rs. 67,000. But in actual practice principal sum only being arrear rent is realised after remitting interest.
In this case the Income-tax Officer has added a further income of Rs. 24,000. I think the sum added by the Income-tax Officer is very high. The so-called omissions and discrepancies as noted by the Income-tax Officer have been satisfactorily explained in most cases. But in the case of Bajrang Prasad Singh Rs. 2,645 interest income has to be taxed. Besides for possible omissions to show interest bearing investment as in the case of documents worth Rs. 67,000 obtained from tenants in lieu of arrear rents a further sum of Rs. 10,000 may be added. There is no excuse for omitting to show investment worth Rs. 67,000 on documents obtained from agricultural tenants. Hence, Rs. 12,645 will have to be added in this case against Rs. 24,000 added by the Income-tax Officer. Therefore there will be a reduction of Rs. 11,355.”
It is, therefore, clear that the handnotes and the mortgage bonds obtained by the assessee from his agricultural tenants were treated as his investments in money-lending business by the department, and the assessee was actually taxed on a sum of Rs. 10,000 taken as accrued interest on these investments in the assessments year 1938-39.
In the year 1941-42 the same basis of taxation was adopted. The order of the Income-tax Officer is not on the record, but the appellate order of the Appellate Assistant Commissioner is Exhibit 14, which shows that the assessee was allowed to deduct Rs. 2,265 as irrecoverable loan in the hands notes secured in lieu of arrears of rent due from the tenants. This is made clear in paragraph 13 at page 47 :-
“The assessee claimed Rs. 2,265 as irrecoverable loan covered by handnotes secured in lieu of arrear of rent. These loans were treated by the Income-tax Officer as money-lending investments after the arrears were secured by handnotes and a sum of Rs. 1,293 has accordingly been taxed under money-lending. The Income-tax Officer has disallowed the claim on the ground that the dues were nothing but rent dues and no money-lending loan was advanced. But in accordance with the ruling in the case of Commissioner of Income-tax v. Zamindar of Kirlampudi, as soon as a handnote is executed in satisfaction of arrear rent there is a new contract and the liability ceases to be rent and becomes a loan. If the Income-tax Officer had taxed the interest on arrear rent under other source the position would have been different but as the income has been taxed under money-lending, I am afraid the position taken by the Income-tax Officer cannot be supported. Therefore Rs. 2,265 will be allowed.” It is, therefore, clear that in this year also the Income-tax department actually taxed the assessee on a sum of Rs. 1,293 on account of the interest which accrued due on these investments made with the agricultural tenants and this interest was taken as income from money-lending.
In the year 1942-43 which relates to the accounting period March, 1941, to March, 1942, the assessee claimed a sum of Rs. 3,292 as the sum that had become irrecoverable in these investments made with the agricultural tenants. This question is discusses under the head Karji Dehat, that is to say loans in the villages, at page 10 by the Income-tax Officer. The discussion shows that the assessee showed an income of Rs. 428 in respect of these loans to the tenants, but claimed that a sum of Rs. 3,720 had become irrecoverable. This claim was disallowed upon the ground that in respect of some of the tenants the assessee had taken the properties of the debtors and the price of these lands will be far more than the amount of land revenue in default, and in respect of some other tenants their properties were purchased by outsiders long before the year under consideration “and so these debtors had no assets before the year under consideration. In view of all these facts I disallow the claim. I have not taken any income this year as there has been remissions to cover the income of Rs. 428, the biggest item of remission being Rs. 341 to Sidheshwar Singh.” This quotation shows that even in this year the Income-tax Officer accepted the position that these investments with the agricultural tenants were part of the money-lending business of the assessee. He included Rs. 428 on account of interest which accrued due, but as the assessee had shown that he had remitted a larger sum than this amount, no income under this head was taken as a part of the assessable income. This order was passed on the 23rd of March, 1943. The appeal was disposed of by the Appellate Assistant Commissioner on the 27th of February, 1944, and this particular question was discussed at page 18, paragraph 7. He observed that these debts arose out of contracts relating to agricultural matters and the assessee had not shown to him that they had even figured as stock-in-trade in the money-lending business being the assessed subject. In this view of the matter he upheld the Income-tax Officers order disallowing the claim for these bad debts some on the ground of point of time and the others being outside the business. The assessee then went up to the Appellate Tribunal who disposed of the appeal on the 20th of December, 1944. They pointed out in their order in paragraph 9 that the reasoning of the Income-tax Officer that the loans had become irrecoverable before the year of account was supported seriously by the Income-tax department before them and in the succeeding paragraphs they came to the conclusion that as these loans did not have their origin in money-lending itself, their irrecoverability did not make them a bad debt of the money-lending business.
At the instance of the assessee the Appellate Tribunal have made in this reference to us already stated. In their order dated the 26th July, 1945, they appeared to take the view that there is nothing anywhere on the record to show that interest income from bonds and pronotes taken in lieu of arrear agricultural rent was treated by the department as income from money-lending business. They say that they had seen the records for 1939-40 and 1940-41 and “there too interest on such bonds and pronotes was lumped up with money-lending income; there too there are loose discussions about interest on bank deposits, debenture interest and dividend under money-lending” and that both the assessee and the Income-tax Officer went on loose ideas and thought only of “convenience,” but did not proceed on any strictly legal principle. While considering the Income-tax Officers assessment order of 1938-39 and the appellate order of the Appellate Assistant Commissioner, and the 1941-42 appellate order of the Appellate Assistant Commissioner they observed at page 2 : “It cannot, therefore, be said that these orders are conclusive of the fact that these officers proceeded on the footing that the bonds and pronotes were a part of the appellants money-lending business after they were taken in lieu of arrears of agricultural rent.” Accordingly they have given their opinion that it could hardly be said that the department treated these bonds and promissory notes as ordinary money-lending transactions and, therefore, the department was now debarred from treating them otherwise.
In our opinion, this view of the Appellate Tribunal is wrong. The Income-tax department for a number of years in the past have treated these investments – to use an expression which has been adopted by the Income-tax Officers in various years referred to above – as being part of the money-lending business of this particular assessee; the assessee was taxed on a portion of the interest which he showed as having accrued due to him from these investments and in one year as much as Rs. 10,000 was added on to the assessable income under this head. It may be that this was a result of a loose idea or an inaccurate appreciation of the legal position, but this defect was common both to the assessee and to the Income-tax department. The department cannot be allowed to blow hot and cold at the same time. They cannot be allowed to treat the investments as a part of money-lending transactions of the assessee when it suits them, and when it comes to the question of disallowance of irrecoverable loans out of these very transactions they cannot be permitted to take up the position that these were not a part of the money-lending transaction of the assessee. Upon the facts of this particular case it must be held that these investments are a part of the money-lending business of this assessee and, therefore, his claim to have a deduction for the irrecoverable loans must be allowed. In this view of the matter the question of law as propounded to us does not strictly arise for decision because on the facts found it must be held that these irrecoverable loans were made by the assess in the course of his money-lending transaction. The assessee must be given a deduction for Rs. 3,292 on account of bad and irrecoverable loans during the assessment year 1942-43.
The assessee is entitled to have his costs which we assess at Rs. 250. The Appellate Tribunal will also return to the assessee the fee of Rs. 100 deposited by him.
For the assessment year 1943-44 the facts are exactly the same. In this case the assessees claim for a deduction of Rs. 2,461 on account of bad and irrecoverable debts in the village investments must be allowed for the reasons just given. We do not make any separate order for the cost of this Court in this case, as the two cases were heard together and no separate argument was advanced in this case, it being agreed that the decision in the two cases would be the same. But if the assessee has deposited any separate fee of Rs. 100 with the Appellate Tribunal, it must be returned to him.
MEREDITH, J. – I agree.
Reference answered accordingly.