Per Shri G. R. Raghavan, Account Member – In this appeal by the assessee against the order of the AAC, Trichy, in his IT Appeal No. 208 (Trichy) of 1982-83 dated 9-4-1984 relating to the assessment year 1980-81 an interesting question has come up for our consideration. The question is whether the sum of Rs. 25,593 being the cumulative credit balance in the current account of the assessee in the books of Kaviram & Co. Madurai, of which she is a partner, written off by the assessee and claimed as a bad debt, or as business loss in the alternative, is admissible as such. Before considering the inherent merits of this claim, a brief recapitulation of the facts in this regard is quite germane to the issue.
2. The assessee had been a partner of Kaviram & Co. since a long time. Her share in the partnership profits in one-fifth and her contribution towards the capital of the company is Rs. 5,000. Besides the capital account, her share of profits in the firm has been credited year after year to a current account. Interest has also been credited on the balances to the credit of the account periodically. As on 12-4-1980, being the last date of the previous year relevant for the assessment year under consideration, the amount due to the assessee by way of share capital and accumulation to the credit of the current account amounting to in all Rs. 25,593 was written off as irrecoverable and claimed as a bad debt or business loss in the assessment relating to 1980-81. To be precise, the accumulation to the credit of the assessee in the current account was Rs. 20,593 and the capital contribution was Rs. 5,000. The basis for claiming the same as a bad debt or as a business loss was that the firm had become defunct and the assessee was not able to recover the amount due to her from the firm. The ITO disallowed the claim stating that, in the absence of the latest final accounts of the firm, it was not possible to decide whether the claim had become a dead loss and also held that in any case the consequent loss as a result of the failure of the assessee to recover the amount would be of capital in nature. He, therefore, disallowed the claim.
3. The submissions and arguments before the AAC on an appeal filed in this regard by the assessee, may be summarized briefly as under : The assessee is a partner of Kaviram & Co. The firm carried on money-lending business. She had invested a sum of Rs. 5,000 by way of her capital contribution to the firm. The share of profit due to her thereafter was credited to a current account in her name in the books of the firm and interest was also being credited on the balances periodically. In other words, the accumulated balance to her credit in the current account as on 12-4-1980 represented share of profit from the firm for a number of years preceding 12-4-1980 and the interest credited to the account on the credit balances periodically. Since the appellant was not able to recover both the capital as well as the accumulated credit balance in the current account, she had though fit to write off the same and claim it as a business loss, or bad debt in the alternative. It was further submitted that the firm had become dormant and ceased to function after 1975-76. In view of the intervening gap of time during which the firm had remained dormant, it was claimed that there was no possibility of recovery of the balance in question. Since the accumulated balance in the current account represented share of profits credited to the account periodically and interest thereon, it was submitted that the same should be treated as an advance made to the firm by the partner in the course of her money-lending business and, therefore, allowed as a bad debt, or as a business loss in view of her inability to recover the same. A distinction was sought to be made between the capital sum of Rs. 5,000 separately advanced and the accumulated credit balance in the current account, in that, it was the submission of the assessee that whereas the former was of a capital nature, the latter was an advance made during the ordinary course of business. Reliance was placed on a decision of the Tribunal, Hyderabad Bench B (SMC) in Kolli Nagaraja Setty v. ITO [IT Appeal No. 1111 (Hyd.) of 1981 dated 20-5-1982] relating to the assessment year 1979-80.
4. The AAC disagreed with this view. According to him, the accumulated credit balance in the current account consisting of share of profits over a period of years and interest credited thereon could not be termed as advances made by the partner to the firm in the course of her money-lending business. He was of the view that there was no difference between this amount and the capital investment of Rs. 5,000 by the partner. As to the argument that the assessee was assessed on the share of profits as also the interest on the accumulated balances, he held that this would be of no significance, inasmuch as, the assessments were necessitated by the fact that she was a partner of the firm and, therefore, her share of profit from the firm had to be subjected to assessment in her hands. In fine, he held that there was no conscious act on the part of the assessee in advancing any movies to the appellant-firm specifically in the course of money-lending business. He also found that the firm had not still been dissolved, as it was only in a dormant state and the assessee still continued to be a partner of the same. In conclusion he held, that the claim of the assessee for allowance of the same as a bad debt was untenable firstly on the ground, that the sum in question was not lent to the firm by the assessee in the course of her money-lending business and secondly, that she failed to establish that the amount had become bad and irrecoverable. He distinguished the facts of the case from those of the decision of the Tribunal cited above. Aggrieved, the assessee is in appeal before us.
5. The submission made on behalf of the appellant by the learned representative for the assessee, Shri K. Srinivasan, may be summarized as under :
At the outset Shri K. Srinivasan gave up the claim for allowance of the capital sum of Rs. 5,000 and confined his arguments to the balance of Rs. 20,593 being the accumulated credit balance in the current account of the assessee as on 12-4-1980. His submissions were two-fold : Firstly, in support of the claim for allowance of the amount as a business loss and, secondly, in the alternative, for its allowance as a bad debt. According to him, the principles enunciated by the Supreme Court in Badri Das Daga v. CIT  34 ITR 10 would be equally applicable to the facts of this case, in that an item of loss or expenditure not falling within the expression deductions may be allowed for it is deductible on ordinary principles of commercial accounting. The assessee being a money-lender herself, the amount standing to her credit in the current account of the firm consisting of periodical credits of the share of profit from the firm and interest thereon, which she has failed to recover from the firm, should be treated as a business loss under ordinary commercial principles of accounting. Alternatively, he submitted that the assessee being a money-lender, the amount standing to her credit in the current account of the firm should be treated as a money-lending debt and since the same is not capable of recovery, it should be allowed as a bad debt since the other requirements specified in this behalf under section 36(2) of the Income-tax Act, 1961 (the Act) are satisfied. He invited our attention to the decision of the madras High Court in Godavari Bai v. CED  86 ITR 533 to the effect that though a firm has no legal entity, the partner would be entitled to file suit and claim repayment of the money advanced by him to the firm and such a claim could also be enforced in a court of law. In other words, according to him, this decision lays down the proposition that a partner is allowed to recover all the debts due to him from the firm and, therefore, his failure to recover the amount would entitle him to claim the same as a bad debt. He also invited our attention to paragraph 3 of the partnership deed wherein the following narration is fund :
3. The capital of the partnership shall be Rs. 25,000 having been contributed and recorded in the partnership books of accounts in the names of respective partners as follows :
KR. Rukmani Achi
RM Chintamani Achi
M. Sakuntala Achi
The share capital may be increased or decreased as may be agreed upon by all the partners. Any other monies contributed by the partners shall be credited to their respective current accounts. No interest will be credited to the capital accounts of partners. Partners current accounts shall bear interest which will be adjusted to their accounts at the end of each year on closing of accounts at her rates of interest that may be fixed by all the partners from time to time.”
Which reference to the above he submitted, that any monies contributed by the partners, over and above their capital contribution mentioned earlier, would be entitled to interest and the credit of the partners share of income periodically in her current account would, without the partner exercising her right of withdrawal, would amount to the partner having voluntarily advanced the amounts in question at interest. His further submission in this regard was, that, since the partner was also separately carrying on her own money-lending business, these periodical credits to her current account should be considered to be advances made by her voluntarily to the firm on interest and, therefore, her inability to recover the same would entitle her to claim the same as a bad debt, the amount in question having been written off by her as irrecoverable.
6. The submissions made on behalf of the department by the learned departmental representative are summarized briefly as under :
As regards the claim for allowance of the amount as business loss, the learned departmental representative submitted, that this was no loss sustained by the assessee in the ordinary course of her business. The amounts credited to the current account of the partner in the books of the firm being her share of profit due from the firm at different points of time, her inability to recover the same would not confer a right upon her to claim it as a business loss. The loss, if any, could at best be a capital loss and nothing else. Developing this argument, the departmental representative submitted, that the loss could not be considered to be incidental to the business activities of the assessee. Even according to the principles of commercial practice such a loss could not be considered to be a revenue loss. As to the alternative argument that the same should be allowed as a bad debt, the departmental representative submitted that none of the essential ingredients necessary for treating the same as bad debt as spelt out in sub-section (2) of section 36 are present in this case. The periodical credits of share of profit to the current account of the assessee cannot, according to him, be considered to be amounts advanced during the ordinary course of the business of money-lending by the assessee. The accumulations in the current account cannot by any alchemy be altered into money-lending advances which at no stage they were or could be. Even if the assessee was a money-lender, for any amounts advanced by her to be considered to be money-lending debts, she should have consciously advanced the same to the firm. In the present case relationship with the firm was that of a partner and she was entitled to her share of profits as and when the accounts of the firm were finalized at the end of each accounting period. Instead of enforcing the claim for withdrawal of the share of profits, she had allowed them to accumulate in a current account. By this process she could not claim, that she had made a corresponding advance of the monies to the firm as a money-lending debt, or during the ordinary course of her business of money-lending. Our attention was invited to the decision in S. Srinivasan v. CIT  63 ITR 273 (SC), Addl. CIT v. Misrimul Sowcar  119 ITR 123 (Mad.) and CIT v. United India Roller Flour Mills Ltd.  155 ITR 358 (Mad.).
7. In S. Srinivasans case (supra) the question for consideration was with reference to the following facts :
A firm consisted of husband and wife and a stranger as partners and his tow minor sons were admitted to the benefits of the partnership. As per one of the clause of the partnership deed the firm could receive advances from the partners in case of necessity and pay interest thereon. For a number of years the shares of profit of the wife and the minor sons were allowed to accumulate in their current accounts in the firms books. From a particular date interest at 9 per cent was allowed thereon. The question was whether the interest so allowed was assessable in the hands of the husband under section 16(3) (a) (i) and (ii) of the Indian Income-tax Act, 1922. The Supreme Court held that it was so assessable. While coming to this conclusion the Supreme Court held that the accumulated profits of the wife and minors with the firm could on no account be equated to deposits made or loans advanced. They specifically held that there was no suggestion that either the wife or the monor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep the accumulated profits as deposits. They also held that there was no contract between the partners and the firm which could convert these accumulations into loans advanced by these persons. They found that the facts indicated that the wife and minor sons had earned the profits because of their membership of the firm and having earned the profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into, if these funds had belonged to a stranger. The following passage from the judgment of the Supreme Court is quite relevant in this context and, therefore, reproduced here under :
“… The argument was that the accumulated profits belonging to the wife and the minor sons should be held to be in the nature of deposits made by them, with the firm, or in the nature of loans advanced by them to the firm, and interest earned on such deposits or loans can have no relationship with to membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons. It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with the firm; but their is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulations profits as deposits. Similarly, there was no such contract which could convert those accumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of the firm or because of their admission to the benefits of the firm, and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these money was allowed to the firm without asking for any interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly across and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3) (a) (i) and (ii) in the Income-tax Act.” (p. 276)
The Madras High Court in Misrinul Succors case (supra), while dealing with a similar question, has followed the decision of the Supreme Court and observed as under :
“The cases when interest is earned on a deposit or a loan differ from a case of the type before us where interest was earned on amounts of which the minor permitted the use by the firm, because they were their accumulated profits arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership.
Learned counsel for the assessee sought to distinguish this decision by contending that in the present case the contract of partnership had itself provided that the amount lying to the credit of any partner is to be treated as loan deposit and should bear interest as may be mutually agreed upon having regard to the rate prevailing in the market. The contract itself, according to the learned counsel, provided a conversion of what was accumulated profits into loan or deposits. We are unable to accept this submission. The contract between the parties is not effective to bring about a legal fiction, just as Parliament could do. Let us take the position as on the closing date of the accounting year of a firm like this. On that date, what is arrived at and credited to the account of the minor is only accumulated profit. Merely because the partnership deed declares that this amount should be, treated as loan its character is not altered. The provisions in a partnership deed do not have such powers of alchemy. In the present case, the accumulated profits alone are the subject-matter under consideration. It is not stated that there was any other amount provided by the minors on which interest has been paid. As the amounts represented accumulated profits and as a mere provision in a partnership deed is not effective to convert it into loan or deposit, we consider that the decision of the Supreme Court would directly apply to this case.
It was pointed out by the Supreme Court that the profits accumulated to the credit of the wife and minor child in that case because they did not draw their share of profits after distribution of profits took place. They merely allowed those profits to remain with the firm. It was further added that there was no suggestion in that case that either the wife or the minor sons or any one on their behalf purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. The relevant passage is found at page 276. The principle of the Supreme Court decision is that in cases where there was a subsequent arrangement between the partners or the persons who are competent to enter into any arrangement on behalf of the minors and the firm, so as to pay interest by conversion of the amount into a deposit or loan, then the position would be different. This is because it is open to the partners to invest their further funds in the firm making it clear that they are doing so in the same manner as if they are stranger. If with reference to strangers interest paid would not be construed as interest payment arising out of the terms of the partnership, similarly in the case of partners also, the interest would not be traceable to the membership in the firm. Learned counsel for the assessee sought to equate clause 3 of the present case with such a position. As envisaged by the Supreme Court the agreement must be subsequent to the crediting of the share of the profits. In the present case, the treatment of the accumulated profit as a loan is almost simultaneous with its credit. Therefore, there is no scope or basis for any subsequent agreement in relation to it. The exception contemplated by the Supreme Court in the passage at page 276, in case of subsequent agreement would not, therefore, apply to this case.” (p. 128)
In United India Roller Flour Mills Ltd.s case (supra), which is a case relating to the Companies (Profits) Surtax Act, 1964 the Madras High Court has held that a borrowing carries a positive act of lending by one coupled with an acceptance by the other as money loaned. They further held that an amount to be treated as borrowal its origin as a borrowing should be there and, according to their Lordships, if in its origin the amount in question was not a borrowing in the sense that the relationship of borrower and lender did not a exist, between the assessee and the person advancing the money, then no subsequent act or deed by way of guarantee, can convert what otherwise was not a borrowing into a borrowing. Though these observations were with reference to the claim under the Companies (Profits) Surtax Act, their significance cannot be lost sight of in the present context. Therefore, the learned departmental representative submitted, that, even though the assessee might be doing money-lending business, there was no relationship creditor and debtor as regards the accumulated credit balance in the current account of the assessee in the sense that the amounts in question were consciously advanced by the assessee to the firm in the course of her money-lending business. It was further submitted that there was also no subsequent contract converting the balances into money-lending advances. In this connection the learned departmental representative submitted that the narration in paragraph 3 of the partnership deed does not have the effect of conferring that status of money-lending creditor on the assessee with reference to the share of profits credited in the current account.
8. We have carefully considered the rival submission and also the authorities referred to earlier. We are inclined to agree with the submissions made on behalf of the department. On a balance of consideration of the various factors referred to earlier, we are of the opinion, that neither at a stage of credit of the share of profits into the current account of the assessee nor subsequently by any contract, implied or otherwise, the assessee has assumed the status of a money-lender with reference to the share of profits credited in the accounts. Paragraph 3 of the partnership deed only makes a reference to the fact that partners current account shall bear interest. Periodical credit of the the share of profit in the current account does not ipso facto convert each installment of such credit into a money-lending advance, merely because, the assessee also happens to be a money-lender. In normal circumstances the share of profit credited to a current account of the partner in the books of the firm would be liable to withdrawal by the partner. The fortuitous circumstance of the same not being withdrawn over a period of years would not confer upon the credit balance the status of a money-lending advance so as to enable the assessee to claim the same as bad debt. Sub-section (2) of section 36 clearly lays down that the debt should represent money lent in the ordinary course of the business of money-lending. This qualification is absent in the present case with reference to the credits in the current account. In this context the observations of the Supreme Court in S. Srinivasans case (supra) are quite relevant and also very significant. We have already extracted them earlier. Their Lordships made a distinction between the accumulated profits remaining in the firm and a conscious deposit or advance made of the same by a partner. Their Lordships have observed that for converting them into a deposit or money-lending advance there should be a separate agreement with the firm to keep the accumulated profits as deposits. In the absence of such a contract the Honble Supreme Court was of the opinion that the accumulations could not be converted into loans advanced to the firm by the persons concerned. The very same observations have also been adverted to by the Madras High Court in Misrimul Sowcars case (supra) at p. 128. The general observations regarding borrowal made by the Madras High Court in United India Roller Flour Mills Ltd. case (supra) are also quite significant in this context. In this decision it has been categorically stated that a borrowing carries a positive act of lending by one coupled with acceptance by the other as money lent. In the present case what has happened is a passive allowance of the share of profits to remain in the firms books without any attempt on the part of the assessee to make a conscious advance of the same to the firm in the light of the criteria of these authorities, we cannot agree with the assessee, that the accumulated balance the current account would be tantamount to a money-lending advance, which could be claimed as a bad debt by virtue of its non-recovery. At best, it is only a capital loss. The decisions relied upon by the learned representative for the assessee are not of much help in this context. We are, therefore, it has been written off by the assessee. The mere fact that these amounts have also been assessed in the hands of the assessee does not confer any extra right on the assessee to claim the same as bad debt so long as the amount was not advanced during the ordinary course of the money-lending business of the assessee.
9. As regards the claim for allowance of the same as a business loss, the proposition has simply to be stated to be rejected, inasmuch as, by the same token, as in the other case, the loan cannot be considered to have arisen during the course of the business of the assessee or incidents to the business of the assessee. Under no commercial principles of accounting a loss of this nature could be considered to be a revenue loss. Here again it can only be classified as a loss of capital.
10. Coming to the decision of the Tribunal relied upon by the learned representative for the assessee, we find that we are unable to agree with the view expressed therein, in view of the fact, that the salient aspects of the issue referred to by us earlier, have not been considered by the Bench in the case. At any rate, the decision of the Supreme Court an the later decision of the Madras High Court are binding on this Bench and, we are, therefore, unable to agree with the view expressed in the Tribunals decision. Even otherwise, we are of the opinion that, the decision proceeded on the basis that the ITO had come the wrong conclusion that a partner could not independently make money-lending advances to the firm of which he is a partner. Since this view as not correct in the light of the Andhra Pradesh High Court decision, referred to in the decision of the Tribunal, the Tribunal came to a different conclusion in that case. Accordingly, we also hold, that on facts, the decision is distinguishable.
11. We, therefore, negative the claim for deduction of the amount either as a bad debt or as a business loss. The appeal is dismissed.