Law:

Section:

Section 36(1)(vii) of the Income-tax Act, 1961 [corresponding to section 10(2) of the Income-tax Act, 1922] - Bad Debts - Assessment year 1942-43 - Assessee, who was a timber merchant, obtained a loan from bank on joint security of himself and one M - On same day M also obtained a loan from bank on joint security of himself and assessee - Assessee paid off his amount but M failed to pay - M also failed in his business and his estate went into hands of receivers and assessee received certain amount from them - Assessee wrote off balance as bad debts - Whether since no part of loan taken by M on joint security of himself and assessee, had been applied to assessee's own business, loss in question could not be said to be in respect of business of assessee and it was not allowable as bad debts - Held, yes FACT The assessee obtained a loan from the bank on the joint security of himself and one M. On the same day M also obtained a loan from the bank on joint security of himself and the assessee. The assessee paid off his loan but M failed to pay his loan. This amount was realized by the bank from the assessee. Subsequently M failed in his business and his estate went into the hands of the receivers. The assessee opened a ledger account in the name of M and the total amount was debited to his account. The assessee received certain amount by way of the dividends from the receivers of M's property. The balance amount was written off by him as bad debt in the assessment year 1941-42 and was claimed as an allowable deduction under section 10 of 1922 Act. The ITO disallowed the claim holding that the said loss was a capital loss. The AAC affirmed the order of the ITO. The Tribunal following the decision in CIT vS.A.S. Ramaswamy Chettiar [1946] 14 I.T.R. 236 (Mad) came to the conclusion that the loss suffered by assessee by standing surety was an allowable loss. On reference the High Court held that the Tribunal had proceeded on an erroneous assumption as to the fact of the case and the application of the money. Since no part of the loan, which had been taken from the Bank by M on the joint security of himself and the assessee was applied to the assessee's own business,…

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