Law: Income Tax Act, 1961

Section: 37(1)

Law: Income Tax Act, 1922

Section: 10(2)(xi)

Section 36(1)(vii), read with section 37(1) of the Income-tax Act, 1961 (Corresponding to section 10(2)(xi), read with section 10(2)(xiv) of the Indian Income-Tax Act, 1922) - Bad debts - Assessment year 1947-48 Main business of assessee was money-lending - He became a director of company 'K' which obtained loans from bank - Assessee stood guarantor in said loan - Company 'K' went into liquidation and bank pressed for repayment of its loans - Assessee sold his house and paid to Bank - As amount of loan paid to bank became irrecoverable, assessee wrote off said amount and claimed deduction in respect of it under section 10(2)(xi) or under section 10(2)(xv) or under general terms of 1922 Act - Whether amount written off by assessee was loss of capital nature, and consequently, assessee's claim for exemption could not be allowed - Held, yes FACTS The main business of the assessee was undoubtedly money-lending. He kept only one account of all the sources of his income and only one assessment was made in respect of his entire income. Loans were advanced by the assessee to company 'K' ever since 1940, when it came into existence and when the assessee became a director of this company. Loans were also sought from the assessee to furnish surety to the extent of Rs. 1.25 lacs. For this amount the assessee gave security. His object in undertaking this extra liability was that company 'K' would make larger profits owing to the larger turnover, and so his own profits constituting one-third of the total profits made by company 'K' would be augmented. Company 'K' went into liquidation in 1946. The Bank pressed for repayment of its loans. The assets of the company in liquidation were insufficient to meet the demand of the bank and so the bank pressed its guarantee against the assessee, and the assessee thereupon sold his house and paid the Central Bank. When the amount became irrecoverable, the assessee wrote off the entire debt in March, 1947, and debited Company 'K' with this amount. The debt was written off as a bad debt, and the assessee claimed that this amount was not subject to tax because it amounted to losses in business. The appellant's claim, therefore, was that…

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