N. V. Balasubramanian, J.
1. At the instance of the assessee the Appellate Tribunal has referred the following' question of law for our consideration under Section 256(1) of the Income-tax Act, 1961 (hereinafter to be referred to as 'the Act') :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs. 20,593 could not be treated as advances made by the applicant to the firm in the course of her money-lending business and, hence, was not admissible as bad debt ?'
2. The question that arises in the tax case is whether the sum of Rs. 20,593 being the credit balance in the current account of the assessee in the books of Kaviram and Co., Madurai, of which she is a partner, written off by the assessee can be claimed either as a bad debt, or in the alternative as a business loss and is an admissible deduction in the computation of income of the assessee, for the assessment year 1980-81. The assessee was a partner in Kaviram and Co., with l/5th share in the partnership for the profits and her capital contribution was Rs. 5,000. Besides the capital account, her share of profits in the firm has been credited year after year to a current account and the interest has also been credited on the balances to the credit of the account periodically. The amount due by way of share capital and accumulation to the credit of the assessee in the current account amounted to Rs. 25,593 and the assessee has written off the entire sum as irrecoverable and claimed the same as bad debt or business loss in the assessment proceedings relating to the assessment year 1980-81. The Income-tax Officer disallowed the claim which was confirmed by the Appellate Assistant Commissioner. In the appeal preferred by the assessee before the Appellate Tribunal, the assessee did not press her claim for allowance of the loss which arose on the loss of the capital of a sum of Rs. 5,000 and the claim was confined only to the allowance of Rs. 20,593 being the balance of accumulated profits in the current account of the assessee as on April 12, 1980. The Appellate Tribunal held that there was no relationship of creditor and debtor, though the assessee might be doing money-lending business and the amount shown at a credit balance in the current account of the assessee was only an accumulated share of profits. The Tribunal held that the amount was not advanced by the assessee to the firm in the course of her money-lending business and there was no subsequent contract converting the balance of the money in the current account as advance. The Tribunal, therefore, held that neither at the stage of the 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. The Tribunal, therefore, held that there was no positive act of lending by the assessee coupled with acceptance by the firm as a lender and there was no conscious advance of the money to the firm and the assessee was not entitled to claim the same as a bad debt, as the amount was not advanced during the course of money-lending business of the assessee. The Tribunal also rejected the claim of the assessee that the allowance should be made as a business loss as the loss cannot be said to have arisen during the course of the money-lending business of the assessee. The Tribunal, in this view of the matter, confirmed the order of the Appellate Assistant Commissioner and dismissed the appeal preferred by the assessee, and it is this order of the Appellate Tribunal that is the subject-matter of the tax case reference.
3. Mr. R. Janakiraman, learned counsel for the assessee, submitted that the interest on the loan was assessed as a part of the money-lending business and the assessee has established that it was a bad debt and he referred to the order of the Appellate Assistant Commissioner wherein it was found that it was immaterial that interest credited to the current account was assessed in the hands of the assessee in the earlier years along with the profits of the relevant year. Learned counsel for the assessee, therefore, submitted that the implication of the finding is that the interest amounts were assessed along with the income from money-lending business and, therefore, when the Department assessed the same under money-lending business, the Department cannot blow hot and cold and take up a position that there was no bad debt which can be claimed by the assessee. Learned counsel for the assessee also submitted that the assessee advanced money standing in the current account and when there was an advance to the firm and the conditions under Section 36 of the Act have been complied with, the Tribunal failed to notice that there was a debt due to the assessee and it is open to the assessee to claim the same as a bad debt, when it becomes irrecoverable. According to learned counsel for the assessee, the Tribunal proceeded on an erroneous basis and failed to notice that it is always open to a partner to advance money from the current account and he relied upon a decision of the Patna High Court in Deoniti Prasad Singh v. CIT : [1947]15ITR165(Patna) , in support of his proposition that where the Department treated the bonds and promissory notes as investment in the money-lending business, the Department could not, when the question of deduction of irrecoverable loans arises, be permitted to take up the position that the advances were not part of the money-lending business of the assessee. He also strongly relied upon a decision in C. T. Narayanan Chettiar v. CIT : [1966]60ITR690(Mad) , wherein this court held that the transactions having been consistently looked upon by the Department as money-lending transactions and the interest on the advances having been treated as income from money-lending business, in the absence of additional material, no valid change could be made in the mode of the tax treatment. He also relied upon the decision of the apex court in Essen Private Limited v. CIT : [1967]65ITR625(SC) , and submitted that when the debts have been incurred in the course of money-lending business and when the debts became bad debts, they are deductible under Section 36 of the Act. Learned counsel for the assessee also placed reliance on the decision of this court in Devi Films Pvt. Ltd, v. CIT : [1970]75ITR301(Mad) , and submitted that even though the claim for bad debt was negatived, the amount can be claimed as trading loss as the money was advanced in the course of money-lending business and the assessee was unable to recover the debt which became a trading loss in the previous year. He also submitted that the money was advanced in the course of money-lending business and since the interest was assessed in the hands of the assessee, the debt must be taken to have arisen in the money-lending business when it became irrecoverable it is open to the assessee to claim the same as bad debt. Mr. Janakiraman also submitted that the extract of the deed of partnership clearly shows that the partners treated the same as a debt and in each year, the partners have fixed the rate of interest and the interest was assessed as money-lending business. Correct in law by applying the principles of Section 64 of the Act to the case falling under Section 36 of the Act. He submitted that the decision of the Supreme Court in the case of S. Srinivasan v. CIT : [1967]63ITR273(SC) , has no application as that case was dealing with a case of interest on accumulated share of profits and the decision of this court in Addl. CITv. Misrimul Sowcar : [1979]119ITR123(Mad) , has also no application. According to learned counsel for the assessee, the Tribunal have not considered the ingredients of Section 36 of the Act and since it was a debt which arose in the money-lending business and the interest had been taken into account in the computation of the assessee's business income and it was established that the debt has become a bad which was also written off as irrecoverable in the books of account of the assessee, the assessee is entitled to claim the same as deduction as a bad debt.
4. Mr. C. V. Rajan. learned counsel for the Revenue, on the other hand, submitted that it is incorrect to state that the Tribunal has not construed the provisions of Section 36 of the Act for the purpose of allowing the claim of the assessee. According to learned counsel for the Revenue, the latter part of Section 36(2)(b) of the Act would apply to the facts of the case and merely because the share of profit was assessed, it does not mean that the debt was taken into account. According to learned counsel for the Revenue, what was taken into account was only the share of profit and not the debt, and as far as the decision of this court in C. T. Narayanan Chet-tiar v. CIT [19661 60 ITR 690 is concerned, according to learned counsel, there was no dispute in that case that the advance was in the nature of money-lending business and in view of the factual finding, this court held that the debt was a money-lending debt. He submitted that the decision of the Supreme Court in S. Srinivasan v. CIT : [1967]63ITR273(SC) , would apply to the facts of the case as the amount credited in the books of account was merely to accumulate profit and it cannot be stated that it was treated as deposit or loan. He strongly placed reliance on the decision of this court in Addl CIT v. Misrimul Sowcar : [1979]119ITR123(Mad) , and submitted that the interest paid on the accumulated profit of the assessee was includible and in the absence of any subsequent agreement to convert the accumulated profit into the loan, it is impermissible for the assessee to claim that the money was advanced and it was advanced in the course of money-lending business. He also submitted that there is no finding anywhere that the interest was assessed as a part of the money-lending business and in the absence of any such finding, the assessee is not entitled to claim the same as a bad debt. He also submitted that since the debt did not arise in the money-lending business, the assessee is not entitled to claim the same as a business loss and the Tribunal was correct in holding that it was a capital loss. He submitted that since it is neither a bad debt nor a business loss, the decisions relied upon by learned counsel for the assessee are not applicable to the facts of the case.
5. Mr. Janakiraman, learned counsel for the assessee, in his reply relied upon a decision of this court in Godavari Bai v. CED [1972] 86 ITR 533 in support of his proposition that though under the general law, the firm is not a legal entity, there can be no relationship between a debtor and creditor in a firm of partnership.
6. Mr. C. V. Rajan, learned counsel, placed reliance on a decision of the Andhra Pradesh High Court in N. Annajee Rao and Brother v. CIT : [1974]97ITR265(AP) , and submitted that merely because the assessee advanced the money to a firm of which he was a partner would not establish that he was carrying on money-lending business and the transactions in question cannot be termed as amounting to money-lending business.
7. We have carefully considered the submissions of learned counsel. The clear finding of the Appellate Tribunal is that there was no contract, either express or implied, either at the time of crediting of the share of profit in the current account or subsequently to convert the share of profits into a debt and in the absence of any finding to show that the share of profit credited to the current account was treated as an advance by the assessee to the firm, that too, in the course of money-lending business, it is not open to the assessee to claim the same as a bad debt when it becomes irrecoverable. There is a vital distinction between the amount in the current account and the amount treated as a loan or a debt and the distinction is that where some amount is credited to the current account, it is open to a partner to withdraw the amounts as of right and as his own money, but in the case of a debt or a loan, it can be recovered only on the basis of the demand and when the borrower repays the same. The legal relationship between the parties will also change from that of a partner to that of a debtor-creditor, in the event the share of profit credited to the current account is treated as a debt or a loan. The assessee has not stated anywhere that there was a conversion of the share of profit to a debt, much less, there is any evidence to show that it was an advance which arose in the course of money-lending business and in the absence of any evidence, we are of the opinion, the accumulated profit credited to the account of the assessee continues to be the accumulated profit and has not shed its character as accumulated profit and been converted into a loan or advance to the firm.
8. The decision of the Supreme Court in S. Srinivasan v. CIT : [1967]63ITR273(SC) , is relevant and the apex court pointed out the distinction between the accumulated profit and the deposits as under (page 276) :
'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 there 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 accumulated 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 those 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 moneys 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.'
9. This court in Addl. GIT v. Misrimul Sowcar : [1979]119ITR123(Mad) , following the decision of the Supreme Court in S. Srinivasan v. CIT : [1967]63ITR273(SC) , held that the accumulated profit credited to the account of the asses-see is different from the deposit or loan and this court held that there must be an agreement subsequent to the crediting of a share of profit to convert the share of profits to a loan. The test laid down by this court reads as under (page 129) :
'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 strangers. 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 the 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.'
10. In view of the finding of the Appellate Tribunal that there was no subsequent contract by the assessee with the firm to convert the accumulated profit as a debt of the firm, in our view, the accumulated profit remained as an accumulated profit in the firm's books of account, and it is not open to the assessee to claim the same as a bad debt. The decision of the Patna High Court in Deoniti Prasad Singh v. CIT : [1947]15ITR165(Patna) , and the decision of this court in C. T. Narayanan Chettiar v. CIT : [1966]60ITR690(Mad) , are not applicable to the facts of the case as in those cases, the interest income was assessed as the assessee's income from money-lending business. There is no finding by any of the authorities including the Tribunal that the interest income arising out of the accumulated profit was assessed as income from the money-lending business. In the absence of any finding that the interest was assessed as income from money-lending business, the decision of the Patna High Court and the certain decisions of this court have no application to the facts of the case.
11. The decision of the Supreme Court in A. V. Thomas and Co. Ltd. v. C/T : [1963]48ITR67(SC) , dealt with the question whether the amount can be treated as a debt. That decision also is not of much help to the assessee as a reading of the apex court's decision shows that the debt was an outstanding which, if recovered, would have swelled the profits and not merely because the money was handed over to some one for purchasing a thing and'that person failed to return even though no purchase was made, it was not a debt and the debt would mean something more than a mere advance and also something which was related to the business or resulted from it. As already seen, the assessee has not established here that the accumulated profit was converted as an advance and the money was advanced during the course of money-lending business and in view of the dearth of the materials, the decision of the Supreme Court in A. V. Thomas and Co. Ltd.'s case : [1963]48ITR67(SC) , is not of much help to the assessee.
12. The decision in Essen Private Ltd. v. C/T : [1967]65ITR625(SC) , another decision of the Supreme Court on which reliance was placed by the assessee, is also not of any help to the assessee as in that case it was found that under Clause 14 of the agreement, there was a specific provision to lend the advance for the use of the company and as a part of the management of the business, to provide funds to the managing company, moneys were advanced in the course of the managing expenses and loss arose during the course of the said business. But, there is nothing to show, on the facts of the case, that the money was advanced in the course of money-lending business or a loss was sustained by the assessee during the course of the money-lending business. Therefore, on the facts of the case, the decision of the Supreme Court is distinguished and it has no application to the facts of the case. So also, the decision of this court in Devi Films Pvt. Ltd. v. CIT : [1970]75ITR301(Mad) , is not of much relevance as in that case the loss occurred during the course of a business and it was found to be a trading loss.
13. There is no dispute as found by this court in Godavari Bai v. CED [1972] 86 ITR 535, that there can be independent relationship between the firm and a partner and for that purpose, the partner should establish that there was a debtor and creditor relationship and to establish the legal relationship, the assessee should come with relevant materials and evidence in support of her plea that the amount standing by way of accumulated profit in the firm was treated either as an advance or as a loan. In the absence of any material and in the absence of any finding by the Appellate Tribunal that there was a debt or loan by the assessee, the claim of the assessee for deduction of the bad debt must necessarily fail. The reliance placed on the deed of partnership also does not help the case of the assessee as the deed merely provided that the amounts standing in the current account shall bear interest at the end of each year and the rate of interest shall be fixed by the partners from time to time. It does not advance the case of the assessee to establish that merely because the rate of interest was provided for, the amount was advanced in the course of money-lending business, and as pointed out by this court in Misrimul Sowcar's case : [1979]119ITR123(Mad) , there must be a subsequent agreement to treat the amount of accumulated profit standing in the accounts of the firm as an advance or a loan and the provision of interest would not establish that the amount was advanced by the assessee in the course of money-lending business. The decision of the Andhra Pradesh High Court in N. Annajee Rao and Brother v. CIT : [1974]97ITR265(AP) , also establishes the proposition that merely because the amount was advanced by a partner to the firm would not show that the assessee was carrying on money-lending business and the transaction in question cannot be treated as money-lending business. Therefore, we are of the opinion that merely because the assessee was carrying on money-lending business, it would not prove that the accumulated profit standing in the account books of the firm was treated as advance or loan, much less, it was an advance or a loan in the course of the money-lending business carried on by the assessee. There is also no positive material to show that the interest income on the accumulated profit was treated as a part of the money-lending business of the assessee. In the absence of any material or contract to show that the accumulated profit was taken as an advance, tbe claim of the assessee that she is entitled to deduct the same as a bad debt has necessarily to fail and we hold that the order of the Appellate Tribunal does not warrant any interference. Accordingly, we answer the question of law referred to us in the affirmative and against the assessee. The Revenue will be entitled to costs of reference, Rs. 750.