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Assessment of debt value for income tax purposes upon disruption of Hindu joint family in insolvency proceedings. Analysis: The case involved the assessment of Messrs. Deoki Nandan and Sons for the year 1937-38 regarding the valuation of a debt from the Hindu joint family upon its disruption. The family, constituted by two brothers, dissolved in 1933, and the firm succeeding it claimed a set-off for an irrecoverable loan written off. The dispute centered around whether the debt should be valued at its market value or book value during insolvency proceedings. The Income-tax Officer disallowed the claim, which led to an appeal and subsequent reference to the High Court. The Opinion of the Commissioner emphasized the distinction between the disrupted Hindu family and the succeeding firm, highlighting the need to value the debt at its real or market value rather than book value. The Commissioner's view was based on accountancy principles and trading practice, asserting that the successor firm should assess the debt as an independent entity would, considering the insolvency of the debtor. The Commissioner argued that the income-tax authorities were entitled to determine the income based on the debt's actual worth, a factual determination within their purview. In the judgment, the Court examined the history of the case, where a Hindu joint family loaned money to a firm that went insolvent in 1925. Following the family's dissolution in 1933, joint debts were taken over by the new firm at their book value. The Court disagreed with the Commissioner's opinion, stating that there was no legal obligation to value assets at market value. It highlighted the impracticality of revaluing assets annually, especially for money-lending firms. The Court also rejected the argument that any loss from bad debts would be a loss to capital, emphasizing that such losses affect the business's assets. Ultimately, the Court ruled in favor of the assessee, allowing the deduction of the bad debt amount in the assessment year. The judgment emphasized that the debt's badness could only be determined based on specific circumstances, such as the insolvency proceedings' outcome. The Court concluded that the debt became irrecoverable only when the Official Receiver declared a final dividend, making the assessee eligible for the deduction. The judgment was delivered by Dalip Singh, J., with concurrence from Ram Lall, J., answering the reference in favor of the assessee. The Court awarded costs to the assessee and ordered a refund of the reference fees, affirming the right to deduct the bad debt amount in the assessment year based on the insolvency proceedings' outcome.
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