1993 (10) TMI 31 - HC - Income Tax

Summary

Issues:
- Deduction of bad debts in the case of a successor to a business
- Interpretation of section 36(2)(i)(a) of the Income-tax Act, 1961

Analysis:
The case involved a dispute regarding the allowance of bad debts amounting to Rs. 42,754 and Rs. 17,944 by the Income-tax Appellate Tribunal for the assessment year 1975-76. The Income-tax Officer had disallowed these bad debts on the grounds that the assessee, a company, was the successor to a firm, and the debts belonged to the predecessor firm. The Tribunal, relying on the decision in T. N. Shah (P.) Ltd. v. Addl. CIT [1979] 120 ITR 354 (All), allowed the deduction. The Income-tax Officer contended that debts of a purchaser in business cannot be claimed as a deduction by the successor. The Tribunal rejected this argument, stating that a change in ownership does not break the continuity of the business identity, allowing the successor to write off bad debts in their accounts.

The Tribunal distinguished decisions cited by the assessee in Expanded Metal Depot. Pvt. Ltd. v. CIT [1971] 80 ITR 483 (Bom), CIT v. Bombay Hing Supply Co. [1966] 61 ITR 672 (Bom), and CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co. [1976] 102 ITR 604 (AP) as they were under the Indian Income-tax Act, 1922, which lacked a provision equivalent to section 36(2)(i)(a) of the Income-tax Act, 1961. The Tribunal relied on the Allahabad High Court decision in T. N. Shah (P.) Ltd. v. Addl. CIT [1979] 120 ITR 354, emphasizing that the identity of the creditor is not crucial; what matters is the debt being taken into account in computing the income of the business.

The Tribunal further referenced the provisions of section 36(2)(i)(a) which state that a deduction for bad debts cannot be allowed unless the debt has been considered in computing the assessee's income in a previous year. In CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co. [1985] 155 ITR 152, the Supreme Court held that a successor to a business is entitled to the same treatment as the original owner regarding bad debts. The Court emphasized that the continuity of the business and the treatment of debts as irrecoverable should not be denied based on a change in ownership.

Based on the interpretation provided by the Supreme Court regarding section 36 of the Income-tax Act, 1961, the High Court upheld the Tribunal's decision, concluding that the Commissioner of Income-tax (Appeals) was correct in allowing the bad debts of Rs. 42,754 and Rs. 17,944. Consequently, the reference was answered in favor of the assessee and against the Revenue.