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Issues Involved:
1. Deduction of bad debts under Section 36(2)(i)(a) of the Income-tax Act, 1961. 2. Allowance of bad debts as a loss incidental to the business. Detailed Analysis: 1. Deduction of Bad Debts under Section 36(2)(i)(a) of the Income-tax Act, 1961: The primary issue was whether the Tribunal was correct in denying the assessee's claim for deduction of bad debts amounting to Rs. 5,276 on the grounds that the requirements of Section 36(2)(i)(a) were not satisfied. The assessee, a partnership firm, had written off these debts as irrecoverable in the accounting year ending April 12, 1973. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) both held that these debts were incurred when the business was carried on by a joint family, and thus, the loss was considered a capital loss in the hands of the partnership firm. The Tribunal confirmed this view. The Tribunal's interpretation was that the debt must have been taken into account in the computation of the assessee's income in the same or an earlier year. Since the debts were accounted for under the joint family and not the partnership firm, the statutory condition was deemed unfulfilled. This interpretation was challenged, with the argument that the principle of allowing trade debts from a predecessor business should apply, as supported by various High Court rulings. The judgment discussed the rationale behind allowing bad debts as a deduction, emphasizing that the debt must have initially contributed to the assessee's profits and should be written off when it becomes irrecoverable. The court noted that the principle of commercial accounting requires that a trading debt, when it becomes bad, should be allowed as a revenue loss. The court compared the provisions of the 1922 Act and the 1961 Act, noting that while Section 10(2)(xi) of the 1922 Act did not explicitly state the requirement of the debt being taken into account in the assessee's income, it was implied. The court concluded that the requirement in Section 36(2)(i)(a) of the 1961 Act was not a new condition but a codification of an existing principle. The court held that the reference to "assessee" in Section 36(2)(i)(a) should not be strictly interpreted to mean the same entity at both the time of debt creation and when it becomes bad. The court cited various judgments supporting the view that a successor in business can claim a bad debt allowance for debts incurred by the predecessor if the business continuity is maintained. The court concluded that the Tribunal's interpretation was incorrect and that the assessee was entitled to the deduction of the bad debts under Section 36(1)(vii) read with Section 36(2)(i)(a). 2. Allowance of Bad Debts as a Loss Incidental to the Business: The second issue was whether the bad debts could be allowed as a loss incidental to the business if not deductible under Section 36(1)(vii). The Tribunal had considered this alternative contention but rejected it. Given the court's decision that the bad debts were deductible under Section 36(1)(vii), the question of allowing them as a business loss became moot. The court did not address this issue further, as the primary ground for deduction was already resolved in favor of the assessee. Conclusion: The court answered the primary question in the negative, against the Revenue, and in favor of the assessee, allowing the deduction of bad debts under Section 36(1)(vii) of the Income-tax Act, 1961. The secondary question regarding the allowance of bad debts as a business loss was not addressed, as it was rendered irrelevant by the primary decision. The assessee was awarded costs, with counsel's fee set at Rs. 500.
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