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Assessment of bad debt claimed by the assessee under Section 10(2)(xi) of the Income-tax Act for the accounting period from December 16, 1942, to December 15, 1943. Analysis: The judgment pertains to the assessment of a bad debt claimed by the assessee under Section 10(2)(xi) of the Income-tax Act for the accounting period from December 16, 1942, to December 15, 1943. The case involves the assessee, a manager of a Hindu undivided family, who carried on a money-lending business in partnership. The partnership was dissolved in 1931, but the firm continued to realize outstanding debts, including one from a debtor named Kidar Pillai Maracair. The partners decided to close the accounts in 1942, dividing the assets equally. The assessee entered his share of the debt in his separate money-lending business, without obtaining a fresh undertaking from the debtor. Subsequent realizations and expenditures were made on the debt, with a portion being written off as irrecoverable. The issue revolved around whether the bad debt of Rs. 5,880 claimed by the assessee arose in the ordinary course of his money-lending business and if the claim was admissible under Section 10(2)(xi) of the Income-tax Act. The Court analyzed the provisions of Section 10(2)(xi) of the Act, which allows a legitimate allowance for a loan made in the ordinary course of a banking or money-lending business, estimated to be irrecoverable. The department contended that merely entering the debt in the new business account was insufficient to classify it as a loan in the ordinary course. However, the Court referred to a previous case where debts from a dissolved partnership were allowed as deductions, emphasizing that the debts became part of the new business's stock-in-trade. The Court rejected the argument that novation or debtor consent was necessary for the old debts to be considered loans in the new business, especially after a decree had been obtained. The Court affirmed that the bad debt arose in the ordinary course of the assessee's money-lending business, considering the genuine entry made in the accounts and subsequent realizations. The debt was deemed irrecoverable in the accounting period, making the assessee eligible for the claimed deduction under Section 10(2)(xi) of the Income-tax Act. Both questions referred to the Court were answered in the affirmative, and the Commissioner was directed to pay costs to the respondent. In conclusion, the judgment clarifies the criteria for claiming bad debts under Section 10(2)(xi) of the Income-tax Act, emphasizing the business context and genuine nature of the transactions. The decision provides guidance on the treatment of debts from dissolved partnerships and the admissibility of deductions for irrecoverable debts in ongoing business activities.
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