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Issues: Allowability of deduction under section 10(2) of the Indian Income-tax Act for bad and doubtful debts incurred by the assessee in the context of a partnership dissolution and business succession.
Analysis: The judgment in question pertains to a reference made under section 66(1) of the Indian Income-tax Act regarding the deductibility of a specific sum as a bad debt under section 10(2) of the Act. The assessee, initially operating as a proprietary concern, later entered into a partnership where the share of the partner was 8/17. The partnership continued for six years until it was dissolved, and the partner retired from the firm. Following the dissolution, the assessee carried on the business individually, inheriting all assets and liabilities of the former partnership. During the assessment year 1956-57, the assessee claimed a deduction of a sum as bad and doubtful debts, which were originally owed to the partnership. However, the Income-tax Officer rejected the claim, asserting that it constituted a capital loss rather than a business deduction. This decision was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal, leading to the reference before the High Court. The Tribunal contended that since the debts belonged to the dissolved partnership, the right to claim a deduction was lost with the dissolution of the entity. Nonetheless, the High Court clarified that in cases where a partnership dissolves, and one partner succeeds and continues the business, it amounts to a succession of the business. As the assessee took over the business with all its assets and liabilities, including the bad debts, it was deemed entitled to write off such debts that had become irrecoverable during the relevant accounting year. Moreover, the Tribunal suggested that the debts lost their identity as dues to the firm once the assessee took over and operated the business individually. However, the High Court distinguished a previous decision concerning valuation under the mercantile system, emphasizing that the present scenario involved a partner continuing the business after the retirement of another partner, maintaining continuity in assets and liabilities. Consequently, the High Court ruled in favor of the assessee, affirming the deductibility of the bad debts and awarding costs to the assessee. In conclusion, the judgment elucidates the principles of business succession following a partnership dissolution and underscores the entitlement of the succeeding partner to claim deductions for bad debts incurred during the course of business operations, even if such debts were originally owed by the dissolved partnership.
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