1966 (2) TMI 98 - HC - Income Tax

Summary

Issues Involved:
1. Whether the bad debts of Rs. 13,824 for the assessment year 1954-55 and Rs. 18,335 for the assessment year 1956-57 could be allowed as deductions under section 10(2)(xi) of the Income Tax Act, 1922.

Detailed Analysis:

Issue 1: Deduction of Bad Debts for Assessment Year 1954-55

Facts and Background:
The assessee, a partnership firm, purchased the business of M/s. Bombay High Supply Co. as a going concern. The business was previously owned by four partners, but disputes led to its sale by a court receiver. The sale included all assets such as goodwill, trade-marks, stock-in-trade, and outstandings. The assessee wrote off Rs. 13,824 as bad debts in Samvat Year 2009, claiming it as a deduction under section 10(2)(xi).

Arguments:
- Revenue: The trading debts of the old firm do not retain their character as trading debts in the hands of the purchaser and become capital assets. Therefore, any loss in their recovery is a capital loss and not deductible.
- Assessee: The trading debts purchased remain trading debts in the hands of the purchaser, who is entitled to claim deduction under section 10(2)(xi).

Court's Analysis:
The court noted that the business was sold as a going concern, and the identity of the business remained unchanged. The business continued uninterrupted under the same name and in the same premises. The debts were due to the assessee in respect of the business it carried on. The court referred to previous decisions, including Commissioner of Income Tax v. Dharmaraja Nadar and C.J. Sheth v. Commissioner of Income Tax, which supported the view that the successor could claim deductions for bad debts if the business identity was preserved.

Conclusion:
The court concluded that the debts were trading debts of the assessee and were due in respect of its business. Therefore, the deduction of Rs. 13,824 as bad debts for the assessment year 1954-55 was justified.

Issue 2: Deduction of Bad Debts for Assessment Year 1956-57

Facts and Background:
Similarly, the assessee wrote off Rs. 26,226 as bad debts in Samvat Year 2011, claiming it as a deduction under section 10(2)(xi). The Appellate Assistant Commissioner reduced the claim to Rs. 18,335, allowing it partially.

Arguments:
- Revenue: The same arguments were presented as for the previous assessment year, contending that the debts were capital assets and any loss in their recovery was a capital loss.
- Assessee: Reiterated that the debts remained trading debts in the hands of the purchaser and were deductible under section 10(2)(xi).

Court's Analysis:
The court applied the same reasoning and principles as in the previous issue. It emphasized that the business continued without interruption, and the trading debts of the old firm became the trading debts of the new firm.

Conclusion:
The court held that the deduction of Rs. 18,335 as bad debts for the assessment year 1956-57 was justified.

Final Judgment:
The court answered both questions in the affirmative, holding that the Tribunal was justified in allowing the deductions for bad debts in the respective assessment years. The Commissioner was directed to pay the costs of the assessee.