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Issues involved: The judgment addresses the applicability of section 41(4) of the Income Tax Act, 1961 to a case involving recovery of bad debts by a different assessee who took over a business from a dissolved partnership.
Summary: Question 1: The assessment of a sum as profits chargeable to tax under section 41(4) in the hands of the assessee was challenged. The Income Tax Officer (ITO) concluded that a realisation amount was taxable under section 41(4) as it exceeded the bad debt allowed in previous assessment years. The assessee contended that the character of the amount should be considered capital in his hands. The Appellate Assistant Commissioner (AAC) upheld the assessee's contention, leading to an appeal by the ITO to the Tribunal. Question 2: The issue revolved around whether the provisions of section 41(4) could be rightly applied when bad debts had been allowed in the hands of a firm, and the recovery was made by a different assessee who took over the business. The Tribunal confirmed the AAC's decision, prompting the ITO to appeal the matter. Question 3: The third question raised whether a bad debt recovered by the assessee-partner, previously allowed as a deduction in the hands of the firm, could be deemed as profits chargeable to tax under section 41(4) when the same business was continued by the partner. The Tribunal's order formed the basis for these questions. The judgment delves into the interpretation of section 41(4) which deems certain profits as chargeable to tax. It explains the provisions of section 41(1) and the subsequent subsections, outlining scenarios where deductions or allowances made earlier are recovered or realized. The court emphasized the importance of the identity of the assessee who enjoyed the benefit of deductions in determining tax liability under section 41(4). It was clarified that the continued existence of the business is not a condition for applying section 41(4), rather the identity of the assessee is crucial. The judgment concluded that in the case at hand, where a partnership was dissolved and the business taken over by a different assessee, section 41(4) could not be applied to tax the receipt in the hands of the new assessee. The questions were answered in favor of the assessee, who was also awarded costs.
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