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Issues:
1. Deduction of bad debt under section 36(2) of the Income-tax Act, 1961. 2. Reasonableness of the deduction of bad debt based on available materials. Analysis: The judgment by the High Court of Madras involved the interpretation of provisions related to the deduction of bad debts under the Income-tax Act, 1961. The case revolved around a partnership firm, which had a debt due from an insolvent constituent. The firm had claimed the amount as a bad debt before dissolution, but the claim was disallowed by the Income Tax Officer (ITO). The dispute arose regarding the treatment of this debt as a bad debt for the assessment year 1966-67. The ITO disallowed the claim on various grounds, including awaiting the final declaration of dividends from the insolvent's estate. However, the firm was dissolved, and the business was taken over by the assessee. The official assignee later paid a final dividend to the assessee. The Tribunal allowed the claim for bad debt, leading to the reference of questions to the High Court. The court analyzed the situation and held that the debt due from the insolvent constituent was indeed an asset of the firm, which was effectively taken over by the assessee upon dissolution. The court emphasized that the amount received as a final dividend by the official assignee was included in the assessee's income computation, further solidifying the assessee's entitlement to the debt amount. The court also dismissed the argument that the debt not being shown as an asset in the wealth-tax assessment precluded its treatment as an asset taken over by the assessee. Regarding the timing of the claim for bad debt, the court noted that the communication about no further dividends was received after the final dividend payment. The court relied on Section 36(2)(iii) of the Income-tax Act, which allows for the deduction of a debt that has been previously written off as irrecoverable. The court highlighted that since the debt had been written off in an earlier year and the conditions of the provision were met, the assessee, as the successor, could claim the deduction without the need for a fresh writing-off of the debt. The court referred to precedents and established principles to support its conclusion that the successor or transferee could claim a deduction for bad debts related to the predecessor's business without a fresh write-off, as long as the conditions specified in the relevant provision were fulfilled. Ultimately, the court answered both questions in favor of the assessee, allowing the deduction of the bad debt amount of Rs. 16,363 for the assessment year 1966-67.
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