1970 (4) TMI 43 - HC - Income Tax

Change of ownership of business - old business continued - successor is entitled to claim bad debts

Summary

Issues:
1. Claim for deduction of a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Detailed Analysis:
The judgment delivered by the Bombay High Court under section 66(2) of the Indian Income-tax Act, 1922, concerned the admissibility of a claim for deduction of a bad debt by a private limited company for the assessment year 1958-59. The company had taken over a business from a partnership firm, including a debt of Rs. 17,617 owed by the firm. The firm's attempt to recover the debt post-partition was unsuccessful, leading the company to claim it as a bad debt written off under section 10(2)(xi) of the Act.

The company also claimed another bad debt of Rs. 2,250, but during the proceedings, it decided to give up this claim. The Tribunal did not uphold the company's claim for the Rs. 17,617 debt, prompting the reference to the High Court. The specific question referred was whether the company's claim for Rs. 19,867 was admissible under section 10(2)(xi) of the Act, with Rs. 19,867 being the aggregate of the two debts.

The High Court analyzed the situation, noting that there was a change of ownership from the partnership firm to the company, but the identity of the business was not broken or interrupted. Citing a previous judgment, the court held that if the business continued without interruption, the successor was entitled to write off trading debts even if they were due from customers prior to the change of ownership. The court rejected the revenue's argument that the debt became a capital asset of the company upon transfer, emphasizing that there was no evidence to suggest the company treated the debt differently from other trading debts taken over.

Ultimately, the High Court applied the precedent and ruled in favor of the company, allowing the deduction of the Rs. 17,617 debt as a bad debt under section 10(2)(xi) of the Act. The court directed the Commissioner to pay the company's costs, concluding the judgment on a favorable note for the assessee.