2013 (2) TMI 526 - HC - Income Tax

Writing off the debts which had already become bad in the hands of amalgamating company Mulberry Investment & Trading Co. Ltd. has merged with the assessee-company whether the assessee company would have been entitled to claim the bad debts Held that - In the case of CIT vs. Veerabhadra Rao, K. Koteshwara Rao & Co. 1985 (7) TMI 2 - SUPREME COURT it has been held that if a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. . If the law permits the transfer to treat the whole or part of the debt as irrecoverable and to claim deduction on that account, the same right should be recognized in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is implied in the transfer of a business be regarded as belonging to the new owner. Assessee becomes the owner of the assets and liabilities of the subsidiary company, i.e. Mulberry Investments & Trading Co. Ltd. and accordingly the ratio of the judgment of the Honble Supreme Court referred to above would be applicable and the assessee is entitled to write off the principal amount and arrears of interest as irrecoverable Against the revenue. Further assessee has fulfilled all the conditions laid down in section 36(1)(vii) the bad debts where written off in the books of accounts the assessee is not trying to set off carry forward loss or unabsorbed depreciation and, therefore, section 72A has no application - Against the revenue.

Summary

Issues:
1. Bad debt claimed by the assessee and allowed by the Tribunal.

Analysis:
The High Court of Gujarat considered an appeal by the Revenue against a Tribunal judgment regarding the bad debts claimed by the assessee company. The main contention was whether the assessee, as a successor company, was entitled to claim bad debts that were initially owed by another company, MITCL, which had not declared them as bad debts before amalgamation. The Tribunal examined the issue and found that the nature of the debt remained the same after amalgamation, allowing the assessee to write off the bad debts and claim them as allowable deductions under section 36(1)(vii) while computing taxable profits. The Tribunal cited the Supreme Court's ruling in a similar case to support the transfer of rights to the new owner in such business transfers. It concluded that the departmental authorities erred in their interpretation and directed the Assessing Officer to allow the bad debts written off by the assessee company.

The High Court concurred with the Tribunal's findings, stating that as a successor company, the assessee was entitled to the benefits of the bad debts incurred by the previous company. The Court noted that there was no error in the Tribunal's decision and that the debts being bad and written off by the assessee were not in dispute. Consequently, the Court dismissed the Tax Appeal, as it found no question of law to be addressed in this case.