1971 (3) TMI 49 - HC - Income Tax

Partner allowed profits to be accumulated in capital account. On the dissolution of the firm the legal representatives agreed to receive lesser amount in settlement of the credit balance in his capital account whether the difference is allowable as bad and irrecoverable debt - Whether on the facts and in the circumstances of the case the assessee is entitled to claim the sum of Rs. 38, 394 as allowable under section 10 of the Income-tax Act ? Whether on the facts and in the circumstances of the case the assessee is entitled to claim Rs. 6, 589 from April 1 1959 to July 14 1959 pertaining to the accrued profit allocatable to the deceased partner till his death is allowable as a deduction ? - our answer to both the questions is in the negative and against the assessee

Summary

Issues Involved:
1. Entitlement to claim Rs. 38,394 as allowable under section 10 of the Income-tax Act.
2. Entitlement to claim Rs. 6,589 as a deduction pertaining to the accrued profit allocatable to the deceased partner till his death.

Detailed Analysis of the Judgment:

Issue 1: Entitlement to claim Rs. 38,394 as allowable under section 10 of the Income-tax Act
The assessee, a firm, claimed a deduction of Rs. 38,394 as a bad debt for the assessment year 1960-61. The amount represented the difference between Rs. 1,33,394 (the credit balance in the account of the deceased partner) and Rs. 95,000 (the amount settled with the other partners of the Nellore firm). The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal rejected the claim, holding that it was a capital loss and not a bad debt under the Act.

The Tribunal found that the assessee was not carrying on the business of being a partner in the Nellore firm and was not engaged in money-lending business. The Tribunal concluded that the loss was a capital loss and not a business loss. The High Court upheld this finding, stating that the assessee did not establish that the debt was irrecoverable in the year of account. The court emphasized that the debt must be related to the business and must have become bad and irrecoverable in the year of account to be deductible under section 10(2)(xi) of the Act.

Issue 2: Entitlement to claim Rs. 6,589 as a deduction pertaining to the accrued profit allocatable to the deceased partner till his death
The assessee claimed Rs. 6,589 as a deduction, representing the accrued profit from April 1, 1959, to July 14, 1959, for the deceased partner. The Tribunal rejected this claim, and the High Court agreed, stating that the profits had already accrued to the assessee by July 14, 1959, and the loss occurred after this accrual. The court held that the assessee voluntarily gave up the amount in the settlement, and it was not a notional or hypothetical income.

Conclusion:
The High Court answered both questions in the negative, holding that the assessee was not entitled to claim Rs. 38,394 as a bad debt or business loss and was not entitled to claim Rs. 6,589 as a deduction for the accrued profit. The assessee was ordered to pay the costs of the reference to the Commissioner of Income-tax, Hyderabad, with counsel's fee fixed at Rs. 300.