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TMI Blog1985 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee-firm for the assessment year 1965-66 ? " The assessee is a partnership firm. It took over the business of an earlier firm. All the assets and liabilities of the predecessor firm passed on to the assessee-firm. These included a debt of Rs. 23,577 due from Laxmi Trading Company to the predecessor firm. The total amount due in the account relating to Laxmi Trading Company was Rs. 40,549 comprising an outstanding amount of Rs. 29,200 and interest thereon in the sum of Rs. 11,349 for the period April 31, 1960, to March 31, 1961. The amount of interest was taxed in the hands of the assessee for the assessment year 1963-64. On March 31, 1965, the parties effected a settlement under which a sum of Rs. 25,000 was accepted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been continued by the assessee on taking over the assets and liabilities of the predecessor firm. The ITO disallowed this claim also, but in appeal the AAC upheld the claim. The Income-tax Department appealed to the Income-tax Appellate Tribunal against the order of the AAC and urged that cl. (i) of sub-s. (2) of s. 36 of the I.T. Act, 1961, did not permit such an allowance because it did not satisfy the requirement mentioned in cl. (a) and cl. (b) of that provision and, therefore, it was not open to the assessee to claim a deduction of Rs. 15,100 as a bad debt nor the legal expenses of Rs. 6,880. The Appellate Tribunal dismissed the appeal, holding that where a business was succeeded to by an assessee, it was entitled to write off th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be written off as irrecoverable in the accounts of its successor, the assessee, in a subsequent year and could be claimed as a bad debt under cl. (vii) of sub-s. (1) of s. 36 of the I.T. Act, 1961. Cl. (vii) of sub-s. (1) of s. 36 of the I.T. Act, 1961 provides "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-... (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year." Sub-s. (2) of s. 36 declares: " (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply:- (i) no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession ", shall be chargeable to income-tax. The profits and gains of a business are charged to income-tax. To compute the profits and gains so chargeable, s. 36 provides for allowing a number of deductions. Each of the deductions must relate to the business. If the same assessee was carrying on a business and he wrote off a debt relating to the business as irrecoverable, he would without doubt be entitled to a corresponding deduction under cl. (vii) of sub-s. (1) of s. 36 subject to the fulfilment of the conditions set forth in sub-s. (2) of s. 36. If a business, along with its assets and liabilities, is transferred by one owner to another, we see no reason why a debt so transferred should not be entitled to the same treatment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed to the assessee by the debtor. The item constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt and that debt was taken into account in computing the income of the assessee of the relevant previous year. It is the same assessee who has subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable in his accounts. It appears, therefore, that the conditions in both sub-clauses (a) and (b) of cl. (i) of sub-s. (2) of s. 36 are satisfied in the present case and the High Court as well as the Appellate Tribunal and the AAC are right in the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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