TMI Blog1985 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ENT The judgment of the court was delivered by PATHAK J.- This appeal by special leave is directed against the judgment of the High Court of Andhra Pradesh disposing of a reference made under sub-s. (1) of s. 256 of the I.T. Act, 1961, for its opinion on the following question of law : "Whether, on the facts and in the circumstances of the case, the bad debt of Rs. 15,100 and the legal expenses of Rs. 6,880 were allowable deductions in the assessment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off the bad debt in the measure claimed by the assessee, the AAC allowed the appeal. It may be mentioned that the assessee had also claimed deduction of a sum of Rs. 6,880 before the ITO on the ground that the assessee had incurred legal expenses in that amount in connection with an appeal filed in the Supreme Court for the purpose of recovering a sum due from the Central Government. The transaction related to the predecessor firm and the suit instituted by it 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts also show that the assessee paid income-tax on the interest income accruing on the debt for the assessment year 1963-64. It is also not disputed that the parties effected a settlement on March 31, 1965, whereby a sum of Rs. 25,000 was accepted by the assessee in satisfaction of the debt and that the balance of Rs. 15,100 was written off by the assessee as irrecoverable. The question is whether money owed by a debtor under transaction with a predecessor firm can 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten off as irrecoverable in the accounts of the previous year and the Income-tax Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply." Section 28, referred to in sub-s. (1) of s. 36, provides that income under the head " Profits and gains of business 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 busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee of that previous year or an earlier previous year and that it has also been written off as irrecoverable in the accounts of the assessee for that previous year. In the present case, the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because it represented an accretion accruing during the earlier year on money 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem. As regards the sum of Rs. 6,880 claimed by the assessee as legal expenses in connection with an appeal filed in this court to recover an amount due from the Central Government, it is apparent that the transaction related to the predecessor firm and the suit instituted by it was continued by the assessee on taking over the assets and liabilities of the predecessor firm. The ITO, the AAC, the Appellate Tribunal and the High Court dealt with this claim on the same basis as the claim made in respect of the bad debt. We are satisfied that the view we are taking in respect of the sum of Rs. 15, 100 claimed as a bad debt should also form the basis for acknowledging the claim to deduction of Rs. 6,880. In the result, the appeal is dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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