TMI Blog1966 (2) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. However, about the year 1952, disputes arose between the three persons, on the one hand, and Bostankhan, on the other, and the aforesaid three persons, therefore, filed a suit on the original side of this court for dissolution of the partnership. By a consent order dated 10th October, 1952, the court receiver was appointed receiver of the said partnership business with a direction to sell the business of the partnership together with the assets thereof including the goodwill, trade-mark, stock-in-trade, outstandings, etc., either by public auction or private treaty. In pursuance of the said consent order, a public auction was held on 29th November, 1952, at which one of the aforesaid three partners, viz., Manilal Narottamdas, gave the highest bid of ₹ 3,05,000. The said highest bid was given by Manilal Narottamdas as a nominee of the remaining two partners, Gaurishankar K. Vyas and Raghunath Ramshankar, and himself. the sale was followed by an indenture of assignment dated 30th January, 1953, executed by the court receiver in favour of the said three persons, Gaurishankar K. Vyas, manilal Narottamdas and Raghunath Ramshankar. It is not necessary to reproduce the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive years as bad debts under section 10(2)(xi). The claim was disallowed by the Income Tax Officer on two grounds : (i) According to annexure 'A' (the deed of assignment of 30th January, 1953), aforesaid, bad debts among the debts sought to be assigned, had already been taken into account in fixing the price; there was, therefore, a margin already available in the price paid. (ii) The out standings of the old firm constitute capital assets in the hands of the assessee and the loss is, therefore, a capital loss. 3. The assessee took an appeal to the Appellate Assistant Commissioner for the assessment years 1954-55 and 1956-57. The Appellate Assistant Commissioner allowed the claim of the assessee for ₹ 13,824 in its entirety. For the assessment year 1956-57, however, he reduced the assessee's claim for deduction form ₹ 26,226 to ₹ 18,335 and to that extent he allowed deduction. the reasons given by the Appellate Assistant commissioner, for allowing the appeal in his words are : The appellants had taken over the assets and liabilities of the old business. The Indenture of assignment makes it clear that the business was sold to the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the purchaser. On the other hand, those trading debts become capital assets in his hands. The loss, if any, suffered by the purchaser in the matter of recovery of these debts is a capital loss and, therefore, not deductible. Mr. Joshi, in the alternative, contends that in fact there had been no loss. Bad debts were already taken into account at the time of purchase of good will and outstandings and that the assessee had not paid ₹ 1,03,286 as consideration of the purchase of bad debts. On the other hand, the assessee had paid a total consideration of ₹ 1,50,000 for purchasing goodwill of the business, trade name of the former business, to occupy the premises in which the business was carried on and the right to use the telephone, etc. The consideration, which, on a proper analysis, could be said to have been paid by the assessee for purchasing the outstandings, would not exceed ₹ 60,000 to ₹ 70,000. Mr. Joshi contends that the assessee had already recovered more than ₹ 60,000 out of the out standings. The assessee, therefore, is not entitled to claim any deduction for the alleged bad debts. 7. Mr. Palkhivala, learned counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was as a going concern. The same business that was being carried on formerly by four partners in now being carried on by three of them under the same name, in the same premises and in respect of the same articles. The customers of the old business, who were indebted to the old business, have continued to be the customers of the new business and it is some of them who have failed to make good the payments in respect of the dues which they owed to the old partnership for the goods purchased by them form it. It is also not disputed that the respective two amounts have become irrecoverable in the said two years of account. The question to be considered is whether those debts, which have become irrecoverable, can be said to be debts due to the assessee in respect of that party of his business . It cannot be disputed that the debts were due to the assessee. It is true that formerly the debts were due to the old firm form these customers, who had purchased the goods form the old firm, but, by reason of the assignment, the assessee had become entitled to recover the dues form those customers. It can, therefore, hardly be disputed that the debts were due to the assessee. The only question, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax, were : The assessee, who was carrying on business by himself took one S as a working partner. The partnership continued for six years and was dissolved when S retired form the firm. Thereafter, the assessee continued the business with the same stock-in-trade, himself taking over the entire assets and liabilities of the firm. As regards the debts, which were originally due to the firm of which s was a partner, he claimed deduction. Another division bench of the Madras High court held that it was well established that, where a partnership was dissolved and one partner took over and continued the business of the partnership, it was a case of succession to the business. The firm's business in this case continued uninterrupted, there having been only the retirement of a partner. There was continuity in regard to the assets and liabilities of the firm. The assessee was, therefore, entitled to write off the debts which had become barred during the year of account, even though such debts originally belonged to the firm. At page 1055 of the report, after considering the decision in Commissioner of Income Tax v. Appu Chettiar, the learned Chief Justice observed : We c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a change of ownership in the business, if the identity of the business is not in and manner broken or interrupted, but, on the other hand, the business as a whole is continued without any interruption, then the successor is entitled to write off the trading debts in the year of account when they become irrecoverable even though the debts may be due form its customers in respect of the dealings of a period prior to the change of ownership. Mr. Joshi tried to distinguish these cases on the ground that in these circumstances the change of ownership has not been brought about by slide the ratio of these decisions, therefore is not applicable to this case. It is indeed true that the change of ownership of business has not been brought about by sale but that, in our opinion, hardly makes many difference. There are various ways by which change of ownership is brought about and, as pointed out in the last decision, change of ownership may be brought about by transfer inter vivos or be the result of operation of law. 17. Turning to the facts of the case, the business was owned by four partners. There were disputes between the partners, three on the one hand and one on the other. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the Tribunal. As the figures would show, the books value of the stock-in-trade, furniture, goodwill, trade-marks, sundry debtors less sundry creditors, as shown in the books of account of the former partnership, was shown at ₹ 5,03,637. All these assets have been shown together purchased at an auction sale for ₹ 3,05,000. In the assignment deed, the break-up of this figure was shown for the purchase of assignment. The real value thereof to the assessee in his business has been shown by the assessee in his books of account and the value of the outstandings has been shown at ₹ 1,03,286. In other words, there is no variation between the valuation of the outstandings as appear in the books of account of the former firm and the books of account of the assessee-firm. That being the position, the department could have challenged before the court of facts that the books of account of the assessee-firm did not depict the correct position. The correct position was that the assessee had purchased the outstandings at a much lower figure. Had the department raised such a contention, the Income Tax authorities and the Tribunal would have examined the facts,. The dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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