1. In compliance with the requisition of this court issued under sub-section (2) of section 66 of the Income-tax Act, 1922, the Tribunal has stated the case on the two questions of law arising out of its judgment. We are here concerned with the two assessment years 1955-55 and 1956-57, the accounting period Samvat years 2009 and 2011. The assessee is a partnership firm doing the business of manufacture and sale of asafetida(hing) under the name and style of M/s. Bombay High Supply Co., Bombay. In the years of assessment, the partners of this firm were Gaurishankar K. Vyas, Manilal Narottamdas and Raghunath Ramshankar. Now, prior to the year 1952, the aforesaid three persons and one Bostankhan Izatkhan were carrying on the same business of manufacture and sale of asafetida under the name and style of 'M/s. Bombay High Supply 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 Rs. 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 clauses of the sale deed, but it would be sufficient to state that the said business of the Bombay High Supply Co. carried on by the aforesaid four partners was sold as a going concern by the receiver and purchased by he aforesaid three persons as a going concern. The break-up of the aforesaid consideration of Rs. 3,05,000 has been shown in the deed of assignment in the following manner :
'And whereas the purchasers have called upon the Court Receiver to execute the assignment of the goodwill of the said business as a going concern and the outstandings aggregating to Rs. 1,03,286-3-3 as particularised in the Schedule 'A' hereto annexed and the benefit of the tenancy rights and the benefit of the hiring agreement in respect of the said telephone. And whereas the movable, stock-in-trade, furniture, articles and things capable of manual delivery and so delivered to the purchasers on the 2nd day of December, 1952, are valued at Rs. 1,55,000 And whereas the goodwill of the said business and the said name of Bombay High Supply Company and the trade names, trade-marks and the outstandings (after taking into account bad debts) to which these presents are intended to relate have been valued at Rs. 1,50,000.'
2. Thus the break-up to the total consideration of Rs. 3,05,000 shown in the deed of assignment is Rs. 1,55,000 for all movable including the stock-in-trade and Rs. 1,50,000 as consideration for goodwill, trademarks, outstandings, etc. It may be stated that a day before the deed of assignment was executed, i.e., on the 29th January, 1953, a deed of partnership was executed between the three persons, Gaurishankar K. Vyas, Manilal Narottamdas and Raghunath Ramshankar enumerating the various terms and conditions on which they greed to carry on the aforesaid business purchased by them in partnership and the deed showed that the commencement of the partnership was the date on which the former business was purchased by Manilal Narottamdas as a nominee of the three partner in a court auction held on 29th November, 1952. Now, in S.Y. 2009 the assessee in its books of account wrote off Rs. 13,824 out of the outstandings purchased by it as bad or irrecoverable debts. Similarly in S.Y. 2011, the assessee wrote off Rs. 26,226 as bad or irrecoverable debts. The assessee claimed deduction of these two amounts in the respective 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 outstandings 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 Rs. 13,824 in its entirety. For the assessment year 1956-57, however, he reduced the assessee's claim for deduction form Rs. 26,226 to Rs. 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 appellants as a going concerned. In estimating the value of the goodwill, etc., the bad debts were taken in the circumstances. But this does not mean that the trade debts ceased to exist. The claim for bad debts in admissible.'
4. Against this decision of the Appellate Assistant Commissioner, the department appealed to the Tribunal. The Tribunal dismissed the appeal. In paragraph 4 of its order, the Tribunal observed :
'The Appellate Assistant Commissioner's decision is right and must be upheld, as it is in accordance with the accepted law on the subject. The assessee has taken over the trade debts of the predecessor and has continued the same trade. When the debts were assigned in favour of the assessee and debited in the books, on taking them over, they became debts incurred by the assessee in the course of its business, notwithstanding the fact that the actual advance of the goods creating the debts had been by the predecessor only and not by the assessee; the cause of action in such cases will still continue to be for goods sold.'
5. The application made by the department under sub-section (1) section 66 was dismissed by the Tribunal. The Commissioner of Income-tax then moved this court under sub-section (2) of section 66 and on a requisition the following two questions have been referred to this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that bad debts of Rs. 13,824 (Rupees eighteen thousand three hundred and thirty-five) had arisen out of the assessee's business and could be allowed in the assessment year 1954-55
6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the bad debts of Rs. 18,335 (Rupees eighteen thousand three hundred and thirty-five) had arisen out of the assessee's business and could be allowed in the assessment year 1956-57 ?' Mr. Joshi, learned counsel for the revenue, contends that the Tribunal was in error in allowing deduction of the said two amounts as bad debts under section 10(2)(xi). He argues that when a business of a going concern is sold as a going concern, the purchasers are not successors of the old business; that the trading debts of the old firm do not become the trading debt of the purchaser and that they do not retain the character and Colours of trading debts in 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 Rs. 1,03,286 as consideration of the purchase of bad debts. On the other hand, the assessee had paid a total consideration of Rs. 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 Rs. 60,000 to Rs. 70,000. Mr. Joshi contends that the assessee had already recovered more than Rs. 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 assessee, on the other hand, contends that when the running business is taken over as a running business, the trading debts purchased by the purchaser remain as trading debts in his hands. They are the debts in respect of the business, which the purchaser carries on. They are the debts in respect of the business, which the purchaser carries on. He, therefore, is entitled to claim deduction in respect thereof under section 10(2)(xi).
8. As regards the second contention, Mr. Palkhvala contended that here is no material on record to show that it had been the case of the department at any time that the assessee had not paid full consideration of Rs. 1,03,286-3-3 for purchasing the outstadnings. In the alternative, he argued that, even assuming that he paid any less consideration, that had no relevance in deciding the question as to whether the assessee is entitled to claim deduction under section 10(2)(xi). He placed reliance on decisions in commissioner of Income-tax v. Dharmaraja Jadar, C.J. Sheth v. Commissioner of Income-tax, and Mettur Sandalwood Oil co. v. Commissioner of Income-tax.
9. We would first proceed to consider the first contention. Clauses (i) to (xv) of sub-section (2) of section 10 enumerated the various heads under which an assessee could claim deduction or allowance in the computation of profits or gains of his business. The material part of clause (xi) reads :
'10. (2) Such profits or gains shall be computed after making the following allowances, namely : > (xi) When the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business..........'
10. To attract the provisions of clause (xi), the following facts must be established :
(1) The assessee's accounts in respect of his business are not kept on cash basis :
(2) that certain debts have become bad or irrecoverable in the year of account; and
(3) that the debts that have bad irrecoverable are due to the assessee in respect of his business.
11. It is not disputed that the books of account of the business of the Bombay High Supply Co. in respect of its business throughout have not been kept on the cash basis. It is also not in dispute that the assignment of the business to the present assessee 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, therefore, that remains is whether the debts were 'in respect of that part of his business'. Mr. Joshi, laying emphasis on the word 'his', argued that the its were in respect of the business of the old partnership. The debts were to in respect of the business carried on by the assessee after the assignment. The assessee therefore, is not entitled to claim any deduction. It is not possible for us to accept the argument of Mr. Joshi. The argument overlooks the fact that the assessee has purchased the business of the old partnership as a going concern. The identity of the business has not undergone any change. The continuity of business has not in any manner been interrupted. The business has been carried on in the name of the Bombay High Supply Co. before as well as even now. The only change that has taken place is that formerly four persons were partners of the business concern and now only three out of the four have remained as partners of the firm. To the old business the three partners of the assessee-firm were not strangers. The trading debts of the old partnership have become the trading debts of the business of the assessee. Some of hose debts have now become bad, some of the customers having failed to pay the same. In the circumstances, in our opinion, the condition 'debts due to the assessee in respect of that part of his business' also has been satisfied. We find support in the three decisions cited by Mr. Palkhivala for the view taken by us.
12. Facts in Commissioner of Income-tax v. Dharmaraja Nadar, were : After partition of a joint Hindu family, the members carried on the family business in partnership for some years and thereafter separated. Debt due form a person to the family business was divided amongst the partners on dissolution of the partnership. One of the partners brought his share of debts into his business and treated the debtor as his customer of the business. Another terminated his business and treated his share of debt as an investment of capital. It was held by a Division bench of the Madras High Court that the debt of the partner, who treated it as a debt of his customer, was a trading asset of the business and he was, therefore, entitled to claim a deduction. However, the debt of the latter was converted into a capital asset and he was, therefore, not entitled to claim a deduction.
13. Facts in C.J. Sheth v. Commissioner 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 cannot see how the principles of that decision can at all apply to the present case where the assessee himself was a partner in the firm and continued the business, after the retirement of the other partner....... There is no question in the present case of an owner putting his property into the business for the first time. The business continued uninterrupted, there having been only the retirement of a partner. There was continuity in regard to the assets and liabilities of the old firm. The assessee would, therefore, be entitled to write off such of the debts as had become bad and irrecoverable during the year of account.'
14. Facts in Mettur Sandalwood Oil Cod. v. Commissioner of Income-tax were : On a partition of a Hindu undivided family the family business was allotted to some of the members and was taken over by them as an integral whole, and the allotters continued the business as a firm. These members wrote off certain debts, which had become irrecoverable in the year of account. The debts were in respect of the business carried on by the joint family. It was contended on behalf of the revenue that the assessee was not entitled to deduction in respect of those debts as they were capital assets. The contention of the revenue was overruled and it was held that it was well settled that a successor in interest of a business taken as a whole is entitled to write off bad debts found in the books of account of the business taken over. At page 787 of the report, the learned judge, delivering the judgment, observed :
'The test to be applied to ascertain whether there a been a discontinuance or succession is to find out whether the identity of the business is preserved or not. A disruption of a Hindu undivided family owning a business need not necessarily involve the disruption of the unity of the business taken as a whole bringing about a cesser of such business.'
15. Further, at page 789 of the report, it has been observed :
'The continuance of business, without its integrity or identity being lost despite the change of ownership, is a frequent and common occurrence. Succession means a change of ownership in the business, keeping it intact. Change of ownership may be brought about by transfer inter vivos or be the result of operation of law.'
16. The principle deductible form these decisions, in our opinion, is that been though there may 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 resulted in the institution of a suit form disillusioned and, by consent of parties, the business was sold as a going concern and taken over by the three out of the four partners as a going concern. The business of the old firm continued without any interruption. The business was carried on the same premises with the same customers and the accounts of the same customers continued in the books of account of the partnership. It is, the these circumstances, in our opinion, that the case is one of succession to the old business and not discontinuance of the old business.
18. As regards Mr. Joshi's contention that the outstandings purchased by the assessee were capital assets in his hands, we find it difficult to accept it in the absence of any evidence showing that the assessee had treated these trading debts in any manner different form that in which he has treated the other trading debts, which he had purchased in the auction sale, later on confirmed by the deed of assignment dated 30th january, 1953. As regards the second contention of Mr. Joshi, it would be necessary to state a few more facts to appreciate the said contention. These facts have been summarised in paragraph 7 of the statement of the case, which runs :
'The book value of the aforesaid business assets and the value at which they were assigned and as recorded by the assessee-firm are set out below : ----------------------------------------------------------------------Items Book Value As recordedValue Annexure 'A' by assessee----------------------------------------------------------------------Stock-in-trade 2,75,351 1,55,000 1,91,714Furniture nil 5,000Goodwill 1,25,000 5,000Trade-marks nilSundry debtors 1,04,734 1,50,000Less : Sundrycreditors 1,448 1,03,286----------- ------------ -------------5,03,637 3,05,000 3,05,000----------------------------------------------------------------------
19. It is the argument of Mr. Joshi that as mentioned in annexure 'A', that is, the deed of assignment, goodwill, trade-marks sundry debtors, etc., which in the books of account of the former partnership are shown to be of the value of Rs. 2,28,286 (goodwill Rs. 1,25,000; sundry debtors Rs. 1,03,286) have been purchased by the assessee for Rs. 1,50,000. That indicates that the value at which the outstandings were purchased by the assessee would be the proportionate amount calculated on the basis of the original valuation of goodwill and sundry debtors. It, according to Mr. Josh, would come to about Rs. 60,000 to Rs. 70,000. Mr. Joshi further argued that it has not been shown that the assessee has not been able to recover even Rs. 60,000 to Rs. 70,000. The assessee, therefore, cannot claim any deduction on the ground that some debts have become irrecoverable. Apart form the merits of the contention, in our opinion, the contention does not arise out of the 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 Rs. 5,03,637. All these assets have been shown together purchased at an auction sale for Rs. 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 Rs. 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 department, however, has not chosen to do so. That being the position, in our opinion, it is not open to the department to raise a point founded on some assumed facts, which have not been fond either by the income-tax authorities or by the Tribunal.
20. The other argument of Mr. Joshi is that the assignment deed having mentioned that the bad debts had been taken into account at the time of fixing the value of the goodwill and the outstandings, it must, therefore, be assumed that provision was already made in respect of the debts, which were going to become bad in the future years. The assessee thus, by reason of the agreement, has deprived himself of claiming any deduction in that respect. The construction, which Mr. Joshi is seeking to put on the assignment deed, is not, in our opinion, well-founded. The bad debts, which could have been taken into account at the time of the deed of assignment, were the debts which had then become bad and could not be debts which would in subsequent years become bad. At any rate, the contention raised again is one of fact and had not been raised at the proper stage. The department, therefore, is not entitled to raise it at this stage. The only contention, which was raised before the Tribunal, was that the outstandings purchased by the assessee were not stock-in-trade in his hands but they represented only a part of the fixed capital of the old partnership taken over and, therefore, any loss in their realisation, d was a capital loss. This contention of the department has not been accepted by the Tribunal and, in our opinion, for reasons already stated, rightly.
21. In the result, we answer both the questions in the affirmative. The Commissioner shall pay the costs of the assessee.
22. Questions answered in the affirmative.