1. The question of law arising for consideration in this reference which is under section 66 (2) of the Indian Income-tax Act, 1922, is a short one and it is so far as we are concerned, covered by a judgment of a Division Bench of this High Court which, in our opinion, fully covers the point arising before us.
2. The assessee is a private limited company. The relevant assessment year is 1958-59, the corresponding, previous year being S. Y. 2013, which ended on 22nd October, 1957. A partnership firm of the name of Esoofally Abdulhussein & Expanded Metal Depot was carrying on business in zinc sheets and expanded metals. On the 1st of August, 1947, the firm dispatched certain goods from Bombay to the Controller of Stores, N. W. Railway, Lahore, under an agreement existing between the parties. Shortly thereafter, followed the partition of India. At that time a sum of Rs. 17,617 was due to that firm on account of that consignment. After partition that firm could not recover its claim form the Controller of Stores, Lahore, who became an officer of the Government of Pakistan and therefore, claimed that amount form the Union of India. The Union of India repudiated its liability on the ground that his was the liability of the Pakistan Government under the Indian Independence (Rights, Property and Liabilities) Order, 1947. On 24th January, 1951, the firm filed a suit, being Suit No. 254 of 1951, in the City Civil Court at Bombay for the recovery of that amount from the Union of India. On 23rd September, 1954, that suit was dismissed. On 4th February, 1956, the firm filed an appeal in this High Court. Thereafter, on 26th November, 1956 the assessee-company was incorporated. On 13th January, 1958, this High Court dismissed that appeal.
3. On its incorporation the assessee-company took over the entire business of the said firm as a going concern together with its assets and liabilities, including the firm's said claim for Rs. 17,617 and made appropriate entries, inter alia, in respect of that claim in its books of accounts. In the said assessment year the assessee-company made a claim for deduction of the said sum of Rs. 17,617 on the ground that it was a bad debt which it had written off and was liable to be deducted under the provisions of section 10(2)(xi).
4. During the assessment year 1958-59 the assessee had also made a claim for deduction of another sum of Rs. 2,250 as a bad debt written off by it. The statement of the case states that the claim was made under identical circumstances. It is however, not necessary for us to deal with that claim, because Mr. Vyas, the learned counsel for the assessee, has during the arguments of this reference, before us stated that the assessee gives up its claim be deduction of that amount of Rs. 2,250 and that therefore, this court need not answer the question as formulated in so far as it refers to that claim.
5. The Tribunal has not upheld the claim of the assessee for deduction of the said sum of Rs. 17,617, has hence been made at the instance of the assessee and the question referred is :
'Whether, on the facts and in the circumstances, the assessee's claim to the sum of Rs. 19,867 (rupees nineteen thousand eight hundred and sixty seven only) is admissible under section 10(2)(xi) of the Indian Income-tax Act ?'
6. The sum of Rs. 19,867 mentioned in the question is the aggregate of the said two sums of Rs. 17,617 and Rs. 2,250. In view of the said statement of Mr. Vyas the question now survives with as it were, the amount of Rs. 17,617 being substituted in the question for the amount of Rs. 19,867 as at present appearing in that question.
7. There is no dispute that the assessee-company took over the said claim for Rs. 17,617 when on its incorporation it took over the entire business of the said firm as a going concern along with all its assets and all its liabilities. A Division Bench of the High Court has held in Commissioner of Income-tax v. Bombay High Supply Co. that even though there may be a change of ownership in the business if the identity of the business is not in any 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 from its customers in respect of the dealings of a period prior to the change of ownership and that it is immaterial whether the change of ownership was brought about by transfer inter vivos or by operation of law. In the case before us there has been a change of ownership. The fact that the change of ownership has been brought about by an act inter vivos makes no difference as laid down in the case of the Bombay Hing Supply Company. Although there has been a change of ownership of the business, the identity of the business in the case before us is not in any manner broken or interrupted but, on the other hand, the business as a whole has continued without may interruption. The ratio of the above judgment is, in our opinion, fully applicable to the case before us. No material distinction or, as a matter of fact, an distinction, has been pointed out by Mr. Joshi, the learned counsel appearing on behalf of the revenue.
8. Mr. Joshi contended that when the limited company i.e., the assessee, was formed and it took over the business of the said firm, this debt in the hands of the assessee became its capital asset. An identical contention had been urged on behalf of the revenue in the said case of the Bombay Hing Supply Company and the judgment holds that it was difficult to accept that contention in the absence of any evidence showing that the assessee had treated the particular subject-matter of that case in any manner different from that in which the transferee had treated the other trading debts which he had purchased. In the case before us also there is nothing to show that the assessee has treated the said debts of Rs. 17,617 in any manner different from that in which it has treated the other treading debts which it took over on the change of the ownership of the business us stated earlier.
9. We, therefore, follow the ratio of the said judgment on both the points urged before us. We, accordingly, answer the question, but confined as aforesaid to the said sum of Rs. 17,617, in the affirmative.
10. The Commissioner will pay the assessee's costs.