Gopal Rao Ekbote, C.J.
1. The assessee, a firm, claimed a sum of Rs. 15,100 by way of bad debts in the account of its predecessor-firm. The predecessor-firm of the assessee dealing in rice had business relations with another firm, Lakshmi Trading Company. The said Lakshmi Trading Co. owed Rs. 23,577 to the predecessor-firm.
2. The assessee-firm succeeded to the predecessor firm. It took over the entire assets and liabilities of the predecessor firm including the above said debt due from Messrs. Lakshmi Trading Co. The total amount due on that account was Rs. 40,549. This amount included a sum of Rs. 11,349, being interest on the outstanding amount of Rs. 29,200. The interest became due for the period April 12, 1960, to March 31, 1961. The said interest was taxed in the hands of the assessee-firm for the assessment year 1963-64.
3. On March 31, 1965, the parties effected a settlement. A sum of Rs. 25,000 was accepted by the assessee-firm in full settlement of the above said debt. The balance of Rs. 15,100 was written off as irrecoverable. The assessee-firm, therefore, claimed deduction of the said amount. The Income-tax Officer disallowed this claim on the ground that the debt was due originally to the predecessor-firm, that there was no reason to take over the loan by the assessee-firm and that it was not proved that the debtor was in such a bad position as not to pay the debt.
4. The Appellate Assistant Commissioner, on appeal, held that the business taken over by the assessee-firm continued uninterrupted. Changeof ownership was not a bar to the allowance of bad debts. It was further found that since the assessee-firm had paid income-tax on the interest of Rs. 11,349, the assessee's bona fides are proved. The write-off, therefore, was justifiable. The Appellate Assistant Commissioner, therefore, allowed the claim.
5. There was a claim for deduction of a sum of Rs. 6,880, which the assessee-firm had incurred by way of legal expenses in connection with an appeal filed in the Supreme Court to recover some amounts from the Central Government. In this claim also, the transaction related to the predecessor-firm and the suit instituted by it was continued by the assessee-firm on taking over the assets and liabilities of the predecessor firm. The Income-tax Officer disallowed the claim for the same reasons on which he has disallowed the claim of bad debts. The Appellate Assistant Commissioner allowed this claim also because of the self-same reasons for which he had allowed the other claim.
6. The department carried the matter in appeal to the Tribunal. The contention was that Section 36(2)(i) did not permit such an allowance because it does not satisfy the two requirements mentioned in Clauses (a) and (b) of that provision.
7. The Tribunal dismissed the appeal holding that where a business was succeeded by the assessee, it was entitled to write off the bad debts of the business so taken over. The Tribunal held that whenever a business was succeeded as a whole and as a running concern the assets and liabilities so taken over become the assets and liabilities of the successor and the assessee, therefore, can write off the bad debts. Not only the assessee treated the amount as debt but the interest accrued thereon was assessed in the hands of the assessee-firm which interest constituted part of the debt. The conditions of the said section, therefore, were clearly satisfied.
8. At the instance of the Commissioner of Income-tax the following question has been referred to us under Section 256(1) of the Income-tax Act for our decision :
'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?'
9. Mr. P. Rama Rao, the standing counsel for the income-tax department, argued that the claim does not satisfy the requirements of Section 36(2)(i) inasmuch as although the debt was taken into account in computing the income of the predecessor firm, it has been written off as irrecoverable not by the predecessor-firm but by the assessee-firm in its accounts. He contended that for the purposes of both the Clauses (a) and (b) of Section 36(2)(i) the assessee must be one and the same The successor-firmnot being the same as the predecessor firm, it cannot claim deduction of the bad debts as well as the legal expenses incurred by it in carrying on the litigation instituted by the predecessor firm.
10. Now Section 36(2)(i) reads :
'In making any deduction for a bad debt or part thereof, the following provisions shall apply :
(i) No such deduction shall be allowed unless such debt or part thereof--
(a) has been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and
(b) has been written off as irrecoverable in the accounts of the assessee for that previous year.'
11. A close and analytical reading of that provision shall reveal that until and unless the two essential requirements enumerated in Clauses (a) and (b) separately are satisfied, a bad debt or part thereof shall not be allowed to be deducted.
12. In Clause (a) two situations have been mentioned. Firstly, the bad debt must have been taken into account in computing the income of the assessee of that previous year or of an earlier previous year. Secondly, such a bad debt represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee. The disjunctive word 'or' puts the two situations in the alternative. A claim, therefore, may come under either of the two situations.
13. Clause (b) which appears after the conjunction word 'and' lays down the second necessary requirement for allowing the deduction of a bad debt, i.e., such a bad debt must have been written off as irrecoverable in the accounts of the assessee for that previous year.
14. We are unable to find any indication in the section which insists that both the said requirements must be satisfied by the self-same assessee and not by the predecessor and the successor assessee whether such assessees are firms or individuals. We are also not able to detect anything in the said provision which indicates that the deductions under the said provisions are allowed by way of personal reliefs. On the other hand, we have reasons to believe that the relief of deduction allowable under the said provision is related to transactions of business and it has nothing to do with any personal qualification of an assessee. In Clause (a) the two alternative situations make out this point beyond any reasonable doubt. In the first alternative, what is required is that the bad debt must have been taken into account in computing the income of the assessee. Thus, the bad debt which is a part of the transaction must have been taken intoaccount. There is nothing personal in it. Similarly, the second alternative insists that such a bad debt must represent money lent in the ordinary course of the business of banking or money-lending carried on by the assessee. Now, the second alternative thus relates only to banking or money-lending business. It must be carried on, however, obviously by the assessee. It could not be contended that in this situation there is any personal quality of the assessee involved in it.
15. The contention, however, was that the demonstrative word 'the' appearing in Clause (b) has reference to the assessee referred to in Clause (a) who has included the debt in question in his total income and has paid tax thereon. It is, therefore, argued from this that the assessees referred to in Clauses (a) and (b) must be one and the same and not two different assessees such as predecessor and successor firms.
16. The argument at first blush may appear plausible but is not certainly convincing.
17. It is true that it has been a common practice in drafting statutes to make general and sometimes inexact reference to other provisions in the same Act. But such referential words ordinarily are 'hereinbefore', 'hereafter' and 'hereinbefore provided', etc. Such words clutter the statute but not the definite article 'the'. It is seldom taken as a backward looking referential word. We do not, therefore, agree that the article 'the' in Clause (b) refers back to the assessee mentioned in Clause (a). If the legislature wanted that the assessee should be one and the same for both clauses, nothing could have been easier than to say so expressly. In Clause (b) the draftsman could have easily used some determinant referential word to particularise the assessee to be the same in both the clauses and for the purposes mentioned therein. The draftsman could have very easily used the ordinary referential words in Clause (b) such as the assessee 'hereinbefore' referred to or similar terms. The very fact that they have not expressly said so can only mean that the legislature did not specifically require the two assessees mentioned in Clauses (a) and (b) to be the one and the same person. To make any such intention clear, if there was an occasion, then such a reference was necessary, particularly when the position of law under the 1922 Act was settled that two assessees need not be the same as we shall see at the appropriate stage.
18. Moreover, it is not that the word 'the' appears in Clause (b) which can be said to look backward to Clause (a) and the assessee mentioned therein. The word 'the' also appears before the word 'assessee' in Clause (a). If the argument is that the word 'the' in Clause (b) refers to the assessee in Clause (a), then one may ask as to which assessee the word 'the' in Clause (a) refers to. It would thus be clear that the term 'theassessee' used in Clause (b) need not on account of the use of the word 'the' be the same assessee as is referred to in Clause (a).
19. If one bears in mind that 'the' is the word used before nouns, with a specifying or particularising effect opposed to the indefinite or generalising force of 'a' or 'an', then it will not be difficult to reach the conclusion that the word 'the' particularises only the assessee mentioned immediately after the said word. So read, the assessee in Clause (a) would mean the assessee in whose account the bad debt 'has been written off as irrecoverable' for the previous year and to no other assessee. Similarly, the term 'the assessee' appearing in Clause (b) would mean 'the assessee in whose accounts the bad debt has been written off as irrecoverable.'
20. It would thus be plain that the article 'the' directs what particular thing or things we are to take or assume as spoken of. The article determines what particular thing is to be meant, i.e., what particular thing we are to assume to be meant. What follows, therefore, is that if we keep the correct use of the word 'the' in view, then the term 'the assessee' cannot mean anything else than what we have just now said.
21. If so read, the article 'the' in Clause (a) would mean the assessee into whose account the bad debt has been taken into account in computing the income of the previous year or the assessee who had lent the bad debt money in the ordinary course of business of banking or money-lending. And for Clause (b) it would mean the assessee in whose account such a bad debt has been written off as irrecoverable. More than this, the use of the article would not mean anything more nor is it intended to be read in any other meaning. It, therefore, follows that merely because the article 'the' is used in Clause (b) it would not necessarily mean that the two assessees for the purposes of Clauses (a) and (b) must be one and the same assessee.
22. We find it almost impossible to hold that the 1922 Act in this respect is in any manner different from the Act of 1961. We cannot find any indication anywhere in the relevant provisions which would produce that result. It could not be doubted that under Section 10(2)(xi) and Section 25(4) of the 1922 Act, it was well established that where a partnership is dissolved and one partner took over and continued the business of partnership, it is a case of succession to the business. There is in such a case continuity in regard to the assets and liabilities of the firm and, therefore, the successor-assessee is entitled to write off the debts which have become irrecoverable even though such debts originally belonged to the firm. See C. J. Seth v. Commissioner of Income-tax : 46ITR1052(Mad) .
23. The same principle is applied to a case where in the partition of a Hindu undivided family, the family business is allotted to some of the members and is taken over and continued by them. See Mettur Sandalwood Oil Co. v. Commissioner of Income-tax : 47ITR781(Mad) , Deoki Nandan and Sons v. Commissioner of Income-tax and Commissioner of Income-tax v. Venkatasubbiah Chetty : 14ITR227(Mad) .
24. The same principle was also applied to a case of transferee to whom the ownership of business was transferred. It did not matter whether such a transfer was made inter vivos or by operation of law. It also did not matter whether such, transfer was made by an individual or by a firm. See Commissioner of Income-tax v. Bombay Hing Supply Co. : 61ITR672(Bom) .and Expanded Metal Depot Private Ltd. v. Commissioner of Income-tax : 80ITR483(Bom) .
25. On the basis of these authorities, it could be validly said that if the 1922 Act were to govern the present case, it would without any doubt be held that since the assessee has taken over the assets and the liabilities of the predecessor-firm and since it continued the business and Was even assessed to tax on the interest on debt which was taken over, the assessee could write off the debt or a part of it and claim deduction therefor. If that is so, then what is to be seen is whether the 1961 Act makes any difference in this behalf.
26. Section 36(2)(i) of the 1961 Act has already been noticed by us. We have found that the said provision does not in express language or by necessary implication insist on the two assessees referred to in Clauses (a) and (b) to be one and the same. What was, however, contended was that under Section 188 where a firm carrying on a business or profession is succeeded by another firm and the case is not covered by Section 187, separate assessment shall be made on the predecessor and the successor-firms in accordance with the provisions of Section 170.
27. According to Section 170, where a person carrying on any business or profession has been succeeded therein by any other person who continues to carry on that business or profession, then the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and the successor shall be assessed in respect of the income of the previous year after the date of succession.
28. What follows is that the method of assessment mentioned in Section 170 in regard to the individual succeeding another individual will also apply to a firm succeeding another firm. These sections do not say anything regarding the capacity of the successor-firm to write off the debt taken over from the predecessor firm. We are unable to understand as to how these provisions make out that the successor cannot write off a bad debt relating to the business of the predecessor which business is taken over bythe successor. The question of writing off bad debt has to be, therefore, decided keeping in view the language of Section 36(2)(i) only. We are of the view that Section 36(2)(i) does not prohibit such a writing off. In our judgment, therefore, the new Act does not in any manner change the position of the law as it was under the old Act. Section 10(2)(xi) and Section 25(4) in so far as this aspect is concerned are not in any way different from Section 36(2)(i) of the new Act even if that provision is read along with Sections 170 and 188 of the new Act. It would, therefore, be not correct to argue that the original creditor alone can claim the relief for bad debts under the new Act which was not necessary under the old Act. In our judgment, the abovesaid decisions rendered under the old Act, even at present, are valid and effective in spite of some change in the form and language of the provisions we have considered.
29. We feel it unnecessary to consider whether the successor to a business can claim set-off and carry-forward to be set off or not under Sections 70 and 71 of the new Act. We are, however, clear in our view that whatever may be the law in that behalf it docs not affect the consideration of the question in this case. Section 36(2)(i) is not subjected to or governed by the provisions relating to set-off. Nor do they indicate that the successor-firm cannot write off bad debt under Section 36(2)(i) of the Act.
30. We asked ourselves in vain the question as to why the legislature could have thought of bringing about a change in this position of law. When it is conceded that even under the present Act, the assessee can write off a bad debt and claim deduction, and likewise even if the assessee dies his legal representative--though technically he is not the same assessee --can write off the bad debt and claim allowance, what difference in principle would it make if the original assessee's transferee by transfer inter vivos or by operation of law writes off the bad debt and claims the allowance No answer was forthcoming.
31. We are consequently of the view that the present Act docs not make any departure from the old law in this respect as was found by the decisions of several High Courts. Under the 1961 Act also, it is not necessary that the self-same assessee mentioned in Clause (a) of Section 36(2)(i) should have written off the debt as irrecoverable. The successor-firm which has taken over the assets and the liabilities of the predecessor-firm can write off bad debts and claim deduction.
32. We have arrived at this conclusion with some difficulty, but without any doubt. The difficulty has arisen, not from anything inherent in the subject itself or in Section 36(2)(i) of the new Act, which we thought is simple enough and might be simply treated but for the view expressed by Sri A.C. Sampath Iyengar in his commentary on the Law of Income Tax, 6th edition, at page 906, under the heading 'Bad debt relief on succession is to theperson and not to the business'. The same line of argument employed by the author was adopted by the learned counsel for the revenue and with which we have, we hope, dealt elaborately. After carefully considering the arguments so advanced, we have, with due respect to the author, reached the conclusion that the view expressed in the said commentary is not in accord with the provisions of the new Act.
33. The learned author seems to have drawn his inspiration from Nopram Ramgopal v. Commissioner of Income-tax : 19ITR219(Orissa) , wherein it is decided that 'under Section 25(4) of the Indian Income-tax Act, 1922, it is the business which was in existence in 1918 and had been assessed to income-tax under the Income-tax Act, 1918, and not the person, irrespective of the nature of the business he was conducting in 1918, that is entitled to the relief'.
34. These observations ought to be read in the context of the facts of that case and in particular the argument advanced and which was being considered. If that is borne in mind, then there will be no occasion to take the view as the learned author has taken that 'unlike the relief which was granted under Section 25(4) of the pre 1961 Act to a business which had been succeeded to after April 1, 1969, being a business which had been taxed under the Act of 1918, the present relief for bad debt is to the person that carried on a business, and not to the business itself'.
35. Kanga and Palkhivala in their work on Income Tax, in volume I, page 397, after expressing a somewhat similar opinion that the position of the 1922 Act is no more valid in this respect under the new Act inasmuch as 'such a debt will not fulfil the requirements of Sub-section 2(i)(a), viz., that the debt should have been taken into account in computing the income of the assessee', nevertheless say that:
'However, this requirement does not apply where the bad debt consists of a loan advanced in the ordinary course of banking or money-lending business. Therefore, under this Clause, Section 36(2)(i), as under the corresponding provision of the 1922 Act, an allowance is permissible where the loans advanced in a banking or money-lending business become the circulating capital of the successor.'
36. In support of this opinion, the learned authors refer to the following decisions, some of which we have already noticed, viz., Deoki Nandan & Sons v. Commissioner of Income-tax, Commissioner of Income-tax v. A.R.M.M. Firm : 13ITR290(Mad) and Commissioner of Income-tax v. Venkatasubbiah Chetty.
37. If this view is correct, as the author thinks it is, in regard to the second limb of Clause (a) of Sub-section (2)(i), then we fail to understand as to why the same position should not apply to the first limb of Clause (a). All the arguments employed by the learned authors would be ineffective, themoment this position in regard to banking and money-lending debts is accepted and it is held that the successor-firm would be entitled to an allowance if and when any of such loans so taken over become thereafter irrecoverable. The same position, in our view, with equal force applies to the cases falling under Clause (a) of Section 36(2)(i) of the new Act.
38. For the reasons stated above, our answer to the question is in the affirmative and against the department. The assessee will be entitled to its costs. Advocate's fee Rs, 250.