1. The following two questions have been referred to this court by the Income-tax Appellate Tribunal, Madras, under Section 256(1) of the I.T. Act, 1961 :
'(1) Whether, on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in holding that a sum of Rs. 16,363should be allowed as a deduction as bad debt , under Section 36(2) of theIncome-tax Act, 1961
(2) Whether the conclusion of the Appellate Tribunal that the assessee would be entitled to deduct the sum of Rs. 16,363 as bad debt could be regarded as reasonable on the materials available on record ?'
2. The respondent-assessee along with one S. M. Palaniappan carried on a partnership business under the name and style of M/s. Union Leather Company in hides and skins. One Hussunudhin, a Delhi merchant, was one of the constituents of the partnership firm. He had a running account with the firm and a sum of Rs. 17,134 was due from him to the firm as on December 31, 1962. During the year ending December 31, 1962, the said Hussunudhin filed an insolvency petition and got himself adjudicated insolvent. On the ground that there was no prospect of recovering any amount from the said Hussunudhin, the firm had written off the sum of Rs. 17,134 as a bad debt in the year ending December 31, 1962. The ITO, however, disallowed the claim in the assessment order dated December 29, 1964, for the assessment year 1963-64, on the ground that the debt should not be considered as bad debt, until final declaration of dividends from the insolvent's estate was made by the official assignee.
3. The firm was, however, dissolved on September 30, 1964, and the entire business along with its assets and liabilities had been taken over by the assessee, and thereafter the business was continued by him as the sole proprietor. On November 10, 1965, the, official assignee in charge of the said insolvent's estate declared the last and final dividend of Rs. 77 land paid the same to the assessee. After deducting the said final dividend received from the official assignee, the assessee claimed the balance amount of Rs. 16,363 as bad debt for the accounting year relevant to the assessment year 1966-67. The ITO disallowed the claim on the ground, (a) that the debt had not been taken into account in computing the assets of the firm as on the date of dissolution, (b) that in the wealth-tax assessment, the outstanding was not shown as an asset by the assessee, and (c) that the communication that no further dividend would be declared was received by the assessee from the official assignee only on October 12, 1966, which fell outside the accounting year relevant to the assessment year 1966-67. On appeal, the AAC also upheld the disallowance. On a further appeal to the Tribunal, the Tribunal allowed the claim by its order dated October 12, 1972. At the instance of the revenue, the above questions have been referred to this court as arising out of the order of the Tribunal.
4. The fact that there was a debt due to the firm from the said Hussunudhin cannot be disputed. Even before the firm was dissolved, the firm claimed the said sum of Rs. 17,134 as a bad debt, but that claim has been disallowed by the ITO on the ground that the firm has to await the final declaration of dividend from the estate of Hussunudhin who had been adjudicated insolvent. As a result of the disallowance of the said claim the amount due from the said Hussunudhin continued to be an asset of the firm. It is not in dispute that on the dissolution of the firm, all its assets and liabilities along with its business were taken over by the assessee. Though the amount due from the said Hussunudhin has not been specifically referred to as an asset taken over by the assessee, still the assessee as one who has taken over the entire business along with its assets and liabilities should be taken to have become entitled to the said asset. As a matter of fact, the official assignee paid a sum of Rs. 771 declared as final dividend to the assessee and the said sum of Rs. 771 received from the official assignee on November 10, 1965, has also gone into the computation of the income of the assessee. This is clear from the assessment order dated August 18, 1969, for the assessment year 1966-67. Besides, the other partner of the erstwhile firm had filed an affidavit before the Tribunal stating that the entire debt in respect of which the relief is claimed has been taken over by the assessee. Since the amount of Rs. 771 has gone into the computation of the income of the assessee for the assessment year 1966-67, it is not possible for the revenue to contend that the debt of Rs. 17,134 was not taken over by the assessee at the time of the dissolution of the firm.
5. It is then contended on behalf of the revenue that as the outstanding of Rs. 17,134 was not shown as an asset by the assessee in his wealth-tax assessment, he cannot treat the said debt as an asset taken over by him. We see no force in this contention as the debt has already been written off even before the dissolution of the firm, and on the date of the dissolution, the books of the firm did not show it as a separate asset. It is for this reason the assessee has not shown it in his wealth-tax assessment.
6. It is next contended that the communication stating that no furtherdividend would be paid was received only on October 12, 1966, which felloutside the accounting year relevant for the assessment year 1966-67, andtherefore, the claim for bad debt cannot be made during the assessmentyear 1966-67. The dividend in respect of the debt was received from theofficial assignee by the assessee on November 10, 1965, and this falls within the accounting year relevant to the assessment year 1966-67. It is true that the assessee received the communication on October 12, 1966, stating that no further dividend would be declared and that the payment made on November 10, 1965, was the last and final dividend. Though the said communication was received from the official assignee on October 12, 1966, the communication makes the dividend paid earlier on November 10, 1965,as the last and final dividend. Therefore, the assessee is entitled to treatthe payment received on November 10, 1965, as the last and final dividendand claim the balance of the amount due from the insolvent as a bad debtin the assessment year 1966-67.
7. That the assessee in such circumstances is entitled to claim the balance as a bad debt is clear from Section 36(2)(iii) which is as follows :
' 36. (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply :--...... (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, but the Income-tax Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;......'
8. The above provision enabled the assessee to claim the balance of the amount as a bad debt without writing it off, if the debt has become irrecoverable during the assessment year provided it had already been written off as irrecoverable in the accounts of an earlier previous year, but the ITO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year. It is not in dispute that in this case the debt was written off as a bad debt in the assessment year 1963-64, and the ITO disallowed the claim on the ground that debt should not be considered as bad until the final declaration of the dividends by the official assignee takes place.' Thereafter the firm was dissolved and the assessee took over the entire business including the assets and liabilities. The assessee claimed deduction in respect of the debt which has already been written off by the firm, in the year 1966-67, as the last and final dividend was paid by the official assignee on November 10, 1965, in respect of the debt.
9. The learned counsel for the revenue would, however, contend that unless the debt is written off in the assessee's accounts during the assessment year 1966-67, no deduction could be claimed in respect of such a debt. A close reading of Section 36(2) would indicate that in cases falling under Clause (iii) since the debt has already been written off in the earlier assessment year, no further writing off is necessary for claiming a deduction. That provision seems to indicate that if an assessee writes off a debt as irrecoverable in an earlier year but the same was not allowed by the ITO either the assessee or his successor can claim the said amount as a deduction in any of the subsequent years if the debt is established to have become a bad debt in that year,
10. The scope of Section 36(2)(i) came up for consideration in CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. : 102ITR604(AP) and it was held that the benefit of deduction of bad debts which had been written off under Section 36(2)(i)(b) of the I.T. Act is not restricted to ' the assessee ' referred to in Clause (a) alone as the relief is not personal to him but will also accrue to the successor in business, and that ' the assessee ' referred to in Section 36(2)(i)(a) and (b) need not be the same assessee. In that case, a new firm had taken over the assets and liabilities of the predecessor-firm. The successor-firm continued the business after the taking over of the assets and liabilities of the predecessor-firm. The question arose whether the successor-firm could write off the debt due to the predecessor-firm and claim deduction therefor. The court held that the successor-firm could do so under Section 36(2)(i)(b). It is well settled that where a partnership is dissolved and one partner took over and continued the business of the partnership, it is a case of succession of the business and that in such a case there is 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 (vide C.J. Sheth v. CIT : 46ITR1052(Mad) . The same principle has also been applied to a case where in the partition of a HUF, the family business is allotted to some of the members and is taken over and continued by them (vide Mettur Sandalwood Oil Co. v. CIT : 47ITR781(Mad) , Deoki Nandan and Sons v. CIT and CIT v. Venkatasubbiah Chetty : 14ITR227(Mad) Again, the same principle has also been applied to the case of a transferee to whom the ownership of the business was transferred either inter vivos or by operation of law by an individual or by a firm (vide CIT v. Bombay Hing Supply Co. : 61ITR672(Bom) and Expanded Metal Depot P. Ltd. v. CIT : 80ITR483(Bom) . Though the decisions referred to above have been rendered with reference to the corresponding provisions in the 1922 Act, the well-established principle laid down therein applies in the interpretation of Section 36(2), as the position in the 1961 Act is the same as in the 1922 Act. We are, therefore, of the view that the successor can write off a bad debt relating to the business of the predecessor which business is taken over by the successor, and the position is not different even if the transfer of the business was as between an individual and a firm.
11. This takes us to the further question as to whether the assessee in this case can claim deduction without actually himself writing off the debt. We are of the view that Section 36(2)(iii) will enable the assessee who is the successor or transferee to claim deduction even without himself writing off the debt after he took over the business as the conditions set out in that provision are satisfied. Admittedly, there has been a writing off of the debt as a bad debt by the transferor but that claim was not accepted by the ITO on the ground that it has not been established to have become a bad debt in the assessment year in which the claim was made. Since the debt has already been written off as irrecoverable in the accounts of the earlier previous year, there is no necessity for a further or fresh writing-off of the debt by the assessee after he took over the business in view of the above provision. In our view, therefore, the Tribunal was right in allowing the deduction in a sum of Rs. 16,363 as a bad debt in the year 1966-67.
12. The above two questions are, therefore, answered in the affirmative and against the revenue. The assessee will have his costs. Counsel's fee Rs. 250 from the revenue.