JAGADISAN J. - Chandappa Iyer and his three sons originally constituted members of a Hindu undivided family. The family was carrying on business in sandalwood oil. There was a partition in the family on October 6, 1954, and the assets of the family including the business were valued at Rs. 40,94,420. Each member of the family got an one-fourth share. The business, as such, was allotted to the shares of Chandappa Iyer, the father, and one of his sons, Hanumantha Rao. The other two sons, Subba Rao and Seshagiri Rao, left the business. There is no dispute that the family business was taken over as an integral whole by Chandappa Iyer and Hanumantha Rao who continued it as a firm by entering into a partnership on October 7, 1954, the day next after the division. There were several trade debts due to the family from third parties forming part of the business and they were carried over by the firm into its books of account. This firm of partnership was assessed to income-tax for the assessment year 1956-57, relevant to the previous year ended on October 25, 1955, and in the computation of the income a claim was made to write off bad and irrecoverable debts amounting to Rs. 24,334-1-11. These debts were due to the family having been advanced by the family in the course of the business and they were undoubtedly trade debts in respect of which the family would have been entitled to write off, if it had carried on business in the relevant year. The Income-tax Officer disallowed the claim but an appeal to the Appellate Assistant commissioner a portion of it was allowed and the balance of Rs. 19,812 was disallowed. The assessee preferred a further appeal to the Income-tax Appellate Tribunal, which confirmed the decision of the Appellate Assistant Commissioner. On an application for reference made under section 66(1) of the Act, the Tribunal has referred the following question to this court :
'Whether the bad debts of Rs. 19,812 arising out of transactions by the predecessor, Hindu undivided family, are trade debts of the assessee allowable as bad debts under section 10(2) (xi) ?'
The Income-tax Officer held that there was a discontinuance of the family business as a result of the partition, that the trade debts in respect of which the writing off was claimed constituted assets of the firm newly constituted and that the loss arising out of the debts proving to be bad can only be a capital loss and not a revenue loss. The Appellate Assistant Commissioner was of the opinion that the allotment of the business to two members of the family on the partition brought about a capital receipt in their hands. He, however, allowed two debts to be written off as these debts were brought into the accounts of the business as a trade debt. The Appellate Tribunal also took the view that the trade debts written off were really capital receipts in the hands of the partners of the firm. The reasoning of the Tribunal is set out thus in its order : 'Apart from all that the assessee has clearly stated that, at the time of partition, a valuation of surplus of assets over the liabilities was put and the aggregate was divided. Therefore, on October, 7, 1954, those amounts became the assessees capital and they lost the identity as debts due to the firm. What is realised out of them or lost on that account can only become capital account.
The relevant statutory provision regarding allowance for bad debts is section 10(2) (xi), which reads :
'When the assessees 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, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee :
Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to be a profit of the year in which it is recovered and if less, the deficiency shall be deemed to be a business expense of that year.'
The primary requisites of this section are as follows :
1. The debt must be a business debt and of the business carried on by the assessee in the relevant accounting year. 2. The method of accounting of the assessee should not be on the cash basis, provided the business is not that of a banker or money-lender. 3. The debt should have arisen in the course of the carrying on of the business and if the business is banking or money-lending must have been advanced in the ordinary course of such business. 4. The debt must have become bad and irrecoverable in the accounting year.
If the joint family, which carried on the business as owner at the time when these debts came into existence, had continued the business in the relevant accounting year and if it were to be assessed on the income of that year, there cannot be any doubt that the debts in respect of which the present write-off is claimed would be properly within the scope of the above provision. This right to claim allowance for bad debts would also of course enure in favour of any person who might claim to have succeeded to that business, now that the joint family has become extinct. The principle 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 taken-over business is now well settled. In C.J. Sheth v. Commissioner of Income-tax, the learned Chief Justice has enunciated it as follows :
'It is well established that where a partnership is dissolved and one partner takes over and continues the business of the partnership it is a case of succession to the business. And in this case the assessee continued the firms business with the same stock-in-trade and with all its assets and liabilities. It must, therefore, be held that the assessee was entitled to write off the debts which had become barred during the year of account, albeit such debts originally belonged to the firm to which the assessee succeeded.'
The question that arises for consideration, therefore, is whether the assessee firm really succeeded the joint family in the matter of carrying on the business. A business owned by a Hindu undivided family is a divisible asset to be brought into the hotchpot in the family partition. How it is to be divided is a matter of volition of the members of the family. They can stop the business and divide its assets and liabilities in the proportion of their shares; or they may allot the business to one or more members of the family leaving it to them to carry it on in all its integrity. It is plain that where the business itself is split up, if not totally extinguished, there is a discontinuance of the business, but where the business if merely allotted without its structure being in any way impaired, to one or more members of the family, there is only succession. 'Discontinuance' and 'succession' are mutually exclusive. The test to be applied to ascertain whether there has 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 censer of such business. It was held in Meyyappa Chettiar v. Commissioner of Income-tax, that where members of the family continue the family business in partnership after division, there is a succession by the partnership of the family business. This decision has been approved by the Judicial Committee in commissioner of Income-tax v. Polson. In Commissioner of Income-tax v. Saran Singh Ram Singh, it was held that a member of the family to whom a family business is allotted on partition is a successor of the business, succeeding the family. Whether a business owned by a Hindu undivided family is succeeded to or not by some members of the family after partition is a question of fact depending upon the circumstances of each case. A division of the business by dividing the assets and liabilities destroys the business, in which case there can of course be no succession as there is nothing which can be succeeded to; but an allotment of the business to a share or sharers necessarily indicates that the allottee is the successor of the family in such business.
Mr. S. Ranganathan, learned counsel for the department, relied upon the decision in Annamalai Chettiar v. Commissioner of Income-tax, and endeavoured to submit that the impact of a partition on a family business can result only in discontinuance of the business and not in succession. In that case a Hindu undivided family consisting of a father and his son carried on money-lending business under different vilasams. There was a partition in the family under which some of the vilasams were allotted to the father and the rest were allotted to the assessee. After the partition, the son, who assessed to income-tax for the assessment year 1939-40, claimed that there was a discontinuance of the business within the meaning of section 25(3) of the Indian Income-tax Act. It was held that, on partition, as the assets of the joint family business were split up the joint family business was no longer in existence. It was terminated and there was a discontinuance within the meaning of section 25(3). It is quite clear on the facts of that case that the business itself was split up. Satyanarayana Rao J. in fact referred to the decision in Meyyappa Chettiars case and Polsons case and observed thus at page 244 :
'This is not a case of mere transfer of ownership as in Commissioner of Income-tax v. Polson or in Meyyappa Chettiar v. Commissioner of Income-tax. It is a case of disintegration of a unit into its component parts so as to annihilate the unity of the business.'
Raghava Rao J. at page 246 observed thus :
'The endeavour of Mr. Rama Rao Sahib in this case was to extend the operation of the Privy Council decision in Polsons case to cases of business in respect of which there has been not merely a change of ownership, but also a destruction of the integrity of the business.'
Mr. Ranganathan drew our attention to the following passage in the judgment of Satyanarayana Rao J. at page 244 :
'The process of partition involves the restriction of what was a joint right of a member extending to the entirety of the properties to some of the assets of the family which were allotted at the partition. It is not quite correct to treat a partition as involving a change of ownership in the sense of a transfer of ownership from one to the other. The father, under the partition, acquired an exclusive right to some of the assets as did the son to the other assets. The son, therefore, has no interest in the business of the father and vice versa. In other words, the business a of the father is a totally different business in the eye of the law through of a similar or same nature as the business which was previously carried on by the joint family.'
We do not understand this passage to mean that a joint family business allotted to a member of the family at a partition does not bring about a change of ownership from the family to the individual separated member. The case before the learned judges was one in which there was a complete disintegration of the family business. This is made quite clear from the following further observations of Satyanarayana Rao J. :
'In my view, the legal position of the assessee and his father after partition in relation to the business was correctly stated by the Appellate Assistant Commissioner who held that, after splitting up of the assets of the business, the joint family business no longer continued its existence but terminated.'
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 view or be the result of operation of law. In Muthuveeran Chetty v. Govindan Chetty a Full Bench of this court, to which we were parties, held that the interest acquired by the members of the family as a result of a partition under the Hindu law is brought about by operation of law. It can well and truly be said that in the present case there was a change of ownership from the family to the firm by operation of law due to the partition. That the business was the same before and after partition does not admit of any doubt. The Tribunal states as follows in its order :
'On the 7th October, the partnership referred to above started and the old business was continued.'
In our opinion, the constitution of partnership between Chandappa Iyer and his son, Hanumantha Rao, to continue and carry on the erst-while joint family business as a result of the partition, brought about a succession by the firm of the pre-existing business and that the assessee firm is entitled to claim the allowance under section 10(2) (xi) of the Act. The trade debts written off as bad and irrecoverable debts do not constitute capital assets in the hands of the assessee.
The question is answered in favour of the assessee who will get his costs from the department. Counsels fee Rs. 250.
Questions answered in the affirmative.