1961-VIL-85-MAD-DT

Equivalent Citation: [1962] 46 ITR 1052

MADRAS HIGH COURT

T. C. NO. 172 OF 1958

Dated: 16.11.1961

C.J. SHETH

Vs

COMMISSIONER OF INCOME-TAX

S. Padmanabhan and K. R. Ramamani for the Applicant

S. Ranganathan for the Respondent

Bench

Ramachandra Iyer, CJ. And Srinivasan, J.

JUDGMENT

Ramachandra Iyer, CJ.

The following question has been referred to us for our opinion under section 66(1) of the Indian Income-tax Act:

"Whether, on the facts and circumstances of the case, the sum of Rs 23,049 is an allowable deduction under section 10(2) of the Act?"

The assessee who was carrying on business originally as a proprietary concern took a working partner, Shantilal Navalchand, on and from the 1st April, 1949, the share of the latter being 8/17. The partnership continued for about six years and was dissolved on 31st March, 1955, when Shantilal Navalchand retired from 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.

While submitting his return for the assessment year 1956-57 (the relative year of account ending with March 31, 1956) the assessee deducted a sum of Rs 23,049 as bad and doubtful debts. Those debts were originally due to the firm of which Shantilal Navalchand was a partner. The Income-tax Officer refused to accept the claim of the assessee to write off bad debts on the ground that they do not belong to the assessee's proprietary business and that it was, on the other hand, a capital loss. This view was affirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal. Hence this reference. The Tribunal has stated:

"These debts which are now claimed to have become bad are those of the business carried on previously by the firm and, therefore, the deduction could be claimed only by that entity and, with the dissolution of that entity before the previous year, the right to such claim can be said to have been lost with it."

In making this observation, the Tribunal evidently did not notice that the assessee's proprietary concern only succeeded to the business of the firm. 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 firm's 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 Tribunal has, however, given a second reason in support of its conclusion, namely, that where the assessee took over the outstandings and started as it were his sole business, they became the assessee's capital and they lost the identity as debts due to the firm. Mr. Ranganathan, who appears for the department, supported this view and referred to a recent decision of this Bench in R. C. No. 95 of 1957 (Commissioner of Income-tax v. Appu Chettiar [1962] 45 ITR 152). That was a case where a question as to the valuation of an asset under the mercantile system of accounting arose. A testator had a business in art silk. In his books he adopted the cost as the basis of valuation. He died leaving a will by which he bequeathed the business to his two daughters. The business was stopped on the date of the death of the testator but re-commenced by the two daughters after forming themselves into a partnership about three weeks later. The opening value of the stock in the accounts of the new firm was based on the market value of the property as on the date of the death of the testator. The legatees did not adopt the valuation of the stock as per the books of the testator. We had held that, as the legatees became entitled to the stock-in-trade as owners by virtue of the bequest, there was no cost value to them and that they could, therefore, adopt the market value of the goods as the basis of valuation of stock-in-trade. 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, Shantilal Navalchand. 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. We answer the question referred to us in the affirmative and in favour of the assessee, who will be entitled to his costs.