C J SHETH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE following question has been referred to us for our opinion under section 66(1) of the Income Tax Act, 1922 " 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

(2.) 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). 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.