Law:

Section:

Section 36(1)(vii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xi) of the Indian Income-tax Act, 1922] - Bad debts - Whether where assessee as a partner invested certain amounts in a partnership which ended in a loss, such a loss could not be considered as bad debts in hands of assessee - Held, yes FACTS The assessee was partner in two firms along with R and P. There was a dissolution of partnership and certain amount was found due to the assessee as his share of the partnership assets from both the firms 'R' became a debtor in one of the firms mainly as a result of one of his nephews, failing to pay that firm a sum owed by him. This debt of 'R' was transferred in equal shares to the accounts of both 'R' and 'P', as the debtors was said to be related to both of them. Decrees were obtained against 'R' The claim was settled by transfer of certain properties valued at Rs. 54,000 and the balance was written off as bad debt. The assessee claimed that he was entitled to reduction in respect of that amount. The Tribunal worked out the proportion in which the sum of Rs. 54,000 was to be divided between the different items and, disallowed a set-off with regard to the dues from the firms. On reference: HELD The Tribunal in its appellate order apportioned the entire sum of Rs. 54,000 between all the debts, excluding the amount of costs awarded to the assessee. From the statement of the case it appeared that the loss in the business from both firms which was to be recovered from R, after the dissolution of partnership, was Rs. 48,510 and Rs. 14,541. Part of this loss was written off by transfer of property worth Rs. 54,000, the balance still remained due and must be deemed to be the loss in the business. That it could not be said that there was any debt advanced by the assessee to R and P, part of which was recovered and the rest became a bad debt. The Tribunal rightly relied upon the decision of the Privy Council in Rm. Ar. Ar. Rm. Arunachalam Chettiar v. CIT [1936] 4 ITR 173, where dealing with the question, whether in a partnership business, which has ended in a loss, the partner, who had invested money in that business, could claim the loss suffered as…

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