Law: Income Tax Act, 1922

Section: 10(2)(xi),25(4)

Law: Income Tax Act, 1922

Section: 10(2)(xi),25(4)

Law: Partnership Act, 1932

Section: 4,17(a),5,2

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 - Assessment year 1958-59 - Assessee was a partnership firm which was constituted with five partners - In assessment for year 1956-57, assessee's claim for bad debts was disallowed on ground of premature written off - In assessment for year 1958-59, assessee again claimed to set off said bad debt - ITO rejected assessee's claim holding that constitution of firm had been changed and it become a new firm with nine partners - Tribunal upheld ITO's order - Whether since partnership is result of mutual agreement between parties, it is open to partners to adjust their rights and liabilities in any manner they please - Held, yes - Whether, since in instant case, as per terms of partnership deed with introduction of new partners, no new partnership had come into existence but it was only a reconstitution of existing partnership, Tribunal was not justified in disallowing assessee's claim in respect of bad debts - Held, yes. FACTS The assessee was a partnership which was constituted with five partners. The business of the firm was that of dealing in kapok, cotton, yarn and cloth. The firm supplied cotton to A Mills Limited, and on that account a sum of Rs. 20,598 was owing to the assessee. During the assessment year ending 14-11-1955, the assessee wrote off this amount as irrecoverable. In the assessment for the year 1956-57, the claim to treat this sum as a bad debt in the computation of the income was negatived by the ITO on the ground that it had been prematurely written off. In the following assessment year, the claim was not apparently raised. In the assessment for the year 1958-59, the assessee claimed to set off this bad debt. The ITO rejected the claim for this assessment year. His reasons were that the bad debt had been written off by the firm consisting of five partners in the account year ending with 14-11-1955. On the very next day, the constitution of the firm had been changed and it became one with nine partners. He accordingly thought that the new firm had not taken over the asset in question, that is, the claim against A…

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