Law:

Section:

JUDGMENT Gopal Rao Ekbote, CJ. -The assessee, a firm, claimed a sum of Rs. 15,100 by way of bad debts in the account of its predecessor-firm. The predecessor-firm of the assessee dealing in rice had business relations with another firm, Lakshmi Trading Company. The said Lakshmi Trading Co. owed Rs. 23,577 to the predecessor-firm. The assessee-firm succeeded to the predecessor firm. It took over the entire assets and liabilities of the predecessor firm including the above said debt due from Messrs. Lakshmi Trading Co. The total amount due on that account was Rs. 40,549. This amount included a sum of Rs. 11,349, being interest on the outstanding amount of Rs. 29,200. The interest became due for the period April 12, 1960, to March 31, 1961. The said interest was taxed in the hands of the assessee-firm for the assessment year 1963-64. On March 31, 1965, the parties effected a settlement. A sum of Rs. 25,000 was accepted by the assessee-firm in full settlement of the above said debt. The balance of Rs. 15,100 was written off as irrecoverable. The assessee-firm, therefore, claimed deduction of the said amount. The Income-tax Officer disallowed this claim on the ground that the debt was due originally to the predecessor-firm, that there was no reason to take over the loan by the assessee-firm and that it was not proved that the debtor was in such a bad position as not to pay the debt. The Appellate Assistant Commissioner, on appeal, held that the business taken over by the assessee-firm continued uninterrupted. Change of ownership was not a bar to the allowance of bad debts. It was further found that since the assessee-firm had paid income-tax on the interest of Rs. 11,349, the assessee's bona fides are proved. The write-off, therefore, was justifiable. The Appellate Assistant Commissioner, therefore, allowed the claim. There was a claim for deduction of a sum of Rs. 6,880, which the assessee-firm had incurred by way of legal expenses in connection with an appeal filed in the Supreme Court to recover some amounts from the Central Government. In this claim also, the transaction related to the predecessor-firm and the suit instituted by it was continued by the…

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