Law:

Section:

Section 36(2), read with section 28, of Income-tax Act, 1961 - Bad debts - Assessment years 1968-69 to 1970-71 - A partnership firm got incorporated as a private limited company, with its erstwhile partners becoming shareholders of new company - By an agreement, company took over firm's business as a going concern with all assets and liabilities - Company's claim for deduction of bad debts was disallowed by ITO and said disallowance was confirmed by Tribunal, holding that though those amounts had been taken into account while computing income of erstwhile partnership firm in an earlier year, that was an assessee distinct from present private limited company - Whether in view of provisions of section 36, if income of a business is computed by taking into account certain debt, allowance on account of said debt having become bad can not be denied merely because assessee's identity has changed, though identity of business continues - Held, yes -Whether, therefore, debts in question were allowable under section 36(2)(i) - Held, yes FACTS 'T' a partnership firm converted itself into a private limited company, with its erstwhile partners becoming shareholders of the new company. By an agreement, the private limited company took over the business of the erstwhile partnership firm as a going concern with all assets and liabilities. For the relevant assessment years the company claimed deduction of certain amounts on account of bad debts. These amounts were all taken into account in computing the income of the partnership firm in earlier years. The ITO disallowed the claims in toto. On second appeal, the Tribunal upheld the disallowance, and observed that no doubt these amounts had been taken into account while computing the income of the partnership firm, in an earlier previous year, but then that was an assessee distinct from the present private limited company. The firm was, no doubt, the predecessor in business of the present assessee-company but section 36(2)(i), however, allowed only the original creditor to claim relief on account of bad debt and a successor creditor was not entitled to do so. On reference: HELD In section 36(2) there is no indication that the…

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