Law:

Section:

Section 36(2), read with section 187 of the Income-tax Act, 1961 – Bad debts – Assessment year 1967-68 – On voluntary retirement of two of its partners assessee firm was dissolved by a deed of dissolution – Subsequently remaining partners constituted a new firm and continued same business – Dissolved firm had bad debts and it was recorded that recovery of debt against one ‘KV' was doubtful – Tribunal allowed amount due from ‘KV' as bad debt – Whether having regard to provisions of section 187, if same business is continued by a reconstituted firm of which at least one of old partners continues to be partner of new firm, firm would be treated as continuing entity in eyes of law – Held, yes – Whether expression ‘assessee' as mentioned in section 36(2)(i)(a) has to be interpreted keeping in view interpretation of section 187 regarding reconstituted firm or succeeding firm, as case may be – Held, yes – Whether in view of aforesaid legal position, assessee-firm was only a reconstituted firm of first firm and as such, decision of Tribunal was correct in allowing bad debt to assessee-firm – Held, yes FACTS A firm consisting of six partners, was dissolved on the retirement of two of them, ‘SDV' and ‘SPK', by a deed of dissolution, and the continuing partners, after constituting a new partnership, continued the same business. The dissolved firm had number of bad debts including one against ‘KV'. It was specifically recorded in the dissolution deed that the recovery of said debt was doubtful, a suit was pending in the Civil Court and that ‘SDV', one of the partners had paid his proportionate share of that debt;. that in case said debt was recovered, after deducting litigation expenses, the balance amount would be paid to the retiring partner, ‘SDV', in proportion to his share and if nothing was recovered, he would be required to pay his share of the litigation expenses. Regarding other debts also, the stipulation was in similar terms. The other retiring partner, ‘SPK', was, however, not to be liable to and responsible for any bad debt whether recovered or otherwise. This firm was again reconstituted by another deed of partnership ‘SPK' who had retired from the first firm…

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