Law:

Section:

Section 36(1)(vii), read with section 36(2)(i)(a) of the Income-tax Act, 1961 - Bad debts - Assessment year 1973-74 - Business of assessee firm was originally carried on by joint family consisting of two individual members - After partial partition in family, those two individuals constituted themselves into partnership firm and continued business - Certain trade debts due to business when it was being carried on by Family, became irrecoverable and assessee-firm wrote off same as bad debt - Whether, if business is continued right through, without any break, change merely occurring in persons carrying on business, then identity of business as well as debt to be incorporated in accounting of business would not get lost, and provision of section 36(2)(i)(a) will have to be regarded as fully complied with - Held, yes - Whether, in view of aforesaid legal position, assessee firm was entitled to deduction of bad debts - Held, yes FACTS The business of the assessee-firm was originally carried on by a Mitakshara joint family in which two individuals were members. In April, 1972, this business was subjected to a partial partition between these two individuals, who immediately thereafter constituted themselves into the assessee partnership firm and continued the business. Amongst the assets of the business, there were trade debts and other outstandings. A few of them, however, became bad and doubtful debts after the business became that of the partnership. The assessee firm wrote off the amounts irrecoverable in the firm's books as bad debts. The ITO held that as the debts in question were incurred when the joint family had been carrying on the business and as that business became partitioned and the business was subsequently continued by the assessee-firm, the loss in the hands of the assessee was a capital loss. Much the same view was taken by the AAC in appeal. On further appeal, the Tribunal pointed out that the allowance under section 36(1)(vii) was subject to the fulfilment of the conditions set out in section 36(2). According to the Tribunal, the requirement of clause (1)(a ) of section 36(2) was that the debt for which the assessee asks for an allowance as a bad…

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