Law:

Section:

Section 36(1)(vii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xi) of Indian Income-tax Act, 1922] - Bad debts - Assessment year 1956-57 - Assessee-HUF carrying on money-lending business - It was also a partner in a firm - Assessee advanced money to firm from its money lending business which was credited to assessee's loan account in firm's books and firm paid interest thereon - Such interest was taxed as assessee's income from money-lending business - On other day assessee borrowed funds from firm and paid interest which was allowed as deduction in computing assessee's income - As part of the arrangement of dissolution, the assessee became entitled to certain amounts - Certain liabilities were also allotted to it - One of these liabilities was a sum of Rs. 26,600 which the assessee had to discharge - In the deed of dissolution, it was agreed that one of the partners, had to pay a sum of Rs. 23,500 to the assessee - Out of this amount, the assessee realised a sum of Rs. 11,500 and the balance of Rs. 12,000 was not recovered - Whether since assessee had two capacities, one as money lender and another as partner of firm and since assessee could have advanced amounts to a third party which on being unrealisable could be allowable as bad debt, in instant case assessee's claim could not be denied merely because it was partner of firm to which moneys were advanced - Held, yes - Whether, further, in instant case since interest incomes on these advances were submitted to assessment as income from money-lending business in past years and accepted as such by department, impugned amount should be deductible as bad debt - Held, yes - Whether liability of firm allotted to assessee on dissolution of firm arose as an incident of partnership transaction would be a capital loss and could not be allowed - Held, yes - Whether further irrecoverable part of amount not paid by a partner who agreed to pay certain sum to assessee, could also not be allowed as deduction - Held, yes FACTS The assessee-HUF carrying on money lending business, was also a partner in a firm. Besides contributing towards capital of the firm the assessee remitted money from its money lending…

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