Bad debt valuation on family business disruption: no revaluation to market value until irrecoverability becomes final.

On disruption of a Hindu joint family, a money-lending debt taken over by the succeeding firm did not have to be revalued at market value merely because the debtor had already become insolvent. The recoverable amount could not be fixed by later insolvency dividends, since realisation depended on uncertain future contingencies. The debt became finally ascertainable as bad only when the Official Receiver declared the final dividend and no further recovery was expected. Accordingly, the book value need not be substituted at the date of disruption, and the bad debt was deductible only in the year it finally became irrecoverable.

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Issues: Whether, on disruption of a Hindu joint family, the succeeding firm was bound for income-tax purposes to take over an outstanding debt at its market value instead of its book value while the debt was still under insolvency realisation.

Analysis: The debt was part of the money-lending business carried on by the family and was taken over by the new firm as an asset of the business. There was no legal rule requiring the assessee to revalue the debt at the date of disruption merely because the debtor had already become insolvent. The realisable value of the debt in 1933 could not be fixed by later dividends received in insolvency, as the actual recoverable amount depended on uncertain future contingencies. The debt therefore became finally ascertainable as bad only when the Official Receiver declared the final dividend and no further recovery remained expected.

Conclusion: The assessee was not bound to substitute market value for book value at the time of disruption, and the bad debt was deductible in the year when it finally became irrecoverable. The answer was in favour of the assessee.

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