Hindu Undivided Family continuity and mercantile bad-debt treatment shaped assessment liability and deduction entitlement.

A separation by one member from a Hindu undivided family business did not amount to discontinuance of the business under the Income-tax Act, 1922; the remaining members continued the same business, so the family remained liable for assessment. A debt maintained on the mercantile system and consistently treated in earlier years as a subsisting business asset could not later be denied as a bad-debt deduction on an inconsistent change of treatment; the deduction was allowable in the assessment year. The reference was thus answered partly against the assessee on the assessment basis issue and partly in the assessee's favour on the deduction issue.

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Issues: (i) Whether the assessment was rightly made on the basis of a Hindu undivided family after one member separated from the business. (ii) Whether the debt due from a debtor was an admissible deduction in the year of assessment.

Issue (i): Whether the assessment was rightly made on the basis of a Hindu undivided family after one member separated from the business.

Analysis: Separation of one member from the family business did not amount to discontinuance of the business within the meaning of Section 25 of the Income-tax Act, 1922. The remaining members continued the same business, and the matter was not open to challenge as a new factual issue because it had not been raised at the appropriate stage. On the proper construction of the Act, the family remained liable in respect of the assessment year.

Conclusion: The issue was answered in the affirmative and against the assessee.

Issue (ii): Whether the debt due from a debtor was an admissible deduction in the year of assessment.

Analysis: The accounts were maintained on the mercantile system, and the item had been consistently treated in earlier years as a subsisting asset and as part of the business profits. A later attempt to treat the same debt as bad and irrecoverable in the year of assessment was inconsistent with the department's earlier treatment. The debt was therefore allowable as a deduction in the year of assessment.

Conclusion: The issue was answered in the affirmative and in favour of the assessee.

Final Conclusion: The reference was decided partly against the assessee on the assessment basis issue and partly in the assessee's favour on the bad debt deduction issue.

Ratio Decidendi: A continuing business in the hands of remaining family members is not discontinued merely because one member separates, and a debt consistently treated under the mercantile system cannot be denied as a deduction in a later year by an inconsistent change of treatment.

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