Bad debt deduction follows continuity of business where the debt entered income computation before succession.

A bad debt deduction under section 36(1)(vii) depends on whether the debt was taken into account in computing income of the same continuing business, not on a rigid identity of the assessee. Where a successor firm carries on the identical business without break and the debt had already entered the predecessor's business income computation, the successor may claim the deduction. Section 36(2)(i)(a) does not bar the claim in that situation, and the later recovery rule in section 41(4) does not alter this position because it concerns a different charging mechanism for amounts recovered after allowance.

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Issues: Whether a successor firm carrying on the same business can claim deduction for bad debts that had arisen and been taken into account in the predecessor's business, under section 36(1)(vii) read with section 36(2)(i)(a) of the Income-tax Act, 1961.

Analysis: The allowance of bad debts rests on commercial accounting principles under the mercantile system, because a debt which has already been credited to profits when good must be debited when it becomes irrecoverable. The requirement in section 36(2)(i)(a) that the debt must have been taken into account in computing income is not new; it reflects the implicit position under section 10(2)(xi) of the Indian Income-tax Act, 1922. The decisive consideration is not the identity of the assessee in a rigid sense, but whether the same business continued and the debt had entered the computation of business income. Where the business is continued without break and only the persons carrying it on change, the successor is entitled to claim the bad debt. The later decision under section 41(4) did not alter this position, because that provision concerns a distinct charging rule for recovery of a debt already allowed as bad.

Conclusion: The assessee was entitled to the deduction of the bad debt under section 36(1)(vii), and section 36(2)(i)(a) did not bar the claim.

Ratio Decidendi: For a bad debt deduction, the material requirement is that the debt formed part of the income computation of the same continuing business; the deduction is not denied merely because the assessee's identity changed on succession.

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