Successor business can deduct predecessor bad debts when the undertaking continues intact without losing identity.

Bad debts carried in the books of a business allotted intact on partition of a Hindu undivided family remained deductible when the business was continued by the successor partnership without loss of identity. The court treated the change as a transfer of ownership by operation of law, not a discontinuance or extinction of the business. Because the same business continued as a going concern, the debts retained their character as trade debts and did not become capital assets in the hands of the successor firm. The deduction for bad debts was therefore allowed under section 10(2)(xi) of the Indian Income-tax Act, 1922.

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Issues: Whether bad debts arising out of transactions entered into by the predecessor Hindu undivided family were allowable as bad debts to the successor firm under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The business was not split up or extinguished on partition but was allotted intact to two members who continued it as a partnership from the next day. A successor to a business taken as a whole is entitled to write off bad debts found in the books of the taken-over business. The decisive test is whether the identity of the business was preserved. On the facts, the change was one of ownership by operation of law, not a discontinuance. The debts remained trade debts of the same continuing business and did not become capital assets in the hands of the firm.

Conclusion: The assessee firm was entitled to claim the deduction for the bad debts under section 10(2)(xi); the question was answered in favour of the assessee.

Ratio Decidendi: Where a business is allotted intact to members of a Hindu undivided family on partition and is continued by them without loss of identity, the successor is entitled to deduct bad debts of the predecessor business under the provision governing bad debts.

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