Bad debt recovery by successor assessee does not attract deemed income under section 41(4) absent original deduction.

Section 41(4) of the Income-tax Act, 1961 applies only where the same assessee who earlier obtained the bad debt deduction later recovers the amount. The provision is a strict deeming fiction read with section 36(1)(vii), and it cannot be extended to tax a successor assessee who did not receive the original allowance. Accordingly, recovery by a successor in business does not trigger the charge under section 41(4), because liability arises only from recovery by the person who enjoyed the prior deduction.

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Issues: Whether section 41(4) of the Income-tax Act, 1961 applies when bad debts were allowed as deduction in the hands of a firm, but the recovery was made by a successor assessee who took over the business.

Analysis: Section 41(4) is a deeming provision intended to recapture the benefit of a bad debt allowance when the assessee who obtained that allowance later recovers the debt. The provision has to be read with section 36(1)(vii) of the Income-tax Act, 1961 and its predecessor in section 10(2)(xi) of the Income-tax Act, 1922. The absence of the words indicating continued existence of the business does not dispense with the requirement that the same assessee who enjoyed the deduction must be the person who recovers the amount. A charging fiction must be construed strictly, and tax cannot be levied on a person who never obtained the original allowance.

Conclusion: Section 41(4) could not be invoked against the successor assessee. The reference was answered in favour of the assessee.

Ratio Decidendi: Liability under section 41(4) arises only where the same assessee who obtained the bad debt deduction subsequently recovers the amount; recovery by a successor in business does not attract the provision.

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