Post-discontinuance interest retains business income character; bad debt claim needs statutory proof and fresh verification.

Post-discontinuance interest on an outstanding advance was taxable as business income because sums received after cessation are deemed to retain their business character under section 176(3A) when they would have formed part of business income if received earlier; the assessee succeeded on this issue. The bad debt claim relating to fixed deposits was not finally allowed because section 36(2) requires proof that the amount was previously taken into account in computing income or represented money lent in the ordinary course of banking or money-lending business, and the supporting material was insufficient; the matter was remitted for fresh adjudication.

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Issues: (i) Whether interest received on advances after discontinuance of business was taxable as business income or as income from other sources; (ii) Whether the claim of bad debt written off in respect of fixed deposits was allowable under the Income-tax Act.

Issue (i): Whether interest received on advances after discontinuance of business was taxable as business income or as income from other sources.

Analysis: The receipt related to an outstanding amount from a borrower after the business had discontinued. Section 176(3A) of the Income-tax Act, 1961 deems sums received after discontinuance to be taxable in the year of receipt if, had they been received before discontinuance, they would have formed part of business income. The lower authorities did not apply this provision.

Conclusion: The interest receipt was assessable as business income and not as income from other sources, in favour of the assessee.

Issue (ii): Whether the claim of bad debt written off in respect of fixed deposits was allowable under the Income-tax Act.

Analysis: Allowability of bad debt under Section 36(2) of the Income-tax Act, 1961 depends on proof that the amount was taken into account in computing income in an earlier year or represented money lent in the ordinary course of banking or money-lending business. The assessee had not produced sufficient supporting material to establish these foundational facts, so further verification was required.

Conclusion: The issue was remitted for fresh adjudication and the claim was not finally allowed at this stage.

Final Conclusion: The appeal succeeded on the tax treatment of interest receipts and was sent back for reconsideration on the bad debt claim, resulting in a partial relief to the assessee.

Ratio Decidendi: Post-discontinuance receipts that would have been business income if received earlier are taxable as business income under Section 176(3A), and a bad debt claim under Section 36(2) requires proof of the statutory conditions and supporting evidence.

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