Business continuity, bad debt scrutiny and prior-year interest taxation under mercantile accounting were the central tax issues.

An assessee whose electricity undertaking had been taken over but who had altered its objects, obtained a money-lending licence and continued some lending activity was treated as not wholly closed; the business was regarded as dormant, not abandoned, so depreciation and carry forward of unabsorbed depreciation remained available. A bad-debt claim could not be rejected in a blanket manner without item-wise examination, and the disallowance required fresh consideration on merits. Interest relating to earlier years, payable under the Electricity Act from delivery of the undertaking until payment, could not be taxed in the current year where the assessee maintained mercantile accounts, so its inclusion in present-year income was wrong.

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Issues: (i) Whether the assessee was still carrying on business so as to claim depreciation and carry forward of unabsorbed depreciation; (ii) Whether the claim for bad debts could be rejected summarily without examining each debt on merits; (iii) Whether interest attributable to earlier years could be taxed in the present year.

Issue (i): Whether the assessee was still carrying on business so as to claim depreciation and carry forward of unabsorbed depreciation

Analysis: The assessee's electricity undertaking had been taken over, but the record showed that the company had altered its objects, obtained a money-lending licence, and carried on some lending activity. The revenue itself had treated parts of the accounts as business items, including expenditure and a loss on sale of assets. On that footing, the business could not be treated as wholly closed; at most it had become dormant, with the intention to continue business still subsisting.

Conclusion: The assessee was entitled to depreciation and carry forward of unabsorbed depreciation.

Issue (ii): Whether the claim for bad debts could be rejected summarily without examining each debt on merits

Analysis: The claim for bad debts was not examined debt-wise by the first appellate authority, and the disallowance by the assessing authority rested largely on the view that no adequate recovery steps had been taken. Whether a debt had in fact become bad depended on the facts of each item and could not be decided in a blanket manner without such examination.

Conclusion: The disallowance of bad debts could not stand, and the claim had to be reconsidered afresh on merits.

Issue (iii): Whether interest attributable to earlier years could be taxed in the present year

Analysis: Under the proviso to sub-section (3) of section 5 of the Indian Electricity Act, 1910, the purchaser was liable to pay interest from the date of delivery of the undertaking until payment of the purchase price. As the assessee kept mercantile accounts, interest relating to prior years could not properly be brought to tax in the current year.

Conclusion: The earlier-year interest was wrongly included in the income of the present year.

Final Conclusion: The appeal succeeded in substantial part, with relief granted on the business-status and interest issues and the bad-debt claim sent back for fresh consideration.

Ratio Decidendi: Where a business is not wholly abandoned and the assessee continues some commercial activity with subsisting business intention, depreciation-related allowances may remain available; bad debts must be examined item-wise on merits; and income attributable to earlier years cannot be shifted into the current year under a mercantile system merely because payment is received later.

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