1981 (9) TMI 183 - AT - Income Tax

Tribunal upholds bad debt claim for company, clarifies business succession principle.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the bad debt claim for the assessee company. The judgment clarified ... - Issues:1. Disallowance of bad debt by the ITO2. Appeal by the assessee to CIT(A) and subsequent decisions3. Interpretation of provisions of s. 36(2)(I) of the IT Act, 1961Analysis:The judgment involves an appeal by the Revenue concerning the disallowance of a bad debt of Rs. 19,719 by the ITO, which was later allowed by the CIT(A) for the assessment year 1978-79. The controversy revolves around the acquisition of debts by the assessee company from a predecessor firm and the subsequent claim for bad debt deduction. The assessee argued that it succeeded the business of the firm as a running concern, entitling them to claim bad debts. The CIT(A) allowed the claim based on precedents from the Bombay and Andhra Pradesh High Courts. The Revenue contended that the debts were capital assets and not eligible for bad debt deduction under s. 36(2)(I) of the IT Act, 1961.The Tribunal analyzed the facts and submissions, emphasizing the continuity of the business from the predecessor firm to the assessee company without interruption. Relying on previous court decisions, the Tribunal held that succession of business occurred even though a price was paid for the acquisition. The assets and liabilities retained their character in the hands of the assessee company, supporting the allowance of bad debt. The Tribunal rejected the Revenue's argument that the debts were capital assets and upheld the CIT(A)'s decision.The Tribunal delved into the interpretation of the provisions of s. 36(2)(I) of the IT Act, 1961, referencing a case from the Andhra Pradesh High Court. The Court clarified that the same assessee need not have considered the debt for income determination and written it off as a bad debt. It was established that the predecessor firm satisfied one condition, while the assessee company satisfied the other, justifying the allowance of bad debt. The Tribunal endorsed the Andhra Pradesh High Court's view, emphasizing that the business succession allowed for the claim of bad debt, regardless of the entity writing off the debt.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the bad debt claim for the assessee company. The judgment clarified the application of s. 36(2)(I) and upheld the principle of business succession in determining bad debt deductions.