Bad debt deduction for successor business upheld where trading debt remained part of continuing business assets.

A successor carrying on a business as a going concern with its identity unbroken may deduct an irrecoverable trading debt taken over with the business, even if the debt arose before the change in ownership. The debt remained part of the trading assets, and there was no basis to treat it as a capital asset merely because the business changed hands. The deduction for the bad debt was therefore admissible under section 10(2)(xi) of the Indian Income-tax Act, 1922, in favour of the assessee.

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Issues: Whether the assessee, as successor to the business, was entitled to deduction of the debt written off as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The business was taken over as a going concern with its assets and liabilities, and the debt in question formed part of the trading assets. The controlling principle applied was that where the identity of the business is not broken and the business continues without interruption, a successor may write off trading debts that become irrecoverable, even if they arose before the change of ownership. The contention that the debt became a capital asset in the hands of the company was rejected because there was no basis to treat the debt differently from the other trading debts taken over.

Conclusion: The deduction was admissible and the question was answered in the affirmative in favour of the assessee.

Ratio Decidendi: A successor carrying on an uninterrupted business with an unbroken identity may claim deduction of an irrecoverable trading debt taken over with the business, and such a debt does not become a capital asset merely because of the change in ownership.

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