{"id":256476,"date":"1985-07-08T00:00:00","date_gmt":"1985-07-07T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-a-p-vs-ms-t-veerabhadra-rao-k-on-8-july-1985"},"modified":"2017-10-05T15:23:39","modified_gmt":"2017-10-05T09:53:39","slug":"commissioner-of-income-tax-a-p-vs-ms-t-veerabhadra-rao-k-on-8-july-1985","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-a-p-vs-ms-t-veerabhadra-rao-k-on-8-july-1985","title":{"rendered":"Commissioner Of Income Tax, A.P vs M\/S. T.Veerabhadra Rao, K. … on 8 July, 1985"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income Tax, A.P vs M\/S. T.Veerabhadra Rao, K. … on 8 July, 1985<\/div>\n
Equivalent citations: 1985 AIR 1600, 1985 SCR Supl. (2) 20<\/div>\n
Author: R Pathak<\/div>\n
Bench: Pathak, R.S.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME TAX, A.P.\n\n\tVs.\n\nRESPONDENT:\nM\/S. T.VEERABHADRA RAO, K. KOTESWARA RAO & CO.\n\nDATE OF JUDGMENT08\/07\/1985\n\nBENCH:\nPATHAK, R.S.\nBENCH:\nPATHAK, R.S.\nVENKATARAMIAH, E.S. (J)\n\nCITATION:\n 1985 AIR 1600\t\t  1985 SCR  Supl. (2)  20\n 1985 SCC  Supl.  403\t  1985 SCALE  (2)1\n\n\nACT:\n     Income Tax\t Act<\/a>, 1961,  Sec. 36(1)(vii)-  Business of a\npredecessor firm  with assets  and liabilities taken over by\nthe assessee-Assessee  paying income  tax on interest income\naccruing on  debt - Part of debt written off as a bad debt -\nWhether it could be allowed as a deduction.\n\n\n\nHEADNOTE:\n     The assessee, a partnership firm, took over the running\nbusiness  of  an  earlier  firm\t with  all  the\t assets\t and\nliabilities including a debt of Rs.23,577. The assessee paid\nincome tax  on the interest income accruing on the aforesaid\namount of debt for the assessment year 1963-64. On March 31,\n1965 the  assessee and\tthe debtor entered into a settlement\nwhereby a  sum of  Rs.25,000 was accepted by the assessee in\nsatisfaction of\t the debt  and the  amount of  interest\t due\nthereon. The  balance of  Rs. 15,100  was written off by the\nassessee as  irrecoverable. The assessee also incurred a sum\nof Rs.\t6,880 as  legal expenses  on filing  an appeal which\narose out  of a\t suit already  instituted by the predecessor\nfirm for recovering a sum due from the Central Government.\n     In assessment proceedings for the assessment year 1965-\n66, the\t assessee claimed  deduction of\t the  aforesaid\t two\namounts written\t off as\t bad debts.  The Income\t Tax Officer\ndisallowed  both   the\tclaims.\t On  appeal,  the  Appellate\nAssistant Commissioner\tof Income  Tax allowed the claims of\nthe assessee-firm holding that the business transferred from\nthe   predecessor    firm   to\t  the\tassessee   continued\nuninterrupted, and the change of ownership was no bar to the\nbad debt  being allowed.  The Income  Tax Appellate Tribunal\nand the High Court confirmed the view taken by the Appellate\nAssistant Commissioner. Hence this appeal.\n     Dismissing the appeal,\n^\n     HELD:  (1)\t  The  money   owed  by\t a  debtor  under  a\ntransaction with  a predecessor\t firm can  be written off as\nirrecoverable  in   the\t accounts   of\tthe  successor,\t the\nassessee, in a subsequent year and could be claimed as a bad\ndebt under  clause (vii)  of sub-s.(1) of s.36 of the Income\nTax Act<\/a>, 1961. [24 A-B]\n21\n     (2)  When\t a  business   along  with  its\t assets\t and\nliabilities is transferred by one owner to another, there is\nno reason  why a  debt so transferred should not be entitled\nto the\tsame treatment\tin the\thands to  the successor. The\nrecovery of  the debt  is a right transferred along with the\nnumerous  other\t  rights  comprising   the  subject  of\t the\ntransfer. If  the law  permits the  transferer to  that\t the\nwhole or  part of  the debt  as irrecoverable and to claim a\ndeduction on that account, it seems difficult to accept that\nthe same  right should\tnot be recognized in the transferee.\nIt is  merely an  incident flowing  from the transfer of the\nbusiness, together with its assets and liabilities, from the\nprevious owner\tto the\ttransferee.  It\t is  a\tright  which\nshould, on  a proper  appreciation of all that is implied in\nthe transfer  of a business, be regarded as belonging to the\nnew owner. [25 E-H]\n     (3) Even  if the  debt had\t been taken  into account in\ncomputing the  income of  the predecessor  firm only and had\nsubsequently  been  written  off  as  irrecoverable  in\t the\naccounts of  the accounts  of the  assessee would still have\nbeen entitled  to a deduction of the amount written off as a\nbad debt. It is not imperative that the assessee referred to\nin  sub-clause\t(a)  must  necessarily\tmean  the  identical\nassessee referred  to in  sub-section(b). A successor to the\npertinent interest  of a previous  assessee would be covered\nwithin the  terms of  sub-clause (b). the successor assesee,\nIn effect, steps into the shoes of his predecessor. [26 E-F]\n     In the present case, the debt was taken into account in\nthe income  of the  assessee for the assessment year 1963-64\nwhen the  interest income  accruing thereon was taxed in the\nhands of  the assessee.\t It is\tthe same  assessee  who\t has\nsubsequently,  pursuant\t  to  a\t settlement,  accepted\tpart\npayment of the debt in full satisfaction and has written off\nthe balance  of the  debt as  irrecoverable in his accounts.\nTherefore the  conditions in  both sub-clause (a) and (b) of\nClause (1) of sub-s.(2) of s.36 are satisfied. The same test\nhas to\tbe applied  for acknowledging the claim to deduction\nof Rs. 6,880. [26 B-D]\n\n\n\nJUDGMENT:\n<\/pre>\n
     CIVIL APPELLATE  JURISDICTION :  Civil Appeal  No.\t 114
\n(NT) of 1975.\n<\/p>\n
     From the  Judgment and  Order dated  16.1.1974  of\t the
\nAndhra Pradesh High Court in Case Referred No. 9 of 1972.\n<\/p>\n
     B.B. Ahuja and Miss A. Subhashini for the Appellant.\n<\/p>\n
22<\/span><\/p>\n
     A. Subba Rao for the Respondent.\n<\/p>\n
     The Judgment of the Court was delivered by
\n     PATHAK, J.\t This appeal  by special  leave is  directed
\nagainst the  judgment of  the High  Court of  Andhra Pradesh
\ndisposing of  a reference  made under  sub-s.(1) of s.256 of
\nthe Indian  Income Tax\tAct<\/a>, 1961  for its  opinion  on\t the
\nfollowing question of law.\n<\/p>\n
\t  Whether on  the facts\t and in the circumstances of
\n\t  the case  the bad  debt of Rs.15,100 and the legal
\n\t  expense   of Rs.6,880 were allowable deductions in
\n\t  the  assessment  of  the  assessee  firm  for\t the
\n\t  assessment year 1965-66?\n<\/p>\n
The assessee  is  a  partnership  firm.\t It  took  over\t the
\nbusiness of  an earlier firm. All the assets and liabilities
\nof the\tpredecessor firm  passed on  to the  assessee  firm.
\nThese included\ta debt\tof Rs.23,577  due from Laxmi Trading
\nCompany to the predecessor firm. The total amount due in the
\naccount relating  to Laxmi  Trading  Company  was  Rs.40,549
\ncomprising an  outstanding amount of Rs. 29,200 and interest
\nthereon in  the sum  of Rs.  11,349 for the period April 31,
\n1960 to\t March 31, 1961. The amount of interest was taxed in
\nthe hands  of the  assessee for the assessment year 1963-64.
\nOn March  31, 1965  the parties\t effected a settlement under
\nwhich a\t sum of\t Rs.25,000 was\taccepted by  the assessee in
\nfull settlement\t of the\t said debt. The balance of Rs.15,100
\nwas written off as irrecoverable.\n<\/p>\n
     In assessment proceedings for the assessment year 1965-
\n66, for\t which the  previous year  was the year ending March
\n31, 1965  the assessee\tclaimed a deduction of the aforesaid
\nsum of\tRs. 15,100 written off as a bad debt. The Income-tax
\nOfficer disallowed the claim on the ground that the debt was
\ndue originally\tto the\tpredecessor firm,  that there was no
\nreason to  take over  the loan\tby  the\t assessee  firm\t and
\nfurther that  it was  not proved  that\tthe  debtor  was  so
\nfinancially embarrassed\t that he was unable to pay the debt.
\nOn appeal,  the Appellate  Assistant Commissioner  of Income
\nTax held  that the business transferred from the predecessor
\nfirm to the assessee continued uninterrupted, and the change
\nof ownership  was no  bar to  the bad debt being allowed. He
\nalso noted  that the  assessee had  paid income-tax  on\t the
\ninterest of  Rs.11,349, in  an earlier\tassessment year, and
\nheld  that   the  assessee’s  bonafides\t stood\testablished.
\nHolding that there was
\n23<\/span>
\njustification for  writing off\tthe bad\t debt in the measure
\nclaimed\t  by   the   assessee,\t the   Appellate   Assistant
\nCommissioner allowed the appeal.\n<\/p>\n
     It may  be mentioned that the assessee had also claimed
\na deduction  of a  sum of  Rs. 6,880  before the  Income-tax
\nOfficer on  the ground\tthat the assessee had incurred legal
\nexpenses in  that amount  in connection with an appeal filed
\nin the Supreme Court for the purpose of recovering a sum due
\nfrom the  Central Government. The transaction related to the
\npredecessor firm  and the  suit instituted  by it  had\tbeen
\ncontinued by  the assessee  on taking  over the\t assets\t and
\nliabilities of\tthe predecessor firm. The Income Tax Officer
\ndisallowed this\t claim also,  but in  appeal  the  Appellate
\nAssistant Commissioner upheld the claim.\n<\/p>\n
     The Income-tax  Department appealed  to the  Income-tax
\nAppellate  Tribunal  against  the  order  of  the  Appellate
\nAssistant Commissioner and urged that cl.(i) of sub-s.(2) of
\ns.36 of\t the Income  Tax Act<\/a>,  1961 did\t not permit  such an
\nallowance  because   it\t did  not  satisfy  the\t requirement
\nmentioned in  cl.(a)  and  cl.(b)  of  that  provision,\t and
\ntherefore it  was not  open  to\t the  assessee\tto  claim  a
\ndeduction of  Rs.15,100 as a bad debt nor the legal expenses
\nof Rs.6,880.  The Appellate  Tribunal dismissed\t the appeal,
\nholding that  where  a\tbusiness  was  succeeded  to  by  an
\nassessee, it  was entitled to write off the bad debts of the
\nbusiness taken\tover. The  Appellate Tribunal  observed that
\nwhenever a  business was  succeeded to\tas a  whole and as a
\nrunning enterprise  the assets and liabilities so taken over
\nbecame the  assets and\tliabilities of\tthe  successor\tand,
\ntherefore, the\tassessee was  entitled to  write off the bad
\ndebts. It  noted that  the assessee had not only treated the
\namount a  debt owed  to it  but\t had  allowed  the  interest
\naccrued thereon\t to be\tassessed in its hand as the interest
\nconstituted part  of  the  debt.  At  the  instance  of\t the
\nCommissioner of Income-tax, a reference was made to the High
\nCourt of  Andhra Pradesh for its opinion on the question set
\nforth earlier.\tThe High  Court answered the question in the
\naffirmative and against the Department.\n<\/p>\n
     It is  not disputed  that the assessee succeeded to the
\nbusiness of  the predecessor  firm and\ttook  over  all\t its
\nassets and  liabilities, including  the debt  due from Laxmi
\nTrading Company.  The business carried on by the predecessor
\nfirm was now carried on by the assessee. The facts also show
\nthat the  assessee paid\t income tax  on the  interest income
\naccruing on  the debt for the assessment year 1963-64. It is
\nalso not  disputed that the parties effected a settlement on
\nMarch 31, 1965 whereby a sum of
\n24<\/span>
\nRs. 25,000  was accepted  by the assessee in satisfaction of
\nthe debt  and that  the balance of Rs.15,100 was written off
\nby the\tassessee as  irrecoverable. The\t question is whether
\nmoney  owed   by  a   debtor  under  a\ttransaction  with  a
\npredecessor firm  can be written off as irrecoverable in the
\naccounts of  its successor,  the assessee,  in a  subsequent
\nyear and  could be  claimed as\ta bad debt under cl.(vii) of
\nsub-s.(1) of s.36 of the Income Tax Act<\/a>, 1961.\n<\/p>\n
     Cl.(vii) of  sub-s.(1) of\ts.36 of\t the Income Tax Act<\/a>,
\n1961 provides :\n<\/p>\n
\t  “36.(1).  The\t  deductions  provided\tfor  in\t the
\n\t  following clauses  shall be  allowed in respect of
\n\t  the matters  dealt with  therein, in computing the
\n\t  income referred to in section 28<\/a> –
\n\t  ………………………………………….\n<\/p><\/blockquote>\n
\t  (vii) subject\t to the provisions of sub-s.(2), the
\n\t  amount of  any debt,\tor part\t thereof,  which  is
\n\t  established to  have become  a  bad  debt  in\t the
\n\t  previous year”.\n<\/p><\/blockquote>\n
\t  Sub-s.(2) of s.36 declares :-\n<\/p><\/blockquote>\n
\t  “(2). In  making any\tdeduction for  a bad debt or
\n\t  part thereof, the following provisions shall apply
\n\t  :-\n<\/p><\/blockquote>\n
\t  (i) no such deduction shall be allowed unless such
\n\t  debt or part thereof –\n<\/p><\/blockquote>\n
\t  (a) has  been taken  into account in computing the
\n\t  income of  the assessee of the previous year or of
\n\t  an earlier previous year, or represents money lent
\n\t  in the  ordinary course of the business of banking
\n\t  or money  lending  which  is\tcarried\t on  by\t the
\n\t  assessee, and\n<\/p><\/blockquote>\n
\t  (b) has  been written\t off as irrecoverable in the
\n\t  accounts of the assessee for that previous year;\n<\/p><\/blockquote>\n
\t  (ii) if  the amount  ultimately recovered  on\t any
\n\t  such debt  or\t part  of  debt\t is  less  than\t the
\n\t  difference between the debt or part and the amount
\n\t  so deducted, the deficiency shall be deductible in
\n\t  the previous\tyear in\t which the ultimate recovery
\n\t  is made;\n<\/p><\/blockquote>\n
25<\/span><\/p>\n
\t  (iii) any  such  debt\t or  part  of  debt  may  be
\n\t  deducted if  it has  already been  written off  as
\n\t  irrecoverable\t in   the  accounts  of\t an  earlier
\n\t  previous year,  but the Income-tax Officer had not
\n\t  allowed it  to be  deducted on  the ground that it
\n\t  had not been established to have become a bad debt
\n\t  in that year;\n<\/p><\/blockquote>\n
\t  (iv) where  any such\tdebt  or  part\tof  debt  is
\n\t  written off  as irrecoverable\t in the\t accounts of
\n\t  the previous\tyear and  the Income-tax  Officer is
\n\t  satisfied that such debt or part became a bad debt
\n\t  in any  earlier previous year not falling beyond a
\n\t  period  of   four   previous\t years\t immediately
\n\t  preceding the\t previous year in which such debt or
\n\t  part is written off, the provisions of sub-section
\n\t  (6) of section 155<\/a> shall apply”.\n<\/p><\/blockquote>\n
S.28, referred to in sub-s.(1) of s.36, provides that income
\nunder  the   head  “Profits   and  gains   of  business\t  or
\nprofession”, shall  be chargeable to income-tax. The profits
\nand gains  of a\t business  are\tcharged\t to  income-tax.  To
\ncompute the  profits and  gains so chargeable, s.36 provides
\nfor allowing  a number of deductions. Each of the deductions
\nmust relate  to the  business.\tIf  the\t same  assessee\t was
\ncarrying on  a business\t and he wrote off a debt relating to
\nthe business  as irrecoverable,\t he would  without doubt  be
\nentitled to a corresponding deduction under cl.(vii) of sub-
\ns.(1) of  s.36 subject\tto the\tfulfilment of the conditions
\nset forth  in sub-s.(2)\t of s.36.  If a business, along with
\nits assets  and liabilities,  is transferred by one owner to
\nanother, we  see no  reason why a debt so transferred should
\nnot be\tentitled to  the same  treatment in the hands of the
\nsuccessor. The\trecovery of  the debt is a right transferred
\nalong with  the numerous other rights comprising the subject
\nof the\ttransfer. If the law permits the transferor to treat
\nthe whole  or part of the debt as irrecoverable and to claim
\na deduction  on that  account, it  seems difficult to accept
\nthat  the  same\t right\tshould\tnot  be\t recognised  in\t the
\ntransferee. It\tis  merely  an\tincident  flowing  from\t the
\ntransfer of  the business,  together  with  its\t assets\t and
\nliabilities, from  the previous\t owner to the transferee. It
\nis a  right which  should, on  a proper\t appreciation of all
\nthat is\t implied in  the transfer of a business, be regarded
\nas belonging  to the  new owner.  Unless the language of the
\nstatute plainly\t and clearly  compels a\t construction to the
\ncontrary, the  normal rule  of the  law should\tbe given its
\nproper play.  It is  true that\tcl.(i) of  sub-s.(2) of s.36
\ndeclares that a deduction can be allowed only
\n26<\/span>
\nif the debt, or part thereof, has been taken into account in
\ncomputing the  income of  the assessee of that previous year
\nor an  earlier previous\t year and  that\t it  has  also\tbeen
\nwritten off as irrecoverable in the accounts of the assessee
\nfor that  previous year.  In the  present case, the debt was
\ntaken into  account in\tthe income  of the  assessee for the
\nassessment year\t 1963-64 when  the interest  income accruing
\nthereon was taxed in the hands of the assessee. The interest
\nwas taxed  as income  because it  represented  an  accretion
\naccruing during\t the earlier  year  on\tmoney  owed  to\t the
\nassessee by  the debtor. The item constituted income because
\nit represented\tinterest on a loan. The nature of the income
\nindicated  the\t transaction  from  which  it  emerged.\t The
\ntransaction was\t the debt,  and that  debt  was\t taken\tinto
\naccount in  computing the  income of  the  assessee  of\t the
\nrelevant previous  year. It  is the  same assessee  who\t has
\nsubsequently,  pursuant\t  to  a\t settlement,  accepted\tpart
\npayment of the debt in full satisfaction and has written off
\nthe balance of the debt as irrecoverable in his accounts. It
\nappears therefore  that the  conditions in  both sub-clauses\n<\/p>\n
(a) and\t (b) of cl.(i) of sub-s.(2) of s.36 are satisfied in
\nthe present  case,  and\t the  High  Court  as  well  as\t the
\nAppellate Tribunal  and the Appellate Assistant Commissioner
\nare right in the view which they took.\n<\/p>\n
     It seems  to us  that even\t if the\t debt had been taken
\ninto account in computing the income of the predecessor firm
\nonly and  had subsequently  been written of as irrecoverable
\nin the\taccounts of  the assessee,  the assessee would still
\nhave been  entitled to a deduction of the amount written off
\nas a  bad debt.\t It is\tnot  imperative\t that  the  assessee
\nreferred  to   in  sub-cl.(a)\tmust  necessarily  mean\t the
\nidentical assessee referred to in sub-cl (b). A successor to
\nthe pertinent  interest of  a  previous\t assessee  would  be
\ncovered\t within\t the  terms  of\t sub-cl.(b).  The  successor
\nassessee,  in\teffect,\t steps\t into  the   shoes  of\t his
\npredecessor.\n<\/p>\n
     Accordingly, we  hold that\t the assessee in the instant
\ncase was  entitled to the deduction as a bad debt of the sum
\nof Rs.\t15,100 written\toff by\tit in  its accounts  of\t the
\nprevious year as irrecoverable.\n<\/p>\n
     We may  add that  although a  number  of  decisions  of
\nvarious High  Courts were  cited before\t us on behalf of the
\nassessee we consider it unnecessary to refer to them.\n<\/p>\n
27<\/span><\/p>\n
     As regards\t the sum of Rs.6,880 claimed by the assessee
\nas legal expenses in connection with an appeal filed in this
\nCourt to  recover an amount due from the Central Government,
\nit  is\t apparent  that\t  the  transaction  related  to\t the
\npredecessor firm and the suit instituted by it was continued
\nby the assessee on taking over the assets and liabilities of
\nthe predecessor\t firm. The Income Tax Officer, the Appellate
\nAssistant Commissioner,\t the Appellate Tribunal and the High
\nCourt dealt  with this\tclaim on the same basis as the claim
\nmade in\t respect of  the bad debt. We are satisfied that the
\nview we\t are taking  in respect\t of the\t sum of\t Rs.  15,100
\nclaimed as  a bad  debt\t should\t also  form  the  basis\t for
\nacknowledging the claim to deduction of Rs.6,880.\n<\/p>\n
     In the result, the appeal is dismissed with costs.\n<\/p>\n
M.L.A.\t\t\t\t\t   Appeal dismissed.\n28<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income Tax, A.P vs M\/S. T.Veerabhadra Rao, K. … on 8 July, 1985 Equivalent citations: 1985 AIR 1600, 1985 SCR Supl. (2) 20 Author: R Pathak Bench: Pathak, R.S. PETITIONER: COMMISSIONER OF INCOME TAX, A.P. Vs. RESPONDENT: M\/S. T.VEERABHADRA RAO, K. KOTESWARA RAO & CO. DATE OF JUDGMENT08\/07\/1985 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-256476","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income Tax, A.P vs M\/S. 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