COMMISSIONER OF INCOME TAX, A.P. versus M/S. T.VEERABHADRA RAO, K. KOTESWARA RAO & CO.

Citation: [1985] SUPP. 2 S.C.R. 20 · Decided: 08-07-1985 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Dismissed

Judgment (excerpt)

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WIMISSIONER OF INCQIE TAX, A.P. 
v. 
M/S. T.VEERABllADRA RAO, K. KmESWARA RAO & CO. 
JULY 8, 1985 
[R.S. PATHAK AND E.S. VENKATARAMIAH JJ.J 
Income Tax Act, 
1961, Sec. 36(l)(vii)-
Business of a 
predecessor 
firm with assets and liabilities taken over by the 
assessee-Assessee paying income tax on interest income accruing 
on debt -
Part of debt written off as a bad debt - Whether it 
could be allowed as a deduction. 
The assessee, a partnership firm, took over the running 
business of an earlier firm with all the assets and liabilities 
including a debt of Rs.23,577. 
The assessee paid income tax on 
the interest income accruing on the aforesaid amount of debt for 
the asseasment year 1963-64. 
On March 31, 1965 the assessee and 
the debtor entered into a settlement whereby a sum of Rs.25,000 
was accepted by the aasessee in satisfaction of the debt and the 
amount of interest due thereon. 
The balance of Rs. 15,100 was 
written off by the assessee as irrecoverable. 
The assessee also 
incurred a sum of Rs. 6, 880 as legal expenses on filing an appeal 
which arose out of a suit already instituted by the predecessor 
firm for recovering a sum due from the Central Government. 
In assessment proceedings for the assessment year 1965-66, 
the aaseasee claimed deduction of the aforesaid two amounts 
written off as bad debts. The Income Tax Officer disallowed both 
the claims. 
On appeal, the Appellate Assistant Comnissioner of 
Income Tax allowed the claims of the assessee-firm holding that 
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the business transferred from the predecessor firm to the 
assessee continued uninterrupted, and the change of ownership was 
no bar to the bad debt being allowed. 
The Income Tax Appellate 
Tribunal and the High Court confirmed the view taken by the 
Appellate Assistant Comnissioner. Hence this appeal. 
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Dismissing the appeal, 
HELD: (l) The money owed by a debtor under a transaction with · 
a predecessor firm can be written off as irrecoverable in the 
accounts of the successor, the assessee, in a subsequent year and 
could be claimed as a bad debt under clause (vii) of sub-11.(l) of 
H 
s.36 of the Income Tax Act, 1961. [24 A-BJ 
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c.I.T. ,A.P. v. M/S. T.VEERBllADRA RAO 
21 
(2) When a business along with its assets and liabilities is 
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transferred by one owner to another, there is no reason why a 
debt so transferred should not be entitled to the same treatlllent 
in the hands of the successor. The recovery of the debt is a 
right transferred along with the numerous other rights comprising 
the subject of the transfer. If the law permits the transferor 
to treat the whole or part of the debt as irrecoverable and to 
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claim a deduction on that account, it seems difficult to accept 
that the same right should not be recognised in the transferee. 
It is merely an incident flowing from the transfer of the 
business, together with its assets and liabilities, from the 
previous owner to the transferee. It is a right which should, on 
a proper appreciation of all that is implied in the transfer of a 
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business, be regarded as belonging to the new owner. [25 E-11] 
(3) Even if the debt had been taken in::o account in computing 
the income of the predeceasor'firm.only and had subsequently been 
written off as irrecoverabie in the accounts of the assessee, the 
assessee would still have been entitled to a deduction of the 
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amount written off as a bad debt. It is not imperative that the 
assessee referred to in sub-clause (a) must necessarily mean the 
identical assessee referred to in sub-clause (b). A successor to 
the pertinent interest of a previous assessee would be covered 
within the terms of sub-clause (b). The successor assessee, in 
effect, steps into the shoes of his predecessor. [26 E-F) 
In the present case,· the debt was taken into account in the 
income of the assessee for the assessment year 1963~4 when the 
interest income accruing thereon was taxed in the hands of the 
assessee. It is the same assessee who has subsequently, pursuant 
to a settlement, accepted part payment of the debt in full satis-
faction and has written-off the balance of the debt as irrecover-
able in his accounts. Therefore the conditions in both sub-clause 
(a) and (b) of Clause (i) of sub-s.(2) of a.36 are satisfied. 
The same test has to be applied for acknowledging the ciaim to 
deduction of Rs. 6,880. [26 B-D] 
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CIVIL APPELLATE JURISDICTION 
Civil Appeal No. 114 (NT) of 
G 
1975. 
From the Judgmen

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