# WIMISSIONER OF INCQIE TAX, A.P v. M/S. T.VEERABllADRA RAO, K. KmESWARA RAO & CO

- **Citation:** [1985] Supp. 2 S.C.R. 20
- **Court:** Supreme Court of India
- **Decided:** 1985-07-08
- **Bench:** R.S. Pathak, E.S. Venkataramiah Jj
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/wimissioner-of-incqie-tax-a-p-v-m-s-t-veerablladra-rao-k-kmeswara-rao-co-9194
- **Pages:** 8

## Headnote

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.
G
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 satisfaction and has written-off the balance of the debt as irrecoverable in his accounts. Therefore the conditions in both sub-claus

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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.
G
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 satisfaction and has written-off the balance of the debt as irrecoverable 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
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1975.
From the Judgment and Order dated 16.1.1974 of the Andhra
Pradesh High Court in Case Referred No; 9 of 1972.
B.B. Ahuja and Miss A. Subhashini for the Appellant.
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SUPREME COURT REPORTS
[1985] SUPP.2 s.c.R.
A. Subea Rao for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J. This appeal by special leave is directed against
the judgment of the High Court of Andhra Pradesh disposing of a
reference made under sub-s.(l) of s.256 of the Indian Income Tax
Act, 1961 for its opinion on the following question of law.
''Whether on the facts and in the circumstances of the
,,, case the bad debt of Rs.15,100 and the legal expenses
,'of Rs.6,880 were allowable deductions in the
assess~
· ment of the assessee firm for the assessment year
1965-66?"
The assessee is a partnership firm. It took over the business of
an earlier firm.
All the assets and liabilities of the predecessor f i~ passed On to the assessee
firm.. These
included a
debt of Rs.23,577 due from Laxmi Trading Company to the predecessor
firm. The total amount due in the account relating to
Laxmi Trading Company was ·Rs.40,549 comprising an outstanding
amount
of Rs. 29,200 and interest thereon in the sum of
Rs.
11,349 for the period April 31,
1960 to March 31,
1961.
The
amount of interest was taxed in the hands of the assessee for the
assessment year 1963-64. On March 31, 1965 the parties effected a
settlement under which a sum of Rs.25,000 was accepted by the
asses see in fl\11 settlement of the said debt.
The balance of
Rs.15,100 was written off as irrecoverable.
In assessment proceedings for the assessment year 1965-66,
for which· the previous year was the year ending March 31, 1965
the assessee claimed a deduction of the aforesaid sum of Rs.
15,100 written off as a bad debt.
The Income-tax Officer disallowed the claim on the ground that the debt was due originally
to the predecessor finn, that there was no reason to take over
the loan by the assessee firm and further that it was not proved
that the debtor was so financially embarrassed that he was unable
to pay the debt.
On appeal, the Appellate Assistant Commissioner
of Income Tax held that 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.
He
also noted that the assessee had paid income-tax on the interest
of Rs.11,349, in an earlier assessment year, and held that the
assessee's bonafides stood established.
Holding. that there was
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C.I.T.,A.P. v. M/S. T.VEERBllADRA RAO [PATHAK, J.]
23
justification for writing off the bad debt in the measure claimed by the assessee, the Appellate Assistant Commissioner allowed
the appeal.
It may be mentioned that the assessee had also claimed a
deduction of a sum of Rs. 6,880 before the Income-tax Officer on
the ground that the assessee had incurred legal expenses in that
amount in connection with an appeal filed in the Supreme Court
for the purpose of recovering a sum due from the Central Government.
The transaction related to the predecessor firm and the
suit instituted by it had been continued by the assessee on
taking over the assets and liabilities of the predecessor firm.
The Income Tax Officer disallowed this claim also, but in appeal
the Appellate Assistant Commissioner upheld the claim.
The
Income-tax Department appealed
to the Income-tax
Appellate Tribunal against the order of the Appellate Assistant
Commissioner and urged that cl.(i) of sub-s.(2) of· s.36 of the
Income Tax Act, 1961 did not permit such an allowance because it
did not satisfy the requirement. mentioned in cl.(a) and cl.(b) of
that provision, and therefore it was not open to the· assessee to
claim a deduction of Rs.15,100 as a
bad debt nor the legal
expenses
of
Rs.6,880.
The Appellate Tribunal dismissed the
appeal, holding that where a business was succeeded to by an
assessee, it was entitled to write off the bad
debts of the
business taken over. The Appellate Tribunal observed that whenever a business wat; succeeded to as a whole and as a running
enterprise the assets and liabilities so taken over became the
assets and liabilities of the successor and, therefore,
the
assessee was entitled to write off the bad debts. It noted that
the assessee had not only treated the amount a debt ·owed to it
but had allowed the interest accrued thereon to be assessed in
its hand as the interest constituted part of .the debt. At the
instance of the Commissioner of Income-tax, a reference was made
to the High Court of Andhra Pradesh for its opinion on the question set forth earlier. The High Court answered the question in
the affirmative and against the Department.
It is not disputed that the assessee succeeded to the
business of the predecessor firm and took over all its assets and
liabilites, including the debt due from Laxmi Trading Company.
The business carried on by the predecessor firm was now carried
on by the assessee.
The facts also show that the assessee paid
income tax on the interest income accruing on t.he debt for the
assessment year 1963-64.
It is also ·not disputed that the
parties effected a settlement on March 31, 1965 whereby a sum of
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SUPREME COURI REPORTS
[1985] SUPP.2 s.c.R.
Rs. 25,000 was accepted by the assessee in satisfaction of the
debt and that the balance of Rs.15,100 was written off by the
assessee as irrecoverable· The question is whether money owed by
a debtor under a transaction with a predecesor firm can be
written off as irrecoverable in the accounts of its successor,
the assessee, in a subsequent year and could be claimed as a
bad
debt under cl.(vii) of sub-s.(l) of s.36 of the Income Tax Act,
1961.
Cl.(vii) of sub-s.(l) of s.36 of the Income Tax Act, 1961
provides :
"36.(1). The deductions provided for in the following
clauses shall be allowed in respect of the matters
dealt with therein, in computing the income referred
to in section 28 -
......................................................
(vii) subject to the provisions of sub-s. (2).
the
amount of any debt, or part thereof, which is established to have become a bad debt in the previous
year·.
Sub-s.(2) of s.36 declares :- .
"(2)· In making any deduction for a bad debt or part
thereof, the following provisions shall apply :-
(i) no such deduction shall be allowed unless such
debt or part thereof -
(a) has been taken into account in computing
the
incane of the assessee of the previous year or of an
.earlier previous year, or represents money lent J.n the
ordinary course of the business of banking or moneylending which is carried on by the assessee, and
(b) has been written off as irrecoverable in the
accounts of the assessee for that previous year;
(ii) if the amount ultimately recovered on any such
debt or part of debt is less than the difference
between the debt or part and the amount so deducted,
the deficiency shall be deductible in the previous
year in which the ultimate recovery is made;
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C.I.T.,A.P. v. M/S. T.VEERBHADRA RAO [PATHAK, J,]
25
(iii) any such debt or part of debt may be deducted if
it has already been written off as irrecoverable in
the accounts of an ear lier previous year, but the
Income-tax Officer had not allowed it to be deducted
on the ground that it had not been established
to
have become a bad debt in that year;
(iv) where any such debt or part of debt is written
off as irrecoverable in the accounts of the previous
year and the Income-tax Officer is satisfied that
such debt or part became a
bad debt in any earlier
previous year not falling beyond a period of four
previous years immediately preceeding the previous
year in which such debt or part is written off, the
provisions of sub-section (6) of section 155 shall
apply".
S.28, referred to in sub-s.(l) of s.36, provides that income
under the head "Profits and gains of business or profession",
shall be chargeable to income-tax. The
profits and gains of a
business are charged to income-tax. To compute the profits and
gains so chargeable, s .• 36
provides for allowing a number of
deductions. Each of the deductions must relate to the business.
If the same assessee was carrying on a business and he wrote off
a debt relating to the business as irrecoverable, he would without doubt be entitled to a corresponding deduction under cl.(vii)
of sub-s.(l) of s.36 subject to the fulfilment of the conditions
set forth in sub-s.(2) of s.36. If a business, along with its
assets and liabilites, is transferred by one owner to another, we
see no reason why a debt so transferred should not be entitled to
the same treatment 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 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 business, be regarded as belonging to the new
owner. Unless
the language of
the statute plainly and clearly
compels a construction to the contrary, the normal rule of the
law should be given its proper play. It is true that cl.(i) of
sub-s.(2) of s.36 declares that a deduction can be allowed only
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SUPREME COURT REPORTS
[1985) SUPP.2 s.c.R.
if the debt, or part thereof, has been taken into account in
computing the income of the assessee of that previous year or an
earlier previous year and that it has also been written off as
irrecoverable in the accounts of the assessee for that previous
year.
In the present case, the debt was taken into account in
the income of the assessee for the assessment yea 1963-64 when
the interest income accruing thereon was truced in the hands of
the assessee. The interest was truced as income because it represented an accretion accruing during the earlier year on money
owed to the assessee by the debtor. The item constituted income
because it represented interest on a loan. The nature of the
income indicated the transaction from which it emerged. The
transaction was the debt, and that debt was taken into account in
computing the income of the assessee of the relevant previous
year. It is the same assessee·who has subsequently, pursuant to
a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable
in his accounts. It appears therefore that the conditions in both
sub-clauses (a) and (b) of cl.(i) of sub-s.(2) of s.36 are satisfied in the present case, and the High Court as well as the
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Appellate Tribunal and the Appellate Assistant Commissioner are
right in. the view which they took.
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It seems to us that even: if the debt had been taken into
account in computing the income of the predecessor firm only and
had subsequently been written of
as irrecoverable in the
accounts of the assessee, the assessee would Still have been
entitled to a dedution of the amount written off as a bad debt.
It is not imperative that the assessee referred to in sub-cl.(a)
must neeessarily mean the identical assessee referred to in
sub-cl (b). A successor to the pertinent J.nterest of a previous
assessee would
be covered within the terms of sub-cl. (b). The
successor assessee, in effect, steps into the shoes of his
predecesSor.
Accordingly, we hold that the assess~e in the instant case
was entitled to the deduction as a bad debt of the sum of Rs.
15,100 written off by it in its accounts of the previous year as
iri'ecoverable.
We may add that although a number of decisions of various
High Courts were cited before us on behalf of the assessee we
consider' .it unnecessary to refer to them.
C.I.T. ,A.P., v. M/S. T.VEERBHADRA RAO [PATHAK, J.]
27
As regards the sum of Rs.6,880 claimed by the assessee as
legal expenses in connection with an appeal filed in this Court
to recover an amount due from the Central Government, it is
apparent that the transaction related to the predecessor firm and
the suit institued by it was continued by the assessee on taking
over the assets and iiabilities of the predecessor firm. The
Income Tax Officer, the Appellate Assistant Commissioner, the
Appellate Tribunal and the High Court dealt with this claim on
the same basis as the claim made in respect of the bad debt.
We
are satisfied that the view we are taking in respect of the sum
of Rs. 15,100
claimed as a bad debt should also form the basis
for acknowledging the claim to deduction of Rs•6,880.
In the result, the appeal is dismissed with costs.
Appeal dismissed.
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