Universal Radiators Ltd. vs Commissioner of Income Tax

Ratnam, J.—A partnership, under the name and style of M/s. Universal Radiators, was carrying on business in the manufacture and sale of

radiators and in the course of such business, supplied radiators to the Gun Carriage Factory at Jabalpur. Owing to the detection of defects in the

goods supplied, the Gun Carriage Factory authorities cut a portion of the amounts specified in the bills and the partnership was not apprised of the

cuts. The books of the partnership showed that a sum of Rs. 27,393.75 was due from the Gun Carriage factory as on April 1, 1969. the assessee-

company took over the business, assets and liabilities of the partnership and this included the sum of Rs. 27,393.75 due from the Gun Carriage

Factory. Out of this sum of Rs. 27,393.75, the assessee realised a sum of Rs. 6,025.50 on May 24, 1970. Thereafter, in spite of repeated

requests and reminders, the assessee was unable to realise the balance of Rs. 21,368 and reminders, the assessee was unable to realise the

balance of Rs. 21,368 as the Gun Carriage Factory maintained that this amount represented cuts in the bills for the defective goods supplied. The

assessee wrote off this amount of Rs. 21,368 as bad and irrecoverable and made a claim for allowance. In the original assessment made, this claim

of the assessee was accepted and allowed, but, subsequently, the ITO reopened the assessment and negatived the claim of the assessee on the

ground that the debt had not been taken into account while computing the income of the assessee for an earlier previous year and the non-

realisation of the debt by the assessee after the take over of the assets and liabilities of the partnership has to be treated only as a capital loss and

not a trade debt in the hands of the assessee.

On appeal by the assessee, the AAC took the view that the reopening of the assessment and the reassessment were quite in order having been

made as a consequence of information in the possession of the ITO and not as a result of a mere change of opinion and that the claim of the

assessee for bad debt cannot be allowed, as it had not been taken into account while computing the income of the assessee (for an earlier previous

year). The appeal of the assessee was, therefore, dismissed.

On further appeal by the assessee to the Tribunal contending that the disallowance of the claim for bad debt was on the basis of a mere change

of opinion and that as the partnership business was taken over by the assessee as a going concern with all its assets and liabilities and as the

assessee-company as the successor-company had written off the debt as bad and irrecoverable and, therefore, entitled to claim relief for the bad

debt so written off, the Tribunal held that the ITO, as a consequence of information in his possession, had reason to believe that the claim for bad

debt was wrongly allowed in the original assessment and, therefore, the reopening of the assessment by the ITO was quite in order and that since

the bad debt did not consist of a loan advanced in the ordinary course of banking or money-lending business of the assessee and it had not been

taken into account in computing the income of the assessee for the accounting year relevant to the assessment year under reference or of an earlier

accounting year, the disallowance of the claim for bad debt was quite in order. On these conclusions, the appeal of the assessee was dismissed.

At the instance of the assessee, the Tribunal has referred the following two questions of law under s. 256(1) of the I.T. Act, 1961 (hereinafter

referred to as the Act) :

(1) Whether the Tribunal was right in law in holding that the Income Tax Officer had jurisdiction to reopen the assessment ?

(2) If the answer to the first question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in

holding that the assessee was not entitled to deduct the sum of Rs. 21,368 as bad debt during the previous year relevant to the assessment year

1971-72 ?

Regarding the first question relating to the jurisdiction of the ITO to reopen the assessment, it is seen from paragraph 7 of the order of the

Tribunal that the question was not argued before it. Nevertheless, the Tribunal agreed with the AAC that the reopening of the assessment was as a

consequence of information in the possession of the ITO, which led him to entertain the belief that the deduction has been wrongly allowed in the

original assessment. Indeed, a perusal of the order of the AAC shows that originally while allowing the deduction, the ITO had not applied his mind

at all to the question whether the bad debt under consideration was eligible at all for deduction. Inasmuch as the finding arrived at by the AAC was

not seriously challenged by then assessee before the Tribunal, we are of the view that the Tribunal was quite justified in holding that the ITO had

jurisdiction to reopen the assessment in the circumstances of this case. We, accordingly, answer question No. 1 in the affirmative and against the

assessee.

The learned counsel for the assessee next contended that even assuming that question No. 1 is answered against the assessee, yet the view

taken by the authorities below for the disallowance of the claim for bad debt written off made by the assessee is erroneous in law, especially when

the tribunal had rested its conclusion mainly on the ground that the assessee who claimed the benefit of the allowance for bad debt was not the

same as the assessee who had incurred the debt. Strong reliance, in this connection, was placed by the learned counsel for the assessee on the

decisions in Commissioner of Income Tax Vs. T. Veerabhadra Rao, K. Koteswara Rao and Co., , Additional Commissioner of Income Tax Vs.

S. Rm. Pl. Subramania Chettiar, , T.N. Shah (P.) Ltd. Vs. Additional Commissioner of Income Tax, , E.A.V. Krishnamurthy and Son Vs.

Commissioner of Income Tax, and P.C. Dharmalinga Mudaliar Vs. Commissioner of Income Tax, .

On the other hand, the learned counsel for the Revenue maintained that if the allowance for the bad debt is to be made available in the hands of

an assessee different from the one who had incurred it, it would be difficult to work out the provisions of s. 41(4) of the Act especially when it is

found that a bad debt had been allowed in an earlier assessment in the hands of the assessee and it had been later recovered by a different or

successor-assessee. Reliance, in this connection, was placed by the learned counsel for the Revenue on the decision in Commissioner of Income

Tax Vs. P.K. Kaimal, .

There was no dispute before us that the assessee carried on the same business and was assessed to tax on the income referable to the

realisation made by the assessee out of the debt of Rs. 27,393.75 taken over by it from the erstwhile firm. The Tribunal had mainly proceeded on

the ground that owing to the take-over of the business assets and liabilities of the erstwhile partnership, M/s. Universal Radiators by the assessee-

company, there was a change in the assessee and, therefore, the successor cannot claim the benefit of the write-off and allowance with reference

to a bad debt incurred by the predecessor but taken over by the successor, namely, the assessee. Whatever might have been the position under

the Indian I.T. Act, 1922, under the relevant provisions of s. 36 of the 1961 Act, this question had arisen in a series of decisions of this court as

well as other courts and the view has been uniformly expressed that the successor can have the benefit of allowance for the write-off of a bad debt

relating to the business of the predecessor which business was taken over by the successor.

We may make a brief reference to those cases. In Commissioner of Income Tax Vs. T. Veerabhadra Rao, K. Koteswara Rao and Co., , the

successor-firm after having taken over the assets and liabilities of the predecessor-firm continued the business and the question arose whether the

successor-firm could write off a debt due to the presedessor-firm and claim deduction under s. 36(2)(i)(b) of the Act. The Andhra Pradesh High

Court held that since the assessee had taken over the assets and liabilities of the predecessor-firm and since the successor-firm continued the

business, and was even the assesseed to tax on the income accurued on the debt which was taken over, the assessee could write off the debt and

claim deduction therefor. To similar effect is the decision of this court in Additional Commissioner of Income Tax Vs. S. Rm. Pl. Subramania

Chettiar, . In that case, one of the questions which came up for consideration was whether a debt due to a firm which was claimed to be a bad

debt and written of but which was disallowed by the ITO could be the subject-matter of a claim for allowance by the successor-in-interest of the

firm. It was held that the successor can claim the benefit of the write-off of the bad debt due to the predecessor and it was not necessary that the

assessee who claims the deduction should have actually written off the debt after the business was taken over. In T.N. Shah (P.) Ltd. Vs.

Additional Commissioner of Income Tax, , the Allahabad High Court in dealing with the question whether the very same assessee alone will be

entitled to the benefit of the write-off of the bad debt and the successor cannot also project such a claim, pointed out that the emphasis is not on

the assessee being the original creditor but the taking into account of the debt in computing the income of the same business. In doing so, the court

observed as follows (p. 357) :

If in a given case, the income of a business is computed by taking into account certain debts, it does not appear reasonable that, in the absence of

any statutory prohibition, allowance on account of the debt having become bad should be denied only because the assessee''s identity has changed,

though the identity of the business continues.

We are of the view that the aforesaid observations squarely apply to the facts of the present case. Again in krishnamurthy and son v. CIT (Tax

Case No. 658 of 1976, dated March 25, 1981), Balasubrahmanyan J., after exhaustively dealing with all aspects relating to the write-off of a bad

debt and the claim for allowance based on such write-off, relied on Commissioner of Income Tax Vs. T. Veerabhadra Rao, K. Koteswara Rao

and Co., and T.N. Shah (P.) Ltd. Vs. Additional Commissioner of Income Tax, to conclude that in cases where there is a continuity of the

business in which the debt had originally been incurred irrespective of whether there has been a change in the person carrying on the business, a

bad debt may have to be allowed in view of the provisions of s. 36(2)(i)(a) of the Act. This also supports the case of the assessee. P.C.

Dharmalinga Mudaliar Vs. Commissioner of Income Tax, , also dealt with the construction of s. 36(2)(i)(a) of the Act and, on the facts, the court

disallowed the claim for allowance of a bad debt not only as a matter of interpretation of s. 36(2)(i)(a) of the Act, but also on the ground that the

debt was not incurred in the course of the business of the assessee. However, while doing so, the principles governing the allowance of a bad debt

written off in accordance with s. 36(2)(i)(a) of the Act as laid down in the decision referred to earlier were reiterated. In view of these decisions

and on the facts and circumstances of this case, we are of the view that the assessee can claim the benefit of the write-off a bad debt incurred by

its predecessors-in-interest.

We may now refer to the decision of this court in Commissioner of Income Tax Vs. P.K. Kaimal, , relied upon by the Revenue. We are of the

view that it did not decide the question of write-off and the allowance of bad debt in the hands of the successor-assessee of a business. In that

case, a bad debt was written off, regarding which an allowance was also granted in a prior year of assessment but the debt was subsequently

recovered. When the allowance was granted, the business was being carried on by a firm. That was subsequently dissolved. A new partnership

came into existence which collected the debt written off earlier as a bad debt and in respect of which an allowance had already been granted. In

this situation, s. 41(4) of the Act was sought to be applied for the purpose of bringing to charge the debt realised by the successor-firm. The

question before this court was whether the officer was entitled to do so. Section 41(4) of the Act was considered by this court as a charging

provision by itself, which can be applied only to the identical assessee in whose earlier assessment, the write-off and allowance had been made and

granted. In so holding, the emphasis laid on behalf of the department that the charge can be laid on whomsoever was in a position to realise the

bad debt, irrespective of whether the allowance for bad debt had been made in the same assessee''s case or a different assessee, was repelled on

the reasoning that it is the identity of the assessee who enjoyed the benefits of the allowance that has to be established for invoking this provision.

This decision dealt with the nature of the liability sought to be fastened on a taxpayer by reason of recovery of debt written off and allowed as a

bad debt in a prior year and cannot, therefore, be pressed into service. Under s. 41(4) of the Act, there is no scope for any enquiry with reference

to the allowance of the bad debt having been properly made in the earlier assessment. The only consideration under s. 41(4) of the Act appears to

be the recovery of a debt in the relevant previous year allowed in an earlier assessment as bad debt in the hands of the assessee. The provisions of

the Act granting allowances and deductions are independent and operate in their own spheres, even though some of the provisions in the same Act

operate by way of counter-balancing provisions. We find substantial support for this reasoning in E.A.V. Krishnamurthy and Son Vs.

Commissioner of Income Tax, , with which we respectfully agree. We hold that the decision in Commissioner of Income Tax Vs. P.K. Kaimal, ,

cannot be pressed into service by the revenue to negative the claim of the assessee. We, therefore, answer the second question in the negative and

in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsel''s fee Rs. 500.