Decided on July 25,1979



M.K.SHAH - (1.) Mr. B. R. Shah the learned advocate appearing for the appellants has made three submissions. I shall take up these submissions in the order in which they were presented to this court.
(2.) The trial court erred in holding that the defendant was not liable to share in the bad debt to the tune of Rs. 40 0 which was written off after dissolution by the plaintiffs. There was a decree obtained against the judgment debtor in favour of the partnership firm in the year 1968 for this amount and the trial court held that as without consent of the defendant the plaintiffs had written off this amount after dissolution the defendant would not be in any way concerned with the same. In Mr. Shahs submission the writing off of a bad debt in the books of account of the firm is inter se arrangement between the partners of the firm and it does not affect the debtors or a third party. The right to recover a debt in respect of which a decree is already passed in the instant case is not lost and there is therefore no substance submits Mr. Shah in the defendants contention that this amount is lost to the firm as it was written off. It is common knowledge that debts which are treated as bad debts are written off in this fashion in order to get permissible income-tax deduction or relief. But if in fact. they are recovered in future they are to be treated as profits and are liable to income-tax. There is considerable force in this submission of Mr. Shah as is evident from a bare reading of the relevant provisions contained in the Income tax Act. Sec. 36(1)(vii) provides thus: "(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 sec. 28 ... ... ... ... ... ... .. ... ... ... ... ... ... .. ... ... ... ... ... ... .. (vii) subject to the provisions of sub-sec. (2) the amount of any debt or part thereof which is established to have become a bad debt in the previous year." Sub-sec. (2) contains provisions which apply in making any deduction for a bad debt or part thereof and inter alia prescribes procedure to be followed for the purpose. Sec 41(4) provides thus: "Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-sec. (1) of sec. 36 then. if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed the excess shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year in which it is recovered whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not." It appears that the lower court lost sight of the legal position with regard to the effect of making entries in the account book writing off bad debts.
(3.) Mr. B.R. Shah has made a statement from the bar that if in furture the amount of the decree or any part thereof is recovered by the plaintiffs or any one or more of them then they will pay over to the defendant his share in the said recovery that is at the rate of 12 paise in a rupee after making allowance for the expenses incurred for making recovery and even otherwise in law the defendant would be entitled to claim and receive his share in such recovery if any made in future.;

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