- (1.) This appeal by special leave is directed against the judgment of the High Court of Andhra Pradesh disposing of a reference made under sub-sec. (1) of S. 256 of the 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 assessment 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 firm 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 assessee in full settlement of the said debt. The balance of Rs. 15,100/- was written off as irrecoverable.
(2.) 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 firm, 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 bona fides stood established. Holding that there was justifications for writing off the bad debt in the measure claimed by the assessee, the Appellate Assistant Commissioner allowed the appeal.
(3.) 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.;