A reconstituted firm under Section 187(2) of the Income-tax Act, 1961, is deemed to continue as a legal entity for the purpose of income-tax assessment, even if there is a change in the constitution of the firm.

Harbans Lal, J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act "), and the following question of law has been referred to this court by the Income-tax Appellate Tribunal, Amritsar Bench (hereinafter called "the Tribunal"), vide its order dated June 30, 1973 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the sum of Rs. 10,799 as a bad debt for the assessment year 1967-68 ?"

2. For the purpose of appreciation of the point of law in controversy, the relevant facts of the case may be summarised.

3. A firm under the name and style of Messrs. Jagat Ram Om Parkash, Bazar Ghantaghar, Amritsar, was brought into existence by a partnership deed dated February 7, 1963. Its business was the purchase and sale of shawls, yarn and woollen goods. The partnership comprised of the following six partners :

1. Shri Sham Dass Virmani;

2. Shri Shiv Parkash Khanna ;

3. Shri Om Parkash Khanna;

4. Shri Satish Parkash Khanna ;

5. Shri Narpinder Parkash Khanna; and

6. Shri Kulbhushan Khanna.

4. This firm was dissolved by the deed of dissolution dated May 11, 1965. This was necessitated because two of the partners, Shri Sham Dass Virmani and Shri Shiv Parkash Khanna, retired as partners voluntarily. A new partnership was constituted and the remaining four partners executed a new deed of partnership dated May 12, 1965, effective from April 2, 1965, under the same name and style of Messrs. Jagat Ram Om Parkash. According to the preamble of the dissolution deed, the continuing, partners took over the running business of Messrs. Jagat Ram Om Parkash as well as all the assets, liabilities, goodwill, firms name, quota rights, occupancy rights of the business premises, sales tax licences, telephone installations, stock-in-trade and other such rights and privileges, etc., which had been acquired by the said firm in the course of business. The dissolved firm had a number of bad debts outstanding at the time of dissolution. One of such debts was amounting to Rs. 39,662 against Kunwarji Vallabhadass, Bombay. It was specifically recorded in the dissolution deed that the recovery of this debt was doubtful, a suit was pending in the civil court at Amritsar and that Sham Dass Virmani, one of the partners had paid his proportionate share of this debt. It was one of the stipulations that in case this debt was recovered, after deducting litigation expenses, the balance amount shall be paid to the retiring partner, Shri Sham Dass Virmani, in proportion to his share and if nothing was recovered, he will be required to pay his share of the litigation expenses. Regarding other debts also, the stipulation was in similar terms. The other retiring partner, Shri Shiv Kumar Khanna, was, however, not to be liable to and responsible for any bad debt whether recovered or otherwise. The total amount of the bad debt was Rs. 46,372. A separate atta account was opened in the books of the reconstituted firm and the total amount of the bad debts was shown in the account for the assessment year 1965-66. The same state of affairs continued in the account for the assessment year 1966-67.

5. The reconstituted firm carried on the same business which was carried by the earlier firm. Cl. 12 of the new partnership deed was to the following effect :

"That the firm hereby formed has taken over and succeeded to all the assets, liabilities, quota rights, sales tax licences, trade marks, stock-in-trade, occupancy rights of the business premises, telephone installations, goodwill, firms name and such other rights and privileges, etc., acquired by the said predecessor firm which came into existence by virtue of partnership deed dated February 7, 1963."

6. This firm was again reconstituted by another deed of partnership dated July 6, 1966, which was to operate from March 23, 1966, whereby Shri Shiv Parkash Khanna, who had retired from the first firm was again taken as a partner. With his