Bad debt deduction allowed where recovery was realistically impossible and formal recovery proceedings were not essential.

A taxpayer may claim deduction for bad debts written off where contemporaneous material shows the debt had become genuinely irrecoverable in the year of write-off. Here, no payments had been received for several years, representations to the Central Government had been rejected, and the takeover regime restricted winding-up or appointment of a receiver without governmental consent. Applying the prudent businessman standard, the Court found recovery was not realistically possible and that consent for recovery proceedings would not have been granted. Failure to institute formal proceedings was not decisive because the material established no real prospect of recovery. The assessee was therefore entitled to treat the amounts as bad debts and the disallowance could not stand.

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Issues: Whether the assessee was entitled to deduction for bad debts written off in respect of amounts due from textile mills whose management had been taken over by the Central Government, on the footing that the debts had become irrecoverable during the relevant assessment year.

Analysis: For the assessment year in question, the law then applicable required the assessee to establish that the debt had become bad and irrecoverable in the year of write-off. The material on record showed that no payment had been received from the two mills for several preceding years, representations made to the Central Government had been rejected, and the Ordinance governing the takeover of management prevented winding-up or appointment of a receiver without governmental consent. Applying the prudent businessman standard, the Court held that there was ample material to show that recovery was not realistically possible and that consent for recovery proceedings would not have been granted. The decision relied on the principle that failure to institute proceedings is not decisive if the material shows no real prospect of recovery.

Conclusion: The assessee was entitled to treat the amounts as bad and irrecoverable and claim deduction; the disallowance was unsustainable.

Ratio Decidendi: Where contemporaneous material shows that recovery of a debt is not realistically possible, a taxpayer acting as a prudent businessman may validly write off the amount as a bad debt, even if formal recovery proceedings have not been pursued.

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