Business bad debt deduction allowed where financing advances were made in the course of business and linked to taxable profits.

A debt is deductible as a bad debt only if it arises in the ordinary course of business, is incidental to that business, and is of revenue character, so that recovery would have augmented taxable profits. Advances made in the course of the assessee's financing business satisfied that test, and the related interest had already been treated as business income in earlier years. The irrecoverable amount was therefore allowable as a business bad debt under section 10(2)(xi) of the Income-tax Act, 1922, and the issue was decided against the revenue.

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Issues: Whether the sum written off as irrecoverable was allowable as a bad debt under section 10(2)(xi) of the Income-tax Act, 1922.

Analysis: A debt is deductible as a bad debt only if it arises in the course of the assessee's business, is incidental to that business, and is of a revenue character, so that if realised it would have gone to swell the profits. The claim here related to advances made in the ordinary course of the assessee's financing activity, and the interest on those advances had previously been treated by the revenue itself as business income. The Tribunal had also found that the advances were made in the course of business and that the related interest had swollen the assessee's profits in earlier years.

Conclusion: The debt was an allowable deduction under section 10(2)(xi), and the answer was against the revenue.

Final Conclusion: The assessee was entitled to deduct the irrecoverable amount as a business bad debt, since the advance was made in the course of business and had a direct bearing on taxable business profits.

Ratio Decidendi: For deduction under section 10(2)(xi), a bad debt must be a business or trading debt of revenue character which, if recovered, would have formed part of the assessee's taxable profits.

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