Bad and doubtful debts require an honest contemporaneous belief in irrecoverability; subsequent conduct can rebut that belief, negating deduction.

Whether a debt written off is deductible under section 10(2)(xi) turns on whether the creditor could honestly conclude the debt was irrecoverable; the statutory test requires an honest conviction based on the debtor's pecuniary position and contemporaneous circumstances. The analysis emphasises that a creditor's later conduct and subsequent facts may be admissible to show the creditor lacked that honest belief at the time of writing off. Applying these principles to the facts given-debtor remained active, received further advances, held assets, and later receipts were credited-the write off could not be regarded as an honestly estimated irrecoverable debt and thus was not allowable.

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Issues: Whether the sum of Rs. 55,950-13-10 written off by the assessee on 12th April, 1957 is allowable as a deduction under section 10(2)(xi) of the Income-tax Act, 1961.

Analysis: The Court considered the statutory test under section 10(2)(xi) which permits deduction for bad and doubtful debts estimated to be irrecoverable. The expression "bad and doubtful debt" denotes a debt which cannot reasonably be expected to be realised and requires an honest conviction by the creditor based on the debtor's pecuniary position and surrounding circumstances. The Court reviewed the factual matrix: after the write-off the debtor remained active in business; the assessee made a further advance of Rs. 25,000 within six months of the write-off; the debtor owned immovable property and held shares; and the assessee later credited the debtor's account with proceeds from the film. The Court distinguished the cited authority (Kamakshi Chettiar) on its facts and held that a creditor's agreement to accept less does not inexorably prove irrecoverability. The Court also addressed the principle from Anderton and Halstead that an estimate is to be judged by contemporaneous facts, but held that subsequent conduct relevant to the creditor's state of mind may be admissible to show that the creditor could not have honestly believed the debt irrecoverable.

Conclusion: The Court concluded that on the facts the assessee could not have honestly believed the debt to be irrecoverable on 12th April, 1957 and therefore the sum of Rs. 55,950-13-10 is not allowable as a deduction under section 10(2)(xi) of the Income-tax Act, 1961; the petitions are dismissed (with costs in one of the petitions).

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