Bad debt deduction turns on irrecoverability, not mere limitation bar, where no earlier write-off is established.

A debt is deductible as a bad debt in the year in which irrecoverability is shown to have arisen, and mere expiry of limitation does not by itself defeat the claim. The surrounding circumstances must be considered, and the presumption that a time-barred debt is bad remains rebuttable. On the material discussed, there was no contrary finding that the debt had become bad in an earlier year, and the prior tax treatment of interest on the debt supported the view that it remained alive until the relevant year. The assessee was therefore entitled to deduct the debt as bad debt in that assessment year.

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Issues: Whether a debt can be treated as a bad debt for the assessment year in which it becomes barred by limitation, and whether the assessee was entitled to deduct the amount as a bad debt in that year.

Analysis: The debt was treated by the revenue as prima facie bad when barred by limitation, but that presumption was rebuttable by the surrounding circumstances. The later inquiry undertaken by the Commissioner did not yield a proper finding that the debt had become bad in an earlier year; on the material before the Court, the only clear basis available was that the debt became barred in the relevant year after the last acknowledgement. The prior treatment of the interest on the debt as taxable by the department also supported the view that the debt was still regarded as alive until then. In the absence of any contrary finding showing earlier irrecoverability, the assessee's claim could not be disallowed.

Conclusion: The assessee was entitled to deduct the amount of Rs. 30,580 as a bad debt in the assessment year 1985-86 Sambat.

Ratio Decidendi: A debt is deductible as a bad debt in the year in which it is shown to have become irrecoverable, and mere prior bar of limitation does not by itself defeat the claim where no contrary finding of earlier irrecoverability is established.

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