Irrecoverability test governs bad and doubtful debt deductions under income tax law; mere doubt about recovery is insufficient.

Section 10(2)(xi) of the Income-tax Act was construed to require irrecoverability of the debt to the extent estimated by the Income-tax Officer before a deduction can be allowed. The distinction between bad debts and doubtful debts was treated as immaterial for the statutory allowance, because both depend on the same test of irrecoverability. A banking assessee therefore cannot claim deduction on a mere subjective doubt about recovery without satisfying the statutory requirement. On that basis, the referred question was treated as having no practical tax significance and the reference was disposed of without an answer.

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Issues: Whether, under section 10(2)(xi) of the Income-tax Act, a banking assessee could claim deduction for bad and doubtful debts without determining what part of the debt was irrecoverable.

Analysis: The allowance in section 10(2)(xi) was construed as governed by the requirement that the Income-tax Officer estimate the relevant sum to be irrecoverable. The wording was held to apply not only to loans made in the ordinary course of banking business but also to bad and doubtful debts due to the assessee. The distinction sought to be drawn between bad debts and doubtful debts was rejected as immaterial for the purpose of the statutory allowance, because the deduction depended on irrecoverability to the extent found by the Income-tax Officer. On that construction, the question referred had no practical bearing for taxation purposes and was treated as an academic one.

Conclusion: The assessee could not claim the deduction merely on a subjective doubt as to recovery without determining irrecoverability to the extent required by the statute, and the reference was not answered.

Final Conclusion: The reference was disposed of without an answer, while affirming that the statutory allowance depended on irrecoverability as estimated by the Income-tax Officer.

Ratio Decidendi: Under section 10(2)(xi) of the Income-tax Act, the requirement of irrecoverability as estimated by the Income-tax Officer governs both bad and doubtful debts and loans, so a deduction cannot rest on a mere assertion of doubt as to recovery.

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