Trading loss deduction turns on when recovery becomes commercially hopeless, not when the payment was originally made.

A trading loss is deductible in the year in which recovery is no longer commercially reasonable, not merely when the original payment is made. The assessee's amount paid on behalf of a joint debtor became allowable only when efforts to recover it from the other parties had failed, and a book entry treating it as recoverable did not change its character. The principal sum was therefore deductible as a trading loss, while the related interest and litigation expenses were not allowed.

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Issues: Whether the sum of Rs. 50,369-13-6, written off in the relevant assessment year after efforts to recover it had failed, was deductible as a trading loss under section 10(1) of the Indian Income-tax Act.

Analysis: The amount paid to the bank on behalf of the joint debtor was accepted to be a trading loss when it was paid, but the assessee claimed it only in the later assessment year when recovery from the other parties was found to be impossible. The decisive question was whether the loss had ceased to be recoverable in the commercial sense in that year. The governing principle applied was that a trading loss arises when there is no reasonable prospect of recovery, and not merely when the original payment is made. The books-entry treating the amount as recoverable from the other firm did not change the character of the loss. The legal expenses and interest were separately considered, and only the principal amount was held to qualify as a trading loss.

Conclusion: The sum of Rs. 50,369-13-6 was held to be a proper deduction as a trading loss under section 10(1) of the Indian Income-tax Act. The claim failed for the remaining interest and litigation expenses.

Final Conclusion: The reference was answered in part in the assessee's favour, with deduction allowed only for the principal trading loss and not for the ancillary amounts.

Ratio Decidendi: A trading loss is deductible in the year in which the assessee finally loses a reasonable prospect of recovering the amount, and a mere book entry or earlier payment does not alter that character.

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