Illegal transaction dues can still qualify as bad debts or business losses when they become irrecoverable in the year of account.

Amounts arising from an unlawful or otherwise unenforceable transaction may still enter commercial computation of business profits for income-tax purposes. If such dues are treated as recoverable and later become irrecoverable in the relevant year of account, they may be deducted as bad debts or commercial business losses. The inability to enforce the underlying liability in court does not, by itself, prevent deduction where the loss is established on the facts. On that basis, the disputed amounts were held allowable in the relevant assessment years in computing business profits.

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Issues: Whether amounts arising from transactions later found to be illegal could nevertheless be allowed as revenue deductions as bad debts or commercial losses in the relevant assessment years.

Analysis: The assessee's business profits, including those from an illegal business, were still liable to be computed under the taxing statute on a commercial basis. The fact that the underlying liability was not enforceable in a court of law did not prevent the dues from being treated as debts for income-tax purposes, nor did it preclude their becoming irrecoverable or bad when the constituent failed to pay. The amounts had been treated as recoverable until the legal position changed, and on the facts found the loss or irrecoverability arose in the years of account. The deductions were therefore admissible under the provisions governing computation of business profits and bad debts.

Conclusion: The assessee was entitled to claim the deductions in the relevant assessment years.

Final Conclusion: The reference was answered in favour of the assessee, and the disputed amounts were held allowable in computing the business profits.

Ratio Decidendi: For income-tax purposes, even dues arising out of an unlawful or unenforceable transaction may be taken into account in commercial computation of business profits, and if they become irrecoverable in the year of account they are deductible as bad debts or business losses.

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