Compromise remission in a business machinery sale may qualify as a deductible bad debt under the mercantile system.

A compromise remission arising from the sale of machinery used in business was treated as a deductible bad or doubtful debt under the Income-tax Act, 1922 where the transaction formed part of the normal course of the assessee's trade. The note emphasises that the machinery was acquired for business use, the later sale was not a mere investment realisation, and the related interest had earlier been assessed as business income on the mercantile basis. On that footing, the shortfall was characterised as a trading loss arising in the course of business and therefore allowable as a business deduction.

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Issues: Whether the remission of Rs. 33,343 arising from the compromise of the sale transaction of machinery could be treated as a bad and doubtful debt deductible in computing business income under the Income-tax Act, 1922.

Analysis: The machinery had been acquired for business use, the later sale was found to be connected with the normal conduct of the assessee's business, and the transaction was not a mere investment realisation. The contractual interest had been treated and assessed as business income on the mercantile basis in earlier years. The amount subsequently remitted on compromise therefore represented a loss arising in the course of a trading transaction and fell within the allowance for bad and doubtful debts due to the assessee in respect of its business.

Conclusion: The remission was deductible under Section 10(2)(xi) of the Income-tax Act, 1922, and the answer to the reference was in favour of the assessee.

Final Conclusion: The reference was answered by recognising the amount as an allowable business deduction, with costs awarded against the revenue.

Ratio Decidendi: Where a receipt or balance arising from a bona fide trading transaction connected with the ordinary course of business is later compromised and remitted, the resulting shortfall may be treated as a deductible bad or doubtful debt under the mercantile system.

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