Bad debt deduction and non-resident fee withholding require statutory chargeability checks before disallowance can stand.

A bad debt is deductible once it is written off as irrecoverable in the accounts, and after 1 April 1989 it is unnecessary to prove actual irrecoverability; the claim was also supported by section 36(2) because the relevant amounts had earlier been taken into account in computing income. In broker-client transactions, brokerage credited to the profit and loss account satisfied the statutory condition, so the bad-debt disallowance was deleted. A disallowance under section 40(a)(i) for professional fees paid to a non-resident could not be sustained without first examining whether the remittance was chargeable to tax in India under section 195, including the nature of services, treaty position and permanent establishment; that issue was remitted for fresh adjudication. The claim relating to adjustment of earlier years' deemed speculation loss against share-trading income was also sent back for reconsideration.

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Issues: (i) Whether the assessee was entitled to deduction for bad debts written off under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961. (ii) Whether disallowance under section 40(a)(i) in respect of professional fees paid to a non-resident was sustainable without examining whether the remittance was chargeable to tax in India under section 195. (iii) Whether the assessee's claim for adjustment of earlier years' deemed speculation loss against current share-trading income, arising from the treatment of share transactions as business income, required fresh examination.

Issue (i): Whether the assessee was entitled to deduction for bad debts written off under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961.

Analysis: The provision allows deduction once a debt or part thereof is written off as irrecoverable in the accounts. After 1 April 1989, it is not necessary to prove that the debt has actually become irrecoverable. The amounts relating to depository receipts and WDM charges were shown to have been offered as income in earlier years, thereby satisfying section 36(2). For the remaining amounts, the broker-debt principle recognised in the Special Bench decision and approved by the jurisdictional High Court was applied, holding that brokerage credited to profit and loss account and taken into account in computing income satisfies the statutory condition.

Conclusion: The claim for bad debts was allowable and the disallowance was deleted in favour of the assessee.

Issue (ii): Whether disallowance under section 40(a)(i) in respect of professional fees paid to a non-resident was sustainable without examining whether the remittance was chargeable to tax in India under section 195.

Analysis: The appellate authority had upheld the disallowance only by relying on the view that tax should have been deducted at source, without determining whether the amount paid was chargeable to tax in India or examining the nature of services, the treaty position, and the existence or absence of a permanent establishment. Since the governing question under section 195 is whether the remittance contains income chargeable under the Act, the matter required factual and legal examination on merits.

Conclusion: The disallowance issue was set aside and restored for fresh adjudication, with the result in favour of the assessee for statistical purposes.

Issue (iii): Whether the assessee's claim for adjustment of earlier years' deemed speculation loss against current share-trading income, arising from the treatment of share transactions as business income, required fresh examination.

Analysis: The dispute turned on the character of share transactions and the consequential effect of Explanation 2 to section 73 on earlier years' losses. As the record of the earlier years' treatment was not available in full, and the claim involved an interlinked legal and factual examination, the additional ground was admitted and the matter was remitted for reconsideration by the appellate authority after giving both sides an opportunity.

Conclusion: The issue was restored for fresh adjudication and was allowed for statistical purposes.

Final Conclusion: The assessee obtained relief on the bad-debt claim, while the remaining issues were sent back for reconsideration, leaving the appeal partly allowed overall.

Ratio Decidendi: A bad debt is deductible once written off as irrecoverable, and in broker-client transactions the statutory condition under section 36(2) is satisfied where the relevant receivable has been taken into account in computing income; disallowance under section 40(a)(i) cannot stand without first determining chargeability to tax under section 195.

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