Bad debt and embezzlement loss deductions require statutory compliance and an actual, crystallised loss in the relevant year.

A bad debt deduction was unavailable because the amount was not written off in the books and there was no proof that the debt had become irrecoverable in the accounting year. The claim was therefore disallowed. Losses from embezzlement or defalcation were also not deductible as business loss for that year, since such a loss becomes allowable only when it has crystallised as an actual and present loss on the facts of the case; no rigid rule fixes it either at the date of misappropriation or only when recovery becomes impossible. On the facts, the loss had not been shown to have crystallised in the relevant year, so the deduction failed.

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Issues: (i) whether the assessee was entitled to claim the bad debt deduction without the amount having been written off and without proof that the debt had become irrecoverable in the relevant year; (ii) whether the amounts lost through embezzlement or defalcation were deductible as business loss in the year of account.

Issue (i): whether the assessee was entitled to claim the bad debt deduction without the amount having been written off and without proof that the debt had become irrecoverable in the relevant year.

Analysis: A bad debt claim under the relevant provision required not only the absence of recovery but also compliance with the statutory conditions governing allowance. The earlier answer to the reference had already proceeded on the footing that the debt had not been written off in the books, and the supplementary material did not establish that the debts, or any part of them, had become irrecoverable in the accounting year.

Conclusion: The claim for bad debt deduction was not allowable and the issue was answered against the assessee.

Issue (ii): whether the amounts lost through embezzlement or defalcation were deductible as business loss in the year of account.

Analysis: The governing principle was that a trading loss from embezzlement is allowable only when the loss is actual and present, and the time of occurrence depends on the facts and circumstances of each case. No absolute rule fixes the loss either at the moment of embezzlement or only when recovery becomes impossible. On the facts, the liquidator proceeded against the wrongdoer and obtained a decree, and the material did not establish that the loss had crystallised in the accounting year. As to the smaller item, the circumstance relied upon was too slender to show a deductible loss in that year.

Conclusion: The embezzlement amounts were not allowable as business loss in the year of account and the issue was answered against the assessee.

Final Conclusion: The reference was disposed of by holding that neither the bad debt claim nor the claimed embezzlement losses were deductible for the relevant year, with costs awarded against the assessee.

Ratio Decidendi: A loss from embezzlement is deductible only when it has become actual and present on a consideration of the facts of the particular case, and not by application of any rigid universal rule tying the loss exclusively to the date of misappropriation or to the later point of irrecoverability.

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