Bad debt deduction denied where unrecovered sale proceeds of machinery remained a capital loss, not a trade debt.

A bad debt deduction under section 10(2)(xi) of the Indian Income-tax Act, 1922 is available only for a debt arising in the course of business and having revenue character. An unrecovered amount linked to the sale of machinery, which was a capital asset, could not be treated as a bad trade debt merely because recovery failed or the claim had been reduced to a decree debt. The amount due on sale would have been a capital receipt if realised, so the loss remained capital in nature and was not incidental to the manufacturing business within the meaning of the provision. Deduction was therefore disallowed.

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Issues: Whether the unrecovered amount arising from the sale of machinery and other transactions with the debtor could be deducted as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The deduction for bad debts under section 10(2)(xi) applies only where the debt is due in respect of the business and is of a revenue character. A capital loss cannot be converted into a bad trade debt merely because the amount due has been reduced to a decree debt or because recovery proved unsuccessful. The machinery sold by the assessee was a capital asset, and the amount due on its sale would have been a capital receipt if fully realised. The debt therefore did not arise from a transaction incidental to the assessee's manufacturing business in the sense required by the provision.

Conclusion: The claim for deduction was not admissible under section 10(2)(xi), and the answer was against the assessee.

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