Cash-credit additions and bad debt allowance turn on supporting accounts and irrecoverability in the relevant year.

A cash-credit entry cannot be assessed as unexplained income unless there is material supporting the inference that it represents the assessee's income; where the adverse finding rests on a misreading of accounts and the withdrawals and later introductions substantially tally, the addition fails. A debt is allowable as a bad debt when it becomes irrecoverable in the relevant accounting year; time-barred status is relevant but not decisive, and earlier recovery efforts do not prevent allowance if the final execution fails during that year. On these principles, both disputed additions were not sustainable against the assessee.

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Issues: (i) whether the sum of Rs. 86,000 credited in the accounts could be treated as unexplained income and assessed to tax; and (ii) whether the sum of Rs. 14,518 was allowable as a bad debt under Section 10(2)(xi) of the Income-tax Act, 1922.

Issue (i): whether the sum of Rs. 86,000 credited in the accounts could be treated as unexplained income and assessed to tax.

Analysis: The assessment could stand only if there was material to support the inference that the credit represented income of the assessee. The account of withdrawals and introductions from the home chest was a material piece of evidence. The Appellate Tribunal disbelieved the explanation on the basis of an arithmetical error and a wrong comparison of figures. Once that error was corrected, the withdrawals and later introductions substantially tallied, and the explanation for the source of the credit remained supported by the accounts. A finding based on misreading of material evidence and on no supporting material could not be sustained as a pure finding of fact.

Conclusion: The sum of Rs. 86,000 could not be treated as unexplained income and the issue was decided in favour of the assessee.

Issue (ii): whether the sum of Rs. 14,518 was allowable as a bad debt under Section 10(2)(xi) of the Income-tax Act, 1922.

Analysis: For a bad debt allowance, the relevant inquiry was whether the debt had in fact become irrecoverable in the accounting year. A debt being time-barred was relevant but not decisive, and a statute-barred debt was not necessarily bad. The repeated execution proceedings, including the last attempt ending during the accounting year, showed that the assessee still had a reasonable expectation of recovery until the last execution failed. On the facts, the Tribunal applied an erroneous test by focusing on whether the debt was good and recoverable at the commencement of the accounting year rather than whether it became bad during the year.

Conclusion: The amount of Rs. 14,518 was a bad debt allowable under Section 10(2)(xi) of the Income-tax Act, 1922 and the issue was decided in favour of the assessee.

Final Conclusion: Both reference questions were answered for the assessee, and the additions disallowed by the tax authorities were not sustainable.

Ratio Decidendi: A cash-credit addition cannot stand where the explanation is supported by material accounts and the adverse finding rests on misreading of evidence, and a debt is allowable as bad debt when it becomes irrecoverable in the relevant year, even though the debt may have been time-barred or recovery had earlier been pursued.

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