Bad debt deduction: a genuine revised settlement extinguishing part of a debt can make the balance irrecoverable and deductible.

A genuine subsequent agreement can extinguish part of an earlier recoverable debt and render the foregone balance irrecoverable for bad debt purposes. The assessee had advanced money in its money-lending business, the debt being secured by usufructuary mortgage, and later entered into a bona fide reworked settlement after the Madras Agriculturists Debt Relief Act, 1938 came into force. Under that revised bargain, the assessee accepted a reduced amount in full discharge of the mortgage debt, so the balance ceased to be recoverable independently of any inquiry into the debtor's solvency. The statutory conditions for deduction as a bad debt were therefore satisfied, and the deduction was held allowable.

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Issues: Whether the assessee was entitled to deduction of the amount written off as a bad debt under section 10(2)(xi) of the Income-tax Act, 1922.

Analysis: The debt had originally been advanced in the course of the assessee's money-lending business and was secured by a usufructuary mortgage. By a subsequent bona fide agreement entered into after section 9A of the Madras Agriculturists Debt Relief Act, 1938 came into force, the parties reworked the liability and the assessee accepted a reduced amount in full discharge of the mortgage debt. The fresh agreement superseded the earlier contract, so the balance became irrecoverable independently of any enquiry into the debtor's solvency. Since the assessee had in fact lost the right to recover the written-off amount under the revised bargain, the statutory requirements for bad debt deduction were satisfied.

Conclusion: The deduction was allowable and the question was answered in the affirmative in favour of the assessee.

Ratio Decidendi: Where a genuine subsequent agreement lawfully extinguishes part of an earlier recoverable debt, the amount so foregone becomes irrecoverable and qualifies for deduction as a bad debt if the statutory conditions are otherwise met.

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