Bad debt claims require objective proof; reliance on irrelevant factors can raise a referable question of law.

A claim for bad debt must be tested on objective facts, and the assessee must discharge the burden of proof. Where the Tribunal relies on irrelevant considerations, such as the status or position of debtors, instead of examining the actual factual basis and the legal position for the relevant assessment year, a question of law arises for reference under section 256(2) of the Income-tax Act, 1961. On that basis, the reference was allowed and the Tribunal was directed to state the question to the Court.

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Issues: Whether a question of law arose from the Tribunal's order so as to require reference under section 256(2) of the Income-tax Act, 1961 in relation to the allowance of bad debts claimed by the assessee.

Analysis: The entitlement to treat a debt as bad debt is ordinarily a question of fact, but the Tribunal had proceeded on considerations such as the status and position of some debtors rather than on an objective appraisal of the actual facts. The Court noted that the issue had to be examined on the legal position applicable to the relevant assessment year and that the assessee bore the burden of establishing the claim.

Conclusion: A referable question of law arose, and the reference was directed to be made in favour of the Revenue.

Final Conclusion: The application for reference was allowed and the Tribunal was directed to state the question to the Court.

Ratio Decidendi: A claim for bad debt must be determined on objective facts and the assessee must discharge the burden of proof; if the Tribunal's conclusion rests on irrelevant considerations, a question of law arises for reference under section 256(2) of the Income-tax Act, 1961.

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