Bad debt deduction denied where the liability was an accommodation transaction unconnected with the assessee's business profits.

A bad debt deduction was denied because the amount written off was not a trading debt arising in the assessee's own business. The court held that, under the mercantile system, a debt is deductible only if it would have entered the computation of business profits if recovered and is referable to the business carried on by the assessee. Here, the liability arose from a joint borrowing and an accommodation transaction connected with another person's obligation, not from the timber business. As the loss was unconnected with business profits, it could not be treated as a revenue loss or allowable bad debt. The question was answered in the negative, against the assessee.

---

---

Issues: Whether the sum of Rs. 55,030 written off by the assessee was allowable as a bad debt under Section 10(2)(xi) of the Indian Income-tax Act.

Analysis: A debt is deductible as a bad debt only if it is a trading debt arising in the course of the assessee's business and, under the mercantile system, would have entered into the computation of business profits if recovered. The amount in question arose from the assessee having jointly borrowed money and later being called upon to discharge another person's liability; it was not money laid out in carrying on the timber business, nor was it a debt due in respect of that business. A loss of that kind is not connected with the business profits being computed and cannot be treated as a revenue loss merely because the assessee suffered it in the course of an accommodation transaction. The earlier authority relied on was confined to the special facts of money-lending business and did not govern the present case.

Conclusion: The amount of Rs. 55,030 was not an allowable bad debt and the question was answered in the negative, against the assessee and in favour of the Revenue.

Ratio Decidendi: For a loss to be deductible as a bad debt, it must be a trading debt referable to the assessee's own business and one that would have formed part of business profits if recovered; an accommodation liability unconnected with the business is not deductible.

---