Bad debt deduction need not depend on book write-off, but embezzlement loss is deductible only when actual and certain.
Bad debt allowance under section 10(2)(xi) did not require prior write-off in the books of account; the decisive test was whether the debt had in fact become irrecoverable in the relevant year, with any book entry serving only as evidentiary support and as a ceiling where a write-off existed. By contrast, a trading loss caused by embezzlement arose only when the loss became actual and certain, not merely when the misappropriation occurred. Because the embezzlements were undiscovered in the year and recovery still appeared reasonably possible, the loss was not treated as deductible in that year.
Issues: (i) Whether bad debts could be allowed under section 10(2)(xi) without being written off in the books of account. (ii) Whether the loss caused by the secretary's embezzlement was deductible as a business loss in the year of account.
Issue (i): Whether bad debts could be allowed under section 10(2)(xi) without being written off in the books of account.
Analysis: The allowance provision empowered the Income-tax Officer to estimate debts as irrecoverable, subject to a ceiling that the allowance could not exceed the amount actually written off if such write-off had been made. The statutory language did not make prior write-off a condition precedent to allowability. A debt could be treated as a bad debt if it had in fact become irrecoverable in the year of account, and the absence of an entry in the books did not by itself bar the claim, though it remained relevant to the assessment of facts.
Conclusion: The issue was answered in favour of the assessee. The bank was entitled to claim the bad debts as a deduction under section 10(2)(xi) for the year of account.
Issue (ii): Whether the loss caused by the secretary's embezzlement was deductible as a business loss in the year of account.
Analysis: A trading loss from embezzlement is not necessarily sustained when the misappropriation occurs. The loss becomes real only when it is actual and certain, and until there is no reasonable prospect of recovery it cannot be said in a commercial sense that the loss has occurred. On the facts, the embezzlements were not known during the relevant accounting year and there remained a reasonable possibility of recovery; the loss therefore accrued later, not in the year ending June 30, 1947.
Conclusion: The issue was answered against the assessee. The amount claimed as loss from embezzlement was not deductible in the relevant year.
Final Conclusion: The decision recognised bad debt deduction without insisting on prior book write-off, but declined to treat the embezzlement amount as a deductible trading loss in the accounting year in question.
Ratio Decidendi: Under the bad debt provision, write-off in the books is not a condition precedent to allowance, but merely limits the amount deductible where a write-off exists; a trading loss from embezzlement arises only when it becomes actual and certain, and not while a reasonable prospect of recovery remains.