Bad debt deduction allowed when recovery became impossible despite pending arbitration, with later receipts taxable on recovery.

A debt may be allowed as a bad-debt deduction in the accounting year when the surrounding facts show it has become irrecoverable, including closure of the debtor's business, disappearance of the debtor, and unsuccessful recovery efforts. Pending arbitration does not by itself require deferral where the material already establishes that the debt has turned bad. Any later recovery of the amount would be taxable in the year of receipt under section 41(1) of the Income-tax Act, 1961. On these facts, the bad-debt claim was allowable in the year under consideration.

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Issues: Whether the assessee was entitled to deduction of the debt claimed as bad in the relevant accounting year.

Analysis: The debt was treated as irrecoverable on the facts available during the accounting year, including closure of the debtor's business, disappearance of the debtor, and the failure of recovery efforts. The pendency of arbitration did not by itself require postponement of the allowance where the material showed that the debt had already become bad. Any later recovery would be assessable in the year of receipt under Section 41(1) of the Income-tax Act, 1961.

Conclusion: The bad debt claim was allowable in the year under consideration, and the assessee succeeded to that extent.

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