Bad debt deduction allowed where trade dues became irrecoverable; sur-tax remained non-deductible in business profit computation.

Sur-tax was treated as not deductible in computing business profits, so that claim was disallowed. The Tribunal also held that trade dues from four sick mills had become irrecoverable by the relevant accounting date, as their liabilities far exceeded assets and later takeover under sick textile legislation confirmed the financial collapse. On that basis, the amount was regarded as a bad and doubtful debt, and the deduction was allowed for the year in question.

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Issues: (i) Whether sur-tax payable was deductible in computing business profits for the relevant year; and (ii) whether the sum of Rs. 11,33,190 due from four sick mills had become a bad or doubtful debt, or trading loss, allowable as a deduction for the relevant year.

Issue (i): Whether sur-tax payable was deductible in computing business profits for the relevant year.

Analysis: The Tribunal noted its consistent earlier view that sur-tax was not a deductible expenditure and observed that no authority favourable to the assessee had been cited.

Conclusion: The claim for deduction of sur-tax was disallowed, against the assessee.

Issue (ii): Whether the sum of Rs. 11,33,190 due from four sick mills had become a bad or doubtful debt, or trading loss, allowable as a deduction for the relevant year.

Analysis: The debt arose from trade dues of four sick mills whose liabilities far exceeded their assets and which had been taken over by the Central Government under the relevant sick textile legislation. The Tribunal treated the later nationalisation and the financial condition of the mills as supporting the inference that the debt had become irrecoverable even by 31 March 1974, and that a debt may be written off when it has become bad or doubtful. On that basis, the claim was held allowable in the year under appeal.

Conclusion: The claim for Rs. 11,33,190 was allowed as a bad and doubtful debt, in favour of the assessee.

Final Conclusion: The assessee succeeded on the bad-debt claim but failed on the sur-tax deduction claim, so the appeal was partly allowed.

Ratio Decidendi: A debt may be allowed as a deduction when, on a realistic assessment of the debtor's financial condition and later events confirming irrecoverability, it had become bad or doubtful by the relevant accounting date.

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