Bad debt deduction depends on reasonable write-off judgment; Bombay HC upheld denial where recovery still appeared possible.

A debt is allowable as a bad debt only if, on the date of write-off, a reasonable and prudent businessman could honestly treat it as irrecoverable on the facts then known; the proviso on later recovery does not prevent consideration of surrounding circumstances, including subsequent conduct, in testing that judgment. Applying that standard, the Bombay HC held that the write-off of a controlled group company's debt was not justified because the debtor continued to carry on business and later dealings showed recovery was not hopeless. The record also supported the finding that the amount had not become bad or irrecoverable during the relevant previous year, so both questions were decided in favour of the Revenue.

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Issues: (i) Whether the sum of Rs. 2,00,000 written off by the assessee was allowable as a bad debt or deductible business loss under section 10(2)(xi) or section 10(1) of the Income-tax Act, 1922. (ii) Whether there was material to support the finding that the amount had not become bad or irrecoverable during the relevant previous year.

Issue (i): Whether the sum of Rs. 2,00,000 written off by the assessee was allowable as a bad debt or deductible business loss under section 10(2)(xi) or section 10(1) of the Income-tax Act, 1922.

Analysis: The allowance for bad debt depends on whether, on the date of write-off, a reasonable and prudent businessman could honestly treat the debt as irrecoverable on the facts and circumstances then known. The proviso to section 10(2)(xi) deals only with tax treatment of any later recovery and does not exclude consideration of surrounding circumstances, including later conduct and subsequent business events, when testing whether the assessee's conclusion was reasonable. The debtor-company remained a controlled concern of the assessee's group, continued to carry on business, and fresh advances and later dealings showed that its position was not so hopeless as to justify the write-off as a bad debt at that time.

Conclusion: The write-off was not allowable; the finding was against the assessee and in favour of the Revenue.

Issue (ii): Whether there was material to support the finding that the amount had not become bad or irrecoverable during the relevant previous year.

Analysis: The record showed continuing business activity, later financing arrangements, and circumstances indicating that the debtor-company was not commercially beyond recovery on the date of write-off. The authorities were entitled to rely on the entire factual matrix in assessing whether the debt had become bad, and their conclusion was supported by material on record. The assessee's reliance on commercial insolvency did not displace the governing standard of a reasonable businessman's judgment.

Conclusion: There was sufficient material to support the finding that the amount had not become bad or irrecoverable during the previous year, and the finding was against the assessee.

Final Conclusion: The reference was answered wholly against the assessee, with both questions decided in favour of the Revenue.

Ratio Decidendi: A debt is allowable as bad only if, on the date of write-off, the assessee could honestly and reasonably regard it as irrecoverable on the totality of circumstances; later conduct and subsequent events may be considered in judging that reasonableness, and the statutory proviso on later recovery does not exclude such consideration.

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