Bad debt deduction for unlawful business debts allowed where irrecoverability is proved, despite unenforceability in law.

Amounts arising from speculative business transactions prohibited by law were treated as trading debts entered on mercantile account, and their mere unenforceability in court did not by itself destroy their character as deductible bad debts. The governing test was whether the debts were in fact irrecoverable. On the facts, the write-off, the tax officer's enquiry to debtors, the debtors' non-response, and the surrounding circumstances supported the inference that the amounts had become unrealised and unrecoverable, so the deduction as bad debts was allowed under the relevant provisions of the Indian Income-tax Act, 1922.

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Issues: Whether amounts written off as debts arising from speculative business transactions prohibited by law were allowable as deductions as bad and doubtful debts under section 10(1) or section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The debts had arisen in the course of business and had been brought into account on mercantile principles on accrual. The mere fact that the transactions were unlawful and the resulting claims were unenforceable in a court of law did not, by itself, negative the existence of business debts or their character as deductible trading debts. The governing requirement was not legal enforceability alone, but proof that the debts were in fact irrecoverable. The assessee had written off the amounts, the Income-tax Officer had sought confirmation from the debtors, and the debtors' non-response, along with the surrounding circumstances, supported the inference that the amounts had become unrealised and unrecoverable.

Conclusion: The amounts were allowable as bad debts, and the question was answered in the affirmative in favour of the assessee.

Ratio Decidendi: A business debt incurred on mercantile account may be allowed as a bad debt when it is shown to have become irrecoverable, and its mere unenforceability in law does not prevent deduction if irrecoverability is otherwise established.

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