Bad debt deduction for written-off commodity trading dues, with alternative allowance as business loss in ordinary-course dealings

A write-off of unrecovered commodity-trading dues was treated as deductible as bad debt where the amount was debited to the profit and loss account and supported by contract notes, ledger confirmation and delivery reports; pendency of recovery proceedings did not by itself defeat the claim once the debt was written off as irrecoverable. Alternatively, the same unrecovered trading dues were treated as a business loss because they arose from transactions in the ordinary course of commodity business and were not shown to stem from any non-business or scam-related dealing. The taxable income was to be recomputed accordingly.

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Issues: (i) whether the amount written off on account of non-recovery from commodity transactions was allowable as a deduction as bad debt under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961; and (ii) whether, in the alternative, the same amount was deductible as a business loss under section 28 of the Income-tax Act, 1961.

Issue (i): whether the amount written off on account of non-recovery from commodity transactions was allowable as a deduction as bad debt under section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961.

Analysis: The Assessee had written off the amount in the books by debiting the profit and loss account. Contract notes, ledger confirmation and delivery report were on record, and the transactions arose in the ordinary course of the Assessee's business. The mere pendency of recovery proceedings did not defeat the claim, since the statutory conditions were treated as satisfied once the debt was written off as irrecoverable in the accounts.

Conclusion: The claim was allowable as bad debt under section 36(1)(vii) read with section 36(2), in favour of the Assessee.

Issue (ii): whether, in the alternative, the same amount was deductible as a business loss under section 28 of the Income-tax Act, 1961.

Analysis: The loss arose from non-recovery of trading dues in the normal course of commodity business, and the Assessee was not shown to have been involved in any scam or non-business transaction. On the facts, the amount represented a trading loss incidental to the business.

Conclusion: The amount was also allowable as a business loss under section 28, in favour of the Assessee.

Final Conclusion: The disallowance was deleted and the taxable income was to be recomputed by allowing the Assessee's claim, resulting in partial allowance of the appeal.

Ratio Decidendi: After write-off in the books, a trading debt arising in the ordinary course of business is allowable under section 36(1)(vii) read with section 36(2), and, alternatively, a non-recovered business trading amount may be deducted as a business loss under section 28.

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