Bad debt and accrued profit claims fail where a partnership advance is not a trading debt and credited income is later given up.

A partnership-related advance was held not deductible as a bad debt or business loss because it was not a trading debt arising from the assessee's money-lending business, was not shown to be irrecoverable in the relevant year, and was only settled voluntarily for a lesser amount. The accrued share of profits credited before the partner's death was also held taxable, as income accrues when it is ascertained and credited, and later relinquishment does not change its tax character or create a deductible loss. The reference was answered against the assessee on both issues.

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Issues: (i) Whether the sum of Rs. 38,394 was allowable as a bad debt or business loss under the Indian Income-tax Act, 1922; and (ii) whether the sum of Rs. 6,589 representing the accrued share of profits up to the partner's death was notional income not liable to tax or otherwise deductible.

Issue (i): Whether the sum of Rs. 38,394 was allowable as a bad debt or business loss under the Indian Income-tax Act, 1922.

Analysis: A bad debt under section 10(2)(xi) must be a trading debt arising in the course of the assessee's business, and it must be shown to have become bad and irrecoverable in the relevant year and to have been written off. The assessee was not carrying on money-lending business, and the advance to the firm arose from its position as a partner, not from a business of lending money. The amount was not shown to be irrecoverable in the relevant year, and the settlement was voluntarily accepted for a lesser sum. The loss was not incidental to the assessee's business operations and did not bear the character of a trading loss.

Conclusion: The amount of Rs. 38,394 was not allowable as a bad debt or business loss and the finding was against the assessee.

Issue (ii): Whether the sum of Rs. 6,589 representing the accrued share of profits up to the partner's death was notional income not liable to tax or otherwise deductible.

Analysis: Income is taxable when it accrues or is received, and once the share of profits had been ascertained and credited, it became income of the assessee. The subsequent voluntary settlement did not alter the character of the accrued income. The doctrine of real income did not apply because the income had already resulted and was not merely hypothetical. The subsequent relinquishment created no deductible loss in the accounting period in which the profits had accrued.

Conclusion: The sum of Rs. 6,589 was taxable accrued income and the claim for deduction was rejected, against the assessee.

Final Conclusion: The reference was answered in the negative on both questions, leaving the tax authorities' view intact and denying the assessee both deductions.

Ratio Decidendi: An amount can be deducted as a bad debt only if it is a business debt arising from the assessee's trading operations and is shown to have become irrecoverable in the relevant year; a voluntarily settled partnership balance and an accrued share of profits already credited do not lose their tax character merely because they are later given up.

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