Bad debt deduction requires an existing debt; a later write-off of earlier expenditure is not enough.

An earlier expenditure does not become a deductible bad debt or trading loss merely because the assessee later credits it as recoverable and writes it off in the books. The High Court noted that the amount was originally expenditure, not an admitted debt owed to the assessee, and a unilateral book entry could not create a subsisting liability. As no enforceable debt existed, the later rejection of the claim did not convert it into a bad debt, and the write-off did not make it a trading loss of the year. The deduction was therefore disallowed.

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Issues: Whether the sum of Rs. 76,306, written off in the relevant accounting year, was allowable as a deduction either as a bad debt or as a trading loss in computing business profits for the assessment year 1962-63.

Analysis: The amount represented expenditure incurred in 1955 and was not shown to be an admitted debt owed by the Life Insurance Corporation. A mere unilateral allocation in the assessee's books could not convert an expenditure into a debt. Since there was no established liability in favour of the assessee, the claim did not become a bad debt on being rejected later. The writing off in 1961 also did not alter the character of the original outlay or make it a trading loss of that year; at best, it remained a claim arising from earlier expenditure, which was not allowable in the year of write-off.

Conclusion: The deduction was not allowable. The reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: An expenditure incurred in an earlier year does not become a deductible bad debt or trading loss merely because the assessee later treats it as recoverable in its books and subsequently writes it off; an admitted and subsisting debt must first exist.

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