U.N. Bhachawat, J.

1. This is a reference tinder Section 256(1) of the I.T. Act, 1961 (for short hereinafter referred to as "the Act") at the instance of the Department.

2. The material facts giving rise to the present reference are these :

The relevant assessment year is 1973-74. The assessee is a registered firm and derives income from the adhatiya business. It had claimed messing expenses at Rs. 16,400 as an allowable expense. The claim was disallowed by the ITO on two grounds--

(i) that the expenditure was not proved ; and

(ii) that the expenditure was in the nature of entertainment expenditure which could not be allowed in view of Section 37(2B) of the Act.

3. The assessee had also claimed bad debts amounting to Rs. 27,000. This deduction regarding the bad debts was claimed on the ground that the debtor, who owed the above sum to the assessee, had filed insolvency petition and was adjudicated as insolvent. The claim was disallowed by the ITO on the ground that no dividend was yet declared, the petition had not been finally decided and, therefore, the debt could not be treated as a bad debt.

4. The assessee filed an appeal before the AAC. The AAC allowed the claim of ex