Discussion on write off of bad debts

Some important case laws/updates on Bad Debts:

A. Following are the basic conditions govern the grant ofdeduction in respect of bad debt under clause (vii) of section 36(1):

(i) the debt or loan should be in respect of business which is carried on by the assessee in the relevant accounting year;

(ii) the debt should have been taken into account in computing the income of the assessee for the accounting year or for an earlier accounting year or should represent money lent in the ordinary course of his business of banking or money-lending;

(iii) the amount should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time

B. The Delhi High Court, has held in CIT vs. Samara India (P) Ltd (2013) 216 Taxman 93 , following the decision of Supreme Court in T.R.F. Ltd. Vs. CIT(2010) 323 ITR 397:190 Taxman 391 (SC), that for an assessee to claim deduction in relation to bad debts it is, now, no longer necessary to establish that debt had become irrecoverable and it is sufficient if assessee forms such an opinion and writes off debt as irrecoverable in its accounts.

C. It was held in Jethabhai Hirji and Jethabhai Ramdas v. ClT (1979) 120 ITR 792 (Bom)that it is not necessary for the assessee to show that he has failed to recover that debt despite taking legal action. What he is required to show, as held in ClT v. Dunlop India Ltd. (1994) 2091TR987 (Cal), that having regard to the facts and circumstances of the case a bonafide assessment has been made by the assessee to l the effect that the realization of the debt is not possible.

D. The Central Board of Direct Tax (CBDT) vide its Circular dated 12/ 2016 dated 30 May 2016 has observed that the legislative intention of the aforesaid amendment to section 36(1)(vii) was to eliminate litigation on the issue of allowability of bad debts by removing the condition of establishing irrecoverability of the debt by the taxpayer.

E. Delhi High Court in CIT v. R.G. Scientific Enterprises (P.) Ltd.

[2008] 166 Taxman 161 held that non recovery of sums advanced for purchase of premises would constitute a capital loss and not a business loss and cannot be written off as a bad debt.

CA Aniket Kulkarni

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