Supreme Court rules write off of debt is sufficient for claiming bad debts

 

Mar 7, 2010

In a recent ruling Supreme Court in the case of TRF Ltd. 

on the issue of whether a taxpayer, while claiming deduction

of bad debts in its return of income, is required to establish 

that the debts have, in fact, become irrecoverable. 

The SC held that post the amendment to 

Section 36(1)(vii) (Section) of the Indian Tax Law (ITL), f

or claiming deduction of bad debts, it is sufficient that 

the debt is written off in the books of account as bad debt.

It is not necessary for the taxpayer to establish that the debt

has become irrecoverable.

Under the ITL, deduction is allowed for bad debts 

subject to certain conditions. Prior to the amendment from

1 April 1989 to the Section, for claiming the deduction, 

the taxpayer was required to establish that the debt had, 

n fact, become irrecoverable. The factual aspect of establishing 

the irrecoverability of the debt had been prone to litigation. 

To relieve the taxpayers from the burden of proving the bad debts,

the Section was amended to the effect that for claiming deduction 

on account of bad debts, it is sufficient that the debt is

written off as bad debt in the books of account.

However, the Tax Authority, despite the amendment, 

used to take the position that what is contemplated 

by the statute is the write off of ‘bad debts’ as 

distinguished from the write off of ‘debt’. 

Therefore, the taxpayer was required to prove

that the debt has, in fact, become irrecoverable.

 The SC held that the position in law is well-settled. 

After the amendment from 1 April 1989, it is not 

necessary for the taxpayers to establish that the debt,

in fact, has become irrecoverable. It is enough that the

debt is written off as irrecoverable in the books of account

of the taxpayer.

In the present case, the SC observed that since

the Tax Authority has not examined whether the

debt has been written off in the books of account, 

the matter be remitted for fresh consideration by the 

Tax Authority on the limited aspect of write off of the 

debt in the books.

This ruling would settle the controversy surrounding 

the claim for deduction of bad debts post the amendment 

of the Section and relieve the taxpayers from the burden

of establishing the factum of the irrecoverability of the

debt which is written off in the books of account.