Supreme Court Ruling: After 1 April 1989 the Taxpayer
is not required to demonstrate that the debt has become
bad debt once it is written off in the books of account
[TRF Ltd. v. CIT (2010-TIOL-15-SC-IT)]
Supreme Court Ruling:
In order to claim a bad debt as a deduction under
section 36(1)(vii) of the Income tax Act (Act) it
has been a long drawn controversy between the
Taxpayer and the Revenue whether in addition to
write-off the debt in the books of account, it is obligatory on the
Taxpayer to establish that such debt has become a bad debt,
especially after the amendment brought in by the
Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1 April 1989.
This controversy has now been put to rest by the Supreme
Court in the case of TRF Ltd. v. CIT wherein it has been
held that after 1 April 1989 it is not necessary for the
Taxpayer to establish that the debt, in fact, has become
irrecoverable. It is enough if the bad debt is written off
irrecoverable in the accounts of the Taxpayer.
Our View:
The Direct Tax Laws (Amendment) Act, 1987 substituted the
words “any bad debt or part thereof” in place of “any debt,
or part thereof, which is established to have become a bad
debt in the previous year” in section 36(1)(vii) of the Act
w.e.f. 1 April 1989. Subsequent to the above amendment the
Central Board of Direct Taxes (CBDT) has issued
Circular 551 dated 23 January 1990.
The issue pertaining to bad debt is set out in para. 6.6. and
the relevant portion reads as under :-
“In order to eliminate the disputes in the matter of determining
the year in which a bad debt can be allowed and also to rationalise
the provisions, the Amending Act, 1987 has amended clause (vii)
of sub-section (1) and clause (i) of sub-section (2) of the section to
provide that the claim for bad debt will be allowed in the year
in which such a bad debt has been written off as irrecoverable
in the accounts of the assessee.”
The Circular of the CBDT clearly spells
out that the amendment is to eliminate the disputes
in the matter of determining the year in which the
bad debt is written off as irrecoverable.
If we apply the Rule of interpretation as spelt
out in Hyden’s case, it would lead to an irresistible
conclusion, that the Legislature by the amendment
has sought to exclude the burden on the
Taxpayer to prove that the debt is bad debt and
leaves it to the commercial wisdom of the Taxpayer
to treat the debt as bad, once it is written off as
irrecoverable in the accounts of the Taxpayer.
Inspite of this clear provision the Taxpayer was
again called upon to establish that the debt has
become bad debt.
The Supreme Court has now given a ruling
in favour of the Taxpayer that it is not obligatory
on the Taxpayer to prove whether the debt has
become bad debt once such debt has been written
off in the books of account.
This is a welcome decision and would give a
substantial relief to the Taxpayer.
It seems that the judgement of the Rajasthan High Court
in the case of Kashmir Trading Co. v. DCIT (291 ITR 228)
is overruled, while judgements of High Courts in the
case of DIT v. Oman International Bank (313 ITR 128)(Bom)
and CIT v. Global Capital Ltd. (306 ITR 332) (Del) are approved.
Although the aforesaid judgement of the Supreme Court
does not clearly spell out, we believe that after the
amendment, though it is neither obligatory nor is there
burden on the Taxpayer to prove that the debt written
off by him is indeed a bad debt; the write-off needs to
be bona fide and should be based on commercial wisdom or expediency.
