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.