In order to claim deduction of bad debts u/s 36(1)(vii) following conditions must be cumulatively satisfied:
1) It must be a DEBT: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or futuro. (Keshoram Industries and Cotton Mills Ltd. Vs. CWT (1966) 59 ITR 767 (SC).
2) Such debt must be revenue in nature: Only a trading debt will be a debt allowable which should be revenue in nature. It would be such that if recovered it would have booked as profits. (CIT V Birla Bros P Ltd. (1970) 77 ITR 751 (SC). Also, The Bombay High Court in its recent judgment in the case of Salem Magnesite (P) Ltd. V CIT (2010) 321 ITR 43 (Bom) held that loss of money lent to a subsidiary company shall be treated as transaction on capital account and as such loss suffered on account of non return of such loan it would be treated as capital loss and cannot be allowed as deduction unless such loss is a part of money lending activity.
3) Such debt must be incidental to the business or profession of the assessee: Where the assessee held certain shares in certain companies by way of investment and as stock-in-trade, deduction for write off of their value was not admissible, either as bad debt or as business loss. (West Bengal Financial Corporation & Another V Dy CIT (2003) 263 ITR 332 (Cal). Further, the Delhi in the case of CIT V Realst Builders & Services Ltd. (2009) 178 Taxman 163 (Del) held that where interest accrued on advance was assessed to tax as business income of the assessee in the preceding years, it was held that writing off such advance shall amount to bad debts allowable u/s 36(1)(vii) as the assessee was held to be in money lending business.
4) Such debt must have been taken into account in computing the income of the assessee.
Debt must be written off in the books of the assessee: Once assessee has written off debt in his books of account, it is not the requirement of law that he should establish that debt has in fact become bad and it is not open to the Assessing Officer to reject claim of the assessee on the ground that he has failed to establish that debt has become a bad debt. (Suresh Gaggal Vs ITO) (2009) 180 Taxman 90 (HP). Further, bad debts written off from the provision of bad and doubtful debt shall be allowable an deduction in the year of write off in the light of the fact that no deduction is admissible nor was allowed in the year in which the provision for bad debt was made. (Hindustan Zinc Ltd. (2010) 321 ITR 388 (Raj).