Bad Bebts & Provision for doubtful debts

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G.N.V.D.Kiran

G.N.V.D.Kiran (Querist)
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22 March 2008 Please clarify Bad Debts & Provision for Doubtful Debts is allowable expenditure or not under Income tax Acr

R.V.RAO

R.V.RAO (Expert)
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22 March 2008 PROV. FOR BAD DEBTS IS NOT ALLOWED UNDER IT ACT.
BADDEBTS ALLOWABLE IF THE ASSESSEE CAN PROVE BEYOND DOUBT TO THE ASSESSING OFFICER THAT IN SPITE OF BEST EFFORTS AND PROOF OF CORRESPONDENCE AND LEGAL NOTICES OR LEGAL CASES FILED ETC.AGAINST THE CUSTOMER ,THE ASSESSEE COULD NOT RECOVER DUES FROM HIM.
R.V.RAO

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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23 March 2008 Demonstrative and infallible proof cannot be insisted upon - The requirement that the debt has become bad or irrecoverable does not mean that the Department can insist upon demonstrative and infallible proof that the debt has become bad - Kamla Cotton Company v. CIT [1997] 226 ITR 605 (Guj.)/Devi Films Ltd. v. CIT [1963] 49 ITR 874 (Mad.).

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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23 March 2008 News
3rd June, 2006
Need tax exemption on bad debts. Easy!
Companies claiming tax exemption on irrecoverable sales proceeds can do so without furnishing any proof. A special bench of the Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that the onus of proving that debt has gone bad does not rest on the assessee.

The bench, in its order has also clarified that tax deduction on such cases can be claimed in the year in which the amount is written off in the balance sheet. Tax professionals say the Central Board of Direct Taxes should now issue clear guidelines for assessing officers.

“This will put to rest controversies over bad debt deductions. Debt is written off when it goes bad. If the debt is recovered later, it can be taxed under section 41 of the I-T Act,” says T P Ostwal, a chartered accountant.

The bench was set up following a number of conflicting rulings on the issue. Such disputes arise when taxpayers follow the mercantile method of accounting wherein the sales given on credit are also accounted for in the books. In cash system of accounting, where the revenue is not considered realised unless the cash is credited, such situation doesn’t arise.

Over the years, the issue got complicated when tax authorities held divergent views. For instance, some assessing officers started denying tax deduction in the year of write-off as some taxpayers allegedly misused the provision to set off losses against profits to reduce tax outgo.

In 1989, the finance ministry made an effort to help taxpayers by bringing in an amendment to the I-T Act. This amendment allowed taxpayers claim deduction in the year of write-off.

However, litigations started cropping up due to the usage ‘bad debt’ in the amended version. The assessing officers started asking taxpayers to prove that debt being written off was really bad. The bench has now put to rest all inconsistencies by ruling that taxpayers need not establish that the debt has become bad.

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