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bad debt

02 June 2017

a co engaged in trading, could not recover rs 500000.
it claimed bad debt by writing off in books
aggregate sales were 30lakhs
amt eligible for deduction?

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9 Replies

Ashish Gangawani (Chartered Accountant) (88 Points)
Replied 02 June 2017

Prior to 1 April 1989, in order to claim deduction for bad debts under section 36(1)(vii) of the Income-tax Act, 1961 (the Act), the onus was on the taxpayer to establish that the debt advanced by it had, in fact, became irrecoverable. With a view to reduce litigation on account of timing of allowability of bad debts, the provisions were amended by Direct Tax Laws (Amendment) Act, 1987 to remove the condition of establishing the irrecoverability of the debt. The amended provisions allowed the deduction of bad debts in the year in which such the debt or part thereof was actually written off as irrecoverable in the taxpayer's books of accounts, subject to the conditions prescribed under section 36(2) of the Act, which inter alia provides that such debt should have been taken into account in computing the income of previous year(s)1. Despite the amendment, the issue of establishing the irrecoverability of bad debts was being disputed by the tax authorities. This issue was addressed and put to rest by the Supreme Court (SC) in the case of TRF Limited2, wherein it was held that post the amendment, it was not necessary for the taxpayer to establish that the debt had become irrecoverable, and mere write-off of the debt in the books of accounts would suffice for the purpose of claiming deduction of bad debts. CBDT Circular The Central Board of Direct Tax (CBDT) vide its Circular dated 12/ 2016 dated 30 May 2016 has observed that the legislative intention of the aforesaid amendment to section 36(1)(vii) was to eliminate litigation on the issue of allowability of bad debts by removing the condition of establishing irrecoverability of the debt by the taxpayer. Accordingly, respecting the SC decision, it has instructed that claims for any bad debt or part thereof in any previous year shall be admissible under section 36(1)(vii) of the Act if it is written off as irrecoverable in the taxpayer's books of accounts, subject to the other conditions specified under section 36(2) of the Act.

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Kajal Khetwani (236 Points)
Replied 02 June 2017

amt eligible equals to nil or 500000?

Ashish Gangawani (Chartered Accountant) (88 Points)
Replied 02 June 2017

If abovementioned conditions satisfied then full amount eligible for deduction.

Kajal Khetwani (236 Points)
Replied 02 June 2017

and if nothing is mentioned then?

Ashish Gangawani (Chartered Accountant) (88 Points)
Replied 02 June 2017

I was talking about the conditions as i mentioned in above paragraph!

Kajal Khetwani (236 Points)
Replied 02 June 2017

i know that

Kajal Khetwani (236 Points)
Replied 02 June 2017

i am asking, if in question provided nothing is specified

Ashish Gangawani (Chartered Accountant) (88 Points)
Replied 02 June 2017

Simply company can claim 500000 as deduction if previously included in turnover and now written off in books

Sagar Devani (Corporate and International Taxation) (1174 Points)
Replied 02 June 2017

If nothing is mentioned in the question then its to be assumed that the amount of Rs.5,00,000 is included in the Turnover and tax is paid on the same. Now when the company is writtting off Rs.5,00,000 the entire amount will be eligible for deduction as the company has already paid tax on the same.

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