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CA PuRvI M!$rA (-)     18 July 2010

No need for taxpayer to give proof of bad debt to claim ded.

3 Apr 2010

 MUMBAI: Corporates and banks will not have to establish a debt as a ‘bad debt’ in order to claim tax deduction, according to a recent Supreme Court ruling. The apex court order has said that bad debts written off in the books of accounts of the taxpayer is sufficient ground for claiming deduction.

 

Indeed the issue was settled by a 1989 amendment in the income-tax Act. The amendment had clarified that the tax payer need not establish that the debt is irrecoverable for claiming deduction. Under this, if a bad debt is written off, the taxpayer can legitimately claim the deduction. This amendment was incorporated with the specific intention to reduce the number of litigation arising from disputes over whether a debt is a bad or not. But, even after the 1989 amendment, tax officers insisted on proofs from tax payers for declaring a debt as bad debt.

The Supreme Court judgment therefore reaffirmed the importance of the 1989 amendment, much to the relief of several corporates. TP Ostwal, a senior chartered accountant said, “The apex court’s decision will reduce the number of litigation arising from the requirement to establish that the debts are irrecoverable.” According to Vispi T Patel of Vispi Patel & Associates, though the Supreme Court has not spelled it out, we believe that the debts written off needs to be bonafide and should be based on commercial wisdom or expediency.”

The apex court gave this order on an appeal filed by TRF, an engineering company. The company has claimed deduction under section 36 (I) (vii) of income-tax Act that deals with deduction on account of bad debts. The assessing officer disallowed the claim for deduction, triggering a long-drawn litigation that finally reached the Supreme Court.



 14 Replies

Santhosh Poojary

Santhosh Poojary (SIEMPRE AHÍ PARA TI)     18 July 2010

thanks for update

OMPRAKASH MISHRA

OMPRAKASH MISHRA (Chartered Accountant)     18 July 2010

thanks for updating, pls be continue for such updation

Kalpesh Chauhan,

Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com))     18 July 2010

Originally posted by : SAN...

thanks for update
 Somshekar (Rankholder)

Somshekar (Rankholder) (-)     18 July 2010

supreme court judgement is a relief . but clarity is needed on period for which the debt is outstanding. if one writes off bad debt pertaining to current year sales.no more evidence will be required to prove, but if debt is outstanding from more than 2 years or above, there might be possibility that ao can enquire about the delay in writing off the debts in books of accounts.

if a debts relates to related party transaction the ao is bound to enquire about the bonafide ground

Nisha

Nisha (Student)     18 July 2010

Thnk u 4 d update!

Ramesh

Ramesh (Manager - Finance & Accounts)     18 July 2010

Dear Purv Misra,

Thanks for bringing up the redundant matter, even we were asked to produced the same before IT Authorities. Could you pls let me know any case studies if available, If it is passed finance bill what is the section no? Can you explain.

Thanks & Regards,
Ramesh P.

Max Payne

Max Payne (employed)     18 July 2010

Originally posted by : Ramesh P.

Dear Purv Misra,

Thanks for bringing up the redundant matter, even we were asked to produced the same before IT Authorities. Could you pls let me know any case studies if available, If it is passed finance bill what is the section no? Can you explain.

Thanks & Regards,
Ramesh P.

 

From TaxIndiaOnLine :

2009-TIOL-385- ITAT-MUM. pdf + debt story.pdf M/s GSL India Ltd Vs ACIT, Mumbai (Dated: April 17, 2009) Income Tax - assessee is no more required to prove that debt had become bad before claiming allowance for bad debt: there is no onus cast on an assessee to prove that a debt had indeed become bad, and what is required is that assessee should have made a write off bad debts in its books. 

 

Bad Debts: Assessee is manufacturer of synthetic fibre yarn and related materials and also did job work. On the bad debt claim, assessee was required by the A.O to explain when it was offered to tax and steps that were taken to recover the debts. Though the assessee did not initially give reply, later on, in response to a show cause notice issued by the A.O, it claimed such bad debts which were written off in its books of accounts to be allowable under Section 36(1)(vii) of the Income Tax Act 1961 (in short the Act). However, the A.O disallowed the claim citing two reasons. First one was that assessee could not prove that the debtors which were written off were on Revenue Account and formed the part of the total income in any of the earlier previous year and the second reason was that assessee could not establish the debts to have become bad.

The CIT(A) confirmed the disallowance since according to him, the Madras High Court in South India Surgical Co. Vs. ACIT (2006-TIOL-163- HC-MAD-IT) had clearly held that an assessee had to establish that debts had become bad, before effecting a write off.

 

The Tribunal observed that there is no onus cast on an assessee to prove that a debt had indeed become bad, and what is required is that assessee should have made a write off bad debts in its books. Undisputedly, this has been done in the given case. Though the CIT(A) relied on the decision of the Madras High Court in South India Surgical Co. Ltd's case, the Tribunal found that the jurisdictional High Court in the decision of CIT Vs. Star Chemical Pvt. Ltd., has taken the same view as that of the Special Bench of this Tribunal in Oman International Bank Ltd's case and hence assessee's claim that it was not obliged to prove that the debts had indeed become bad is correct. Nevertheless, the ITAT found that, though the assessee now claims that it had furnished the details of bad debts and how it related to the sales for the preceding previous years the A.O., there is a conclusive finding in the assessment order that assessee was unable to establish whether the transactions giving rise to the debtors were offered as revenue income in any of the preceding previous year. Therefore, in the interest of justice, the Tribunal set aside the orders of the CIT(A) and the A.O in this regard remit the matter back to the A.O. for verifying details submitted by the assessee. If it is found that amount of bad debts written off arose out of sales effected in earlier years, no doubt assessee's claim has to be allowed. As already stated, assessee is no more required to prove that debt had become bad before claiming allowance for bad debt.

Max Payne

Max Payne (employed)     18 July 2010

Originally posted by : Ramesh P.

Dear Purv Misra,

Thanks for bringing up the redundant matter, even we were asked to produced the same before IT Authorities. Could you pls let me know any case studies if available, If it is passed finance bill what is the section no? Can you explain.

Thanks & Regards,
Ramesh P.

 

Reproduced from

https://www.caclubindia.com/forum/bad-debts-u-s-36-1-vii--79032.asp

 

 

 

(i) The position in law is well-settled. After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the  accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from Sundry Debtors.

(ii) As the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. the matter is remitted to the AO for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.
===========================================================
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5293 OF 2003
T.R.F. Limited ...Appellant(s)
Versus
Commissioner of Income Tax, Ranchi ...Respondent(s)
With Civil Appeal No.5294 of 2003
O R D E R
Heard learned counsel on both sides.In these appeals, we are concerned with Assessment Year 1990-1991 and Assessment Year 1993-1994. Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word “established”, which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act', for short].
 
For the sake of clarity, we re-produce herein below provisions of Section 36(1)(vii) of the Act, both prior to
1st April, 1989 and post-1st April, 1989:
 
Pre- 1 s t April, 1989:
Other deductions.
36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i) to (vi) xxxx xxxx xxxx
(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.
 
Post- 1 s t April, 1989:
Other deductions.
36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i) to (vi) xxxx xxxx xxxx
(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.”
 
This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer.
 

Download above Judgement in PDF format

In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.
 
Subject to above, the civil appeals filed by the assessee are disposed of with no order as to costs.
 
......................J.
[S.H. KAPADIA]
......................J.
[AFTAB ALAM]

New Delhi,
February 09, 2010.

Sandeep Pandey

Sandeep Pandey (CA FINAL)     18 July 2010

Thanks for updating us


(Guest)

good one

Vikas Gupta

Vikas Gupta (CHARTERED ACCOUNTANT)     18 July 2010

Originally posted by : SAN...

thanks for update
Tejun

Tejun (Student)     19 July 2010

really wonderful info....very very thanx...really great!

Dheeraj Sondhiya

Dheeraj Sondhiya (CA- IPCC)     19 July 2010

thanks for such updation thanks all keep posting.........................

Huzefa Hussain

Huzefa Hussain (Chartered Accountant)     23 July 2010

Thanks for update


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