Generally, a businessman makes
every effort to recover the amounts
due from his customers/clients. It is
only when the chances of recovery
are either remote or non‐existent that
he would, grudgingly, write off the
debt in his books of account. When
this happens, the amount written off
is claimed as bad debt in the books
and is considered as a tax deductible
write off.
The Income‐tax Act, 1961 (the Act)
has a special section that allows
deduction ( from business/
professional income) in respect of bad
debts. The relevant section is 36(1)
(vii). Earlier, the section was worded
in a manner which was interpreted to
mean that the tax payer needed to
establish conclusively to the
satisfaction of the Assessing Officer
that the amount written off had
actually become bad. This led to a
situation where most of the times, the
tax payer had to put in extra efforts to
show that debt had actually become
bad, the steps taken for recovery of
the same and whether any legal
action had been taken against the
debtor. Practically, in many cases, the
bad debts were not allowed as a
deduction because the tax payer was
not able to conclusively establish that
debt had become bad.
However, with effect from
Assessment Year 1989‐90, there was
an amendment in the said section
whereby the necessity for establishing
the fact that the debt has actually
become bad has been done away with.
After the said amendment, the only
conditions to be fulfilled by a tax payer
for successfully claiming a deduction in
respect of bad debts are as under:
- The amount which is claimed as a
deduction should have been taken
into account in computing the
income of the assessee for the year
in which the amount is written off or any earlier year and
- The amount should be written off
as irrecoverable in the books of
accounts of the assessee for the
accounting year in which the claim
for deduction is made.
The wordings of the Section 36(1)(vii)
read with Circular 551 dated
January 23, 1990 issued by the CBDT
leave no scope of debate that any
amount incidental to the business or
profession of the assessee, which is
taken into account in computing the
assessable income would be allowed for
deduction as bad debt, if it is written off in the books of the assessee in the previous year. Despite the above clear
provisions of the law, many tax officers
continued to disallow the claim for bad
debts on the ground that the tax payer
had not conclusively established that the debt had actually become bad. In most cases, the
matter had been taken up for litigation. Many Tribunal
Benches have held against the Income-tax Department
and in favour of the tax payer that after the amendment
to section 36(1)(vii), the tax payer does not have to
prove the fact that the debt has actually become bad.
The Indian Courts have time and again reaffirmed the
above view 1 and accordingly allowed the claim of bad
debts deductibility.
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