Income Tax--Current Issues

Practice Update

V.K. Subramani

EXCEPTION TO THE LIBERAL VIEW OF MERE WRITE OFF OF DEBT IN THE BOOKS OF THE ASSESSEE

Section 36(1)(vii) says that any amount written off as irrecoverable in the accounts of the assessee is eligible for deduction while computing income under the head 'Profits and gains of business or profession'. However, the deduction is subject to the provisions of sub-section (2) to section 36.

The CBDT Circular No. 551, dated 23-1-1990 explained the rationale behind the amendment to section 36(1)(vii) made by the Direct Tax Laws (Amendment) Act, 1987 to clarify that a mere write off is enough for claiming the deduction of bad debt and the assessee need not prove as to how he came to the conclusion that it is irrecoverable and deserves write off. The apex court also in TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) : 2010 TaxPub(DT) 1481 (SC) has held that a mere write off is enough for allowance of bad debt claim.

This amendment and Supreme Court decision emboldened some taxpayers to write off debts to reduce their taxable income and shift resultant tax liability to a future year. One exception to this theory of indiscriminate write off could be found in the case of Embassy Classic (P) Ltd v Asstt. CIT 2011 TaxPub(DT) 0365 (Bang-Trib) where the written off debts were realized before filing the ITR. It was held that at the time of filing the ITR, there was no debt due and was recovered. Thus the claim was disallowed in assessment.

Thus when writing off debt as bad debt one must ensure that the debt was existing and not recovered at the time of filing ITR. There are certain instances where the taxpayers deliberately write off debt in one year and realize the same in a convenient year to offer the amount of realization to income tax by offering it under section 41(1).