TRF Ltd. (Supreme Court of India)
In a recent ruling Supreme Court in the case of TRF Ltd. on the issue of whether a taxpayer, while claiming deduction of bad debts in its return of income, is required to establish that the debts have, in fact, become irrecoverable. The SC held that post the amendment to Section 36(1)(vii) (Section) of the Indian Tax Law (ITL), for claiming deduction of bad debts, it is sufficient that the debt is written off in the books of account as bad debt. It is not necessary for the taxpayer to establish that the debt has become irrecoverable.
Background:- Under the ITL, deduction is allowed for bad debts subject to certain conditions. Prior to the amendment from 1 April 1989 to the Section, for claiming the deduction, the taxpayer was required to establish that the debt had, in fact, become irrecoverable. The factual aspect of establishing the irrecoverability of the debt had been prone to litigation. To relieve the taxpayers from the burden of proving the bad debts, the Section was amended to the effect that for claiming deduction on account of bad debts, it is sufficient that the debt is written off as bad debt in the books of account.
However, the Tax Authority, despite the amendment, used to take the position that what is contemplated by the statute is the write off of ‘bad debts’ as distinguished from the write off of ‘debt’. Therefore, the taxpayer was required to prove that the debt has, in fact, become irrecoverable.
Ruling of the SC: – The SC held that the position in law is well-settled. After the amendment from 1 April 1989, it is not necessary for the taxpayers to establish that the debt, in fact, has become irrecoverable. It is enough that the debt is written off as irrecoverable in the books of account of the taxpayer.
In the present case, the SC observed that since the Tax Authority has not examined whether the debt has been written off in the books of account, the matter be remitted for fresh consideration by the Tax Authority on the limited aspect of write off of the debt in the books.
Comments: – This ruling would settle the controversy surrounding the claim for deduction of bad debts post the amendment of the Section and relieve the taxpayers from the burden of establishing the factum of the irrecoverability of the debt which is written off in the books of account.
The Supreme Court should also have required that the bad debt being written off, and tax relief being claimed, should be accompanied by notification to the debtor that such debt has been written off. Otherwise, what happens is that the debt is claimed as being bad, tax relief is obtained, and the debt is still pursued. This will lead to the practice of routinely writing off debts even as the collection process proceeds. Incomplete judgement.