Madhusudan Babubhai Kocha Vs ACIT (Bombay High Court)
The Bombay High Court held that an assessee is entitled to claim deduction for bad debts under Section 36(1)(vii) of the Income Tax Act even after the insertion of the Explanation effective from 1 April 1989, where the debt has been effectively written off through accounting entries and circumstances establish its recoverability. The assessee had debited the disputed amount to the Profit and Loss Account, made corresponding ledger entries, and initiated recovery proceedings against the debtor. The Court observed that although the individual debtor’s account was not formally closed, this was done to avoid prejudicing pending litigation. Relying on the Supreme Court decisions in Southern Technologies Ltd. and Vijaya Bank, the Court held that a genuine write-off need not fail merely because of the accounting method adopted, provided the debt was effectively reduced from assets and treated as irrecoverable. Accordingly, the High Court restored the CIT(A)’s order, allowed the deduction, and set aside the ITAT’s contrary ruling.
Core Issue: The principal issue before the Bombay High Court was whether a deduction under section 36(1)(vii) for bad debts could be denied merely because the assessee had not formally closed the debtor’s individual ledger account, despite having debited the amount to the Profit & Loss Account, made corresponding accounting entries treating the debt as irrecoverable, and initiated legal proceedings for its recovery.
