Supreme Court in the case of TRF Limited held that post amendment (with effect from 1 April 1989) to claim deduction for the bad debts under section 36(1)(iii) of the Income Tax Act, 1961 (the Act) it is not necessary for the taxpayer to establish that the debt has actually become irrecoverable. It is sufficient if the bad debt is written off as irrecoverable in the books of accounts of the taxpayer.
Facts and background of the case
As per section 36(1)(vii) of the Act, deduction for the bad debts is allowed subject to certain conditions. Before 1 April 1989, to claim deduction every taxpayer was required to establish that the debt has become irrecoverable. However, to establish that the debt has become irrecoverable resulted into litigation. Accordingly, to relive taxpayers from the burden of proving the bad debts, section 36(1)(vii) of the Act was amended with effect from 1 April 1989, by deleting the word ‘established’ from the provision. Accordingly, post amendment the taxpayer was allowed to claim bad debts if it is written off in the books of account. However, the tax department despite the amendment was requiring taxpayer to prove that the debt has actually become irrecoverable.
The taxpayer was an engineering company, which manufactures various materials handling equipment. For Assessment Year 1990- 1991 and 1993- 1994 the taxpayer claimed deduction for bad debts under section 36(1)(vii) of the Act which was disallowed by the Assessing Officer (AO).
Supreme Court ruling
- Supreme Court observed that, prior to 1 April 1989, the burden of proving the bad debts was on the taxpayer. However, post amendment such position got altered by deletion of the word ‘established’ which earlier existed in the provision of section 36(1)(vii) of the Act.
- Accordingly, it is well-settled law that from 1 April 1989, it is not necessary for the taxpayer to establish that the debt has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the books of accounts.
- Since in the present case the AO did not examine whether the debt has been written off in books of accounts of the taxpayer, the Supreme Court remitted the matter to the AO for fresh consideration on the limited aspect of write off of the debt in the books of accounts.
Our Comments:- This is a welcome decision by the Supreme Court holding that post amendment with effect from 1 April 1989, to claim deduction for the bad debts under section 36(1)(iii) of the Act it is not necessary for the taxpayer to establish that the debt has actually become irrecoverable. It is sufficient if the bad debt is written off as irrecoverable in the books of accounts of the taxpayer. This decision will settle the long drawn controversy surrounding the claim for deduction of bad debts.
