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 and accordingly allowed the claim of bad debts deductibility. |