The Reader

Dear friends,

An assessee is having a policy to make the provision in its books of accounts on account of bad and doubtful debts based upon certain criteria duly approved by its board of directors by debiting it to its P&L account and reducing the amount from debtors. Since the this provision is not an allowable item under IT Act, 1961 therefore this is added to the income of assessee while filing the return by assessee itself.

As per section 36(1) (vii) of the IT Act, any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee during the previous year, then the deduction thereof shall be allowed to the assessee.

Further in the case of TRF LIMITED Vs COMMISSIONER OF INCOME TAX, RANCHI the Apex  Court has recently held that “the legal position prior to 1st April, 1989 was that the assessee had to establish that the debt advanced has become irrecoverable. However, this position of law was altered by deleting the word 'established' and post April 1st, 1989, the assessee need not establish so - if bad debts are written off in books, it is enough to become eligible for deduction.”

Now point for consideration is that it is necessary to write off the bad debts in P&L account in the year in which claim is made by the assessee or shall it be a proper compliance of section 36(1) (vii) of the IT Act if a voucher is passed by the assessee during the year by reversing the provision of doubtful debts.

Another point for consideration is when the provision is made by the assessee in its books of accounts in earlier years based upon a certain policy and then it writes of that amount in subsequent years as bad debts, whether the write off in case of specific debtors has to be of the entire amount outstanding in the debtor account or it can be partial also and not full.

Members are requested to share their views on the allowability of bad debts u/s 36(1) (vii) of the IT Act in the above scenario  together with relevant section, rule, case law, circular or notification which support their view.

With best regards,

CA BRAJESH AGARWAL

9818623388 (m)