The Reader

Supreme Court Ruling: After 1 April 1989 the Taxpayer is not required to demonstrate that the debt has become bad debt once it is written off in the books of account [TRF Ltd. v. CIT (2010-TIOL-15-SC-IT)]

Supreme Court Ruling:

In order to claim a bad debt as a deduction under section 36(1)(vii) of the Income tax Act (Act) it has been a long drawn controversy between the Taxpayer and the Revenue whether in addition to write-off the debt in the books of account, it is obligatory on the Taxpayer to establish that such debt has become a bad debt, especially after the amendment brought in by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1 April 1989.

This controversy has now been put to rest by the Supreme Court in the case of TRF Ltd. v. CIT wherein it has been held that after 1 April 1989 it is not necessary for the Taxpayer to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the Taxpayer.

Our View:

The Direct Tax Laws (Amendment) Act, 1987 substituted the words "any bad debt or part thereof" in place of "any debt, or part thereof, which is established to have become a bad debt in the previous year" in section 36(1)(vii) of the Act w.e.f. 1 April 1989. Subsequent to the above amendment the Central Board of Direct Taxes (CBDT) has issued Circular 551 dated 23 January 1990. The issue pertaining to bad debt is set out in para. 6.6. and the relevant portion reads as under :-

"In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee."

The Circular of the CBDT clearly spells out that the amendment is to eliminate the disputes in the matter of determining the year in which the bad debt is written off as irrecoverable. If we apply the Rule of interpretation as spelt out in Hyden's case, it would lead to an irresistible conclusion, that the Legislature by the amendment has sought to exclude the burden on the Taxpayer to prove that the debt is bad debt and leaves it to the commercial wisdom of the Taxpayer to treat the debt as bad, once it is written off as irrecoverable in the accounts of the Taxpayer. Inspite of this clear provision the Taxpayer was again called upon to establish that the debt has become bad debt.

The Supreme Court has now given a ruling in favour of the Taxpayer that it is not obligatory on the Taxpayer to prove whether the debt has become bad debt once such debt has been written off in the books of account. This is a welcome decision and would give a substantial relief to the Taxpayer. It seems that the judgement of the Rajasthan High Court in the case of Kashmir Trading Co. v. DCIT (291 ITR 228) is overruled, while judgements of High Courts in the case of DIT v. Oman International Bank (313 ITR 128)(Bom) and CIT v. Global Capital Ltd. (306 ITR 332) (Del) are approved.

Although the aforesaid judgement of the Supreme Court does not clearly spell out, we believe that after the amendment, though it is neither obligatory nor is there burden on the Taxpayer to prove that the debt written off by him is indeed a bad debt; the write-off needs to be bona fide and should be based on commercial wisdom or expediency.

--
Me on net :
> >>>>>>>>>>>>>>>>>>>>>
http://rajkumaratthenet.blogspot.com/

Virus Warning: Although the I have taken reasonable precautions to ensure no viruses are present in his email, sender (I) cannot accept responsibility for any loss or damage arising from the use of this email or attachment."

__._,_.___

Messages in this topic (1)

Recent Activity:

• New Members 22

DISCLAIMER
AURANGABAD_CA is a Yahoo Group for the benefit of CA and other professional. It is especially meant for written discussion within group members and circulate the information among its members. The mail may contain such research/advice/opinion/information/fact provided by any member or moderator and every contain of the mail or information of yahoo is always subject to the Accuracy and of the description of facts.

The Aurangabad_CA , its moderator/owner do not claim that contains in mail/information obtained after reading as a complete and accurate disclosure of relevant fact(s).

Considering all above facts m the transaction based on above mail may not complete without confirming  proper statue/authority/person. Therefore any action/transaction taken on basis of this mail do not imply the accuracy or value . Further this Group's Owner/Moderator/Member  are not liable for any damages or costs suffered due to action/transaction based on information on this Yahoo Group.

For Seeking any Clarification you may mail only to  Group Moderator on
girishkulk@gmail.com