Business Deduction Allowability of Bad Debts Under Section 36(1)(vii)Conditions Required to be Fulfilled

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The Tax Publishers Income Tax--Business Deduction Allowability of Bad Debts Under Section 36(1)(vii)--Conditions Required to be Fulfilled CA. Nisha Bhandari Recently the Supreme Court in Pr. CIT v. Khyati Realtors (P) Ltd. 2022 TaxPub(DT) 5867 (SC) held that merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to Section 36(1)(vii), would not entitle the assessee to claim a deduction as bad debt under Section 36(1)(vii). The learned author analyses this decision in light of related statutory and judicial position. 1. Deduction when allowable under Section 36(1)(vii) Any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee during the previous year is allowable as deduction under Section 36(1)(vii) subject to fulfilment of conditions specified in sub-section (2). In the case of a bank, financial institution and corporation it is provided by proviso to clause (vii) that the amount of deduction in relation to bad debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debt account made under Section 36(1)(viia). The second proviso to Section 36(1)(vii), as inserted w.e.f. assessment year 2016-17 provides that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of Section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Business Deduction

Allowability of Bad Debts Under Section 36(1)(vii)--Conditions Required to be Fulfilled

CA. Nisha Bhandari

Recently the Supreme Court in Pr. CIT v. Khyati Realtors (P) Ltd. 2022 TaxPub(DT) 5867 (SC) held that merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to Section 36(1)(vii), would not entitle the assessee to claim a deduction as bad debt under Section 36(1)(vii). The learned author analyses this decision in light of related statutory and judicial position.

1. Deduction when allowable under Section 36(1)(vii)

Any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee during the previous year is allowable as deduction under Section 36(1)(vii) subject to fulfilment of conditions specified in sub-section (2). In the case of a bank, financial institution and corporation it is provided by proviso to clause (vii) that the amount of deduction in relation to bad debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debt account made under Section 36(1)(viia).

The second proviso to Section 36(1)(vii), as inserted w.e.f. assessment year 2016-17 provides that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of Section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.