To mitigate litigation on baddebts, CBDT has asked officials not to file or pursue appeal s on the issue of failure of the assessee to establish that debt has become irrecoverable. CBDT has confirmed the decision of Supreme Court in TRF Ltd., which says that it is not necessary for assesseeto establish that debt has become irrecoverabie and it is enough if bad debt is written off as irrecoverable in the books of accounts of the assessee. [Circular No. 12/2016 dated 30-05-2016]

How to Write off a debt as per provisions of Section 36(1)(vii)

Held by Supreme Court in Southern Technologies Ltd. [320 ITR 577]

If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor’s account, it would constitute a write off of an actual debt.

 However, if an assessee debits `provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the `current liabilities and provisions' on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction

Held by Supreme Court in Vijya Bank 323 ITR 168 

upholding the order of Tribunal and reversing the decision of High Court that besides debiting the Profit and Loss Account and creating a provision for bad and doubtful debt, the assessee-Bank had correspondingly/simultaneously obliterated the said provision from it's accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the Balance Sheet was shown as net of the provision “for impugned bad debt”.

In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it's Books, as indicated above

Whether it is imperative for the assessee-Bank to close the individual account of each of it's debtors in it's books or a mere reduction in the Loans and Advances or Debtors on the asset side of it's Balance Sheet to the extent of the provision for bad debt would be sufficient to constitute a write off

SC in the case of Vijya Bank vs. CIT 323 ITR 168 has held that

What is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-Bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under Section 36(1)(vii) of 1961 Act……..because the Assessing Officer apprehended that the assessee-Bank might be taking the benefit of deduction under Section 36(1)(vii) of 1961 Act, twice over.

In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under Section 36(1)(vii), twice over. The Order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of it's debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of Section 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years.

There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against it's debtors. If individual accounts are to be closed, then the Debtor/Defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed.

Further Held by Supreme Court that if amount is recovered subsequently and it is more than difference between debt and amount so allowed , the balance can be taxed u/s 41(4).

Allahabad High Court in U. P. Rajkiya Nirman Nigam Ltd on 04-07-2013 had held that where books of account are not closed and not signed by Board of Directors and not adopted by shareholders as per Companies Act, it is legally permissible to make adjustments before they are finally adopted , therefore, where accounts of assessee were open and subject to correction by auditors, bad debts could be written off even after closure of accounting period, as there is neither any condition nor any provision under section 36(1)(vii), that writing off of bad debt should be done in relevant previous year, i.e., before end of financial year. Supreme Court has admitted SLP of the revenue on this issue on 23-11-2015

Loss on transfer of compensation bonds issued to assessee in consideration of assignment of debt receivable (in US dollars) from Iraq Govt.is not covered by head capital gain and hence no indexation can be made. However loss can be claimed as bad debt because payment received in form of bonds for services rendered under contract would not alter the character of income Ircon International Ltd. (Del HC ) 15.5.15 57TMC 336

Where provision for debts was made in earlier years and then added back to computation of income , any claim of expenditure in the subsequent year is allowable as bad debt u/s 36(1)(vii) because the law does not require that debit towards write off be made in the year of deduction [Rallis India 190 taxman 1 (Bom)]

Writing off export proceeds with out obtaining RBI approval is allowed. RBI directions can not override conditions of 36 (1) (vii) rws 36 (2) Sabra impex (Mum) & ACE designers (Bang) followed in BIG BAGS INTERNATIONAL (P) ltd (BANGLORE TRIB) 21.8.14

Even if advance forfeited by supplier wasn't allowable as bad-debt u/S 36, yet it could be considered as business loss u/S 37-Amines & Plasticizers Ltd.2015] 60 taxmann.com 82 (Guwahati - Trib.)JANUARY 30, 2015

If Interest offered to tax, the principle debt qualifies as bad debt

In Veerabhadra Rao 155 ITR 152 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been “taken into account in computing the income of the assessee” and qualifies for deduction u/s 36(1)(vii).The effect of the judgement is that in order to satisfy the condition stipulated in s. 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. 

If brokerage offered to tax, the principal debt qualifies as a “bad debt”

Judgements of Delhi and Mumbai High Court discussed as under:


In Shreya S. Morakhia held by ITAT Mumbai and confirmed by High Court

The assessee, a broker, claimed deduction for bad debts in respect of shares purchased by him for his clients. The AOrejected the claim though the CIT (A) upheld it. On appeal by the Revenue, the matter was referred to the Special Bench. Before the Special Bench, the department argued that u/s 36(2), no deduction on account of bad debt can be allowed unless “such debt or part thereof has been taken into account in computing the income of the assessee”. It was argued that as the assessee had offered only the brokerage income to tax but not the value of shares purchased on behalf of clients, the latter could not be allowed as a bad debt u/s 36(1)(vii). HELD rejecting the claim of thedepartment:

Deduction of Bad debts in case of Banks- Supreme Court Decision

The decision has been rendered by supreme court on 17-02-2012 In case of Catholic Syrian Bank Ltd.

In this case Supreme Court affirmed the decision of South Indian Bank Ltd. (2003) 262 ITR 579 (Kerala). Supreme over ruled full bench decision of kerela High Court in Catholic Syrian Bank Ltd which had declared interpretation given in South Indian Bank case as wrong.