Supreme Court’s decision on bad debts to cheer taxpayers

No Need To Prove The Debt Is Bad, Write-Off In Books Is Sufficient, Says Apex Court

In a recent decision in the case of TRF Ltd v/s CIT, the apex court has categorically held that after the amendment to section 36 (1) (vii) effective from April 1, 1989, the position in law is well-settled. When a bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision for doubtful debts is deducted from sundry debtors.

This judgement will happily conclude hundreds thousands of appeals pending before various appellate forums all over the country and also relieve the business community from the agony of large disallowances being made in their assessments by incometax officers, on the ground that the deduction for bad debts written off could not be allowed since they had not been proved as bad.

In Gujarat, this issue had become a severe headache for taxpayers after the decision in the case of Dhall Enterprise rendered by the high court in favour of the department.

The business community will heave a sigh of relief with the Supreme Court holding that for securing a deduction for tax purposes, a mere writing off of bad debts in the taxpayer’s books of accounts is sufficient and it is not necessary for the taxpayer to prove that such debt has become actually irrecoverable.