income tax
In the landmark case of TRF Limited, the Supreme Court clarified the provisions concerning the deduction for bad debts under section 36(1)(iii) of the Income Tax Act, 1961 (the Act). The court ruled that following the amendment effective from 1 April 1989, taxpayers no longer need to demonstrate that a debt is irrecoverable. It is sufficient to write off the bad debt as irrecoverable in the taxpayer's books of accounts.
Under section 36(1)(vii) of the Act, taxpayers are allowed deductions for bad debts, but this was subject to certain conditions. Prior to the amendment on 1 April 1989, it was mandatory for taxpayers to prove that the debt had become irrecoverable. This requirement led to significant litigation, imposing a burden on taxpayers.
To alleviate this issue, the law was amended to remove the term "established," which previously required proof of irrecoverability. Post-amendment, taxpayers are allowed to claim bad debts if they are written off in their accounts. However, some tax authorities continued to require proof of irrecoverability, despite this change.
In this particular case, the taxpayer, an engineering company manufacturing various materials handling equipment, claimed deductions for bad debts for the Assessment Years 1990-1991 and 1993-1994. The Assessing Officer (AO) disallowed these claims.
The Supreme Court noted that before the amendment on 1 April 1989, the burden of proof rested with the taxpayer. However, following the amendment, the requirement was altered by removing the need to "establish" irrecoverability.
The Court affirmed that since 1 April 1989, it is unnecessary for the taxpayer to prove that a debt has become irrecoverable. A mere write-off in the books of accounts is sufficient. In this case, since the AO did not verify whether the debts were written off in the taxpayer's accounts, the Supreme Court remitted the case back to the AO for fresh consideration, focusing solely on the write-off aspect.
This decision by the Supreme Court is a significant development, confirming that after the amendment on 1 April 1989, proving irrecoverability is not a prerequisite for claiming deductions for bad debts under section 36(1)(iii) of the Act. It is adequate for a taxpayer to show the bad debt has been written off in their books. This ruling is expected to resolve longstanding disputes surrounding bad debt deductions, providing clarity and ease for taxpayers in future claims.