Income Tax, Issue Update

Credit entry in individual debtor’s account: Prerequisite for claiming deduction on account of writing off of bad debts

Case:  Hajee A.P.Bava & Company Vs. The Assistant Commissioner of Income Tax, Karnataka HC

Outcome: Remand


  • The Assessee was a private limited company, which was engaged in the business of fabrication, erection, commissioning, maintenance of mechanical plants and machinery. The Assessee filed its return of income by declaring total income of Rs.7.71 Crs on 30.11.2014. The Assessee then filed the revised return of income on 28.11.2015 by declaring total income of Rs.20.83 Crs.
  • The original return of the Assessee was processed under Section 143(1) of the Act and the case of the Assessee was selected for scrutiny. Notices under Section 143(2) of the Act dated 28.08.2015 and under Section 142(1) of the Act were issued. The Assessing Officer by an order dated 29.11.2016 passed under Section 143(2) of the Act inter alia held that from perusal of the ledger extracts, it was evident that no credit entry on the account of bad debts has been made in the debtors account during or at the end of financial year 2013-14.
  • It was further held that account was not squared off and closed at the year end and the Assessee continued to transact with the debtor in the subsequent financial year also. It was also held that amount claimed in the profit and loss account as bad debts had not actually been written off from the debtors account and has merely been transferred to account making provision for doubtful debts.
  • Accordingly, the bad debts written off to the extent of Rs.11.45 Crs were disallowed.

Key points

  • On perusal of Section 36(1)(vii) as amended from 01.04.1989 it was evident that after 01.04.1989 it was not necessary for the Assessee to establish the fact that the debt in fact had become irrecoverable and it is sufficient if the bad debt was written off as irrecoverable in the books of accounts of the Assessee.
  • Further, if an Assessee debited an amount of doubtful debts to profit and loss account and credited the asset account like sundry debtors account, it would constitute a right of an actual debt. However, if an Assessee debited ‘provision for doubtful debit’ to profit and loss account and made a corresponding credit to 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 after 01.04.1989.
  • In the present facts of the case, from the close scrutiny of the orders passed by the Assessing Officer, Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal the aforementioned aspect of the matter was not examined.
  • Therefore, the Hon’ble High Court quashed the impugned orders and remitted the matter to the Assessing Officer to ascertain twin questions viz., (i) whether debt which was written off during the relevant year was offered to income in previous year or earlier years, (ii) whether the Assessee had debited the amount of doubtful debt to profit and loss account and had reduced the same from the asset side of the balance sheet.

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