Call ITAT allows Bad debts claimed u/s 36(1)(vii) in respect of identified debts
One of the fears every businessperson has is about incurring bad debts and the claim of such bad debts being disallowed in the books of law. Bad debt represents the financial loss that a business incurs when customers fail to repay credit or outstanding balances. Identifiable bad debts are the irrevocable receivable which is a type of expense that occurs when a customer to whom credit is extended, and such customer is no longer able or willing to pay such receivable.
Section 36(1)(vii) of Income Tax Act,1961 deals with Bad debts or any part thereof allowed as deduction when such bad debts are related to such business that are written off in the books and such bad debts are considered while computing income of the previous year.
Delhi bench of Tribunal has dealt with such an issue where they have allowed deduction under section 36(1)(vii) of Income Tax Act where debts are identifiable.
What does Section 36(1)(vii) specify:
a bad debt is a type of expense that occurs after repayment by a customer (when credit has been extended) is no longer considered to be collectable. In other words, bad debt is an irrecoverable receivable.
Section 36(1)(vii) is related to Bad debts written off. Section 36(1)(vii) of Income Tax Act,1961 deals with Bad debts or any part thereof allowed as deduction when such bad debts are related to such business that are written off in the books and such bad debts are considered while computing income of the previous year. A provision for bad debt can be claimed as a deduction when the entity concerned is in the lending business.
Issues involved:
The assessee involved in this case is E-oriental Bank of Commerce which is a Nationalised Bank. Assessee has filed his original return as well as revised return and in such revised return he had claimed a loss in such revised return for Rs.370.79 crores. Assessing officer had picked this up case for scrutiny and disallowed Bad debts of Rs. 4545.89 crores. Aggrieved assessee had appealed in tribunal against such disallowance.
Facts of the case explained:
The appeal filed by assessee is related to return of income for AY 2017-18. The same issue was dealt in case of assessee for previous assessment years also and the debts in issue were allowed during the previous assessments. The assessee presented the same argument to tribunals. Accordingly the Delhi High Court, dismissing the Revenue’s appeal held that no substantial question of law arises for the issue raised by the Revenue.
Conclusion:
Since an identical issue was brought up for consideration before the Coordinate Bench of the Tribunal in assessee’s case for AY 2015-16, the appeal of the assessee against the order of the CITA(A) is allowed.
Tribunal held that deduction under Section 36(1)(vii) of Income Tax Act will be limited only in those cases where such bad debt exceeds provision under Section 36(1)(viia) of Income Tax Act .
About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.