Bad Debts Written Off: If a provision for expense is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of “real income theory”.

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Bad Debts Written Off: If a provision for expense is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of “real income theory”.

 

  1. Citation: Pr. CIT Vs Kyati Realtors Pvt. Ltd (SLP(C) No. 672 of 2020, Dated 25-08-2022) Supreme Court of IndiaSections : 36(1)(vii) and 37(1)

    1. In this case, the assessee contended that an amount of ₹ 10 crores was deposited with one party towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007).

  2. It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder.
  3. However, the latter did not respond.
  4. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009.
  5. It was also contended that the amount could also be construed as a loan, since the assessee had ‘financing’ as one of its objects.
  6. The assessee claimed the same as bad debt. The Supreme Court negated it and reversed the judgment of High Court.
  7. The Hon’ble Apex Court laid down the following principles to allow a claim of bad debt under the Income-tax Act, 1961:-(i) The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the assessee for the previous year;

    (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee;

    (iii) No deduction is allowable unless the debt or part of it “has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year”, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;

    (iv) The assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act.

    Further, it observed that in view of Explanation which keeps such a provision outside the scope of “written off” bad debt, Section 37 cannot come in. If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36 (1) (vii) then Section 37 cannot come in.

Section 37 applies only to items which do not fall in Section 30 to 36. If a provision for expense is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of “real income theory”.

 

Supreme Court in its para 23 observed as under:

 

  1. This court is of the opinion however, that in the facts of this case, the judgment in Southern Technologies (supra) on this issue (where the claim of bad and doubtful debt was disallowed) is appropriate, and applicable. The relevant extract of the said judgment is as follows: “44. As stated above, Section 36(1)(vii) after 1.4.1989 draws a distinction between write off and provision for doubtful debt. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. However, in view of Explanation which keeps such a provision outside the scope of “written off” bad debt, Section 37 cannot come in. If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36 (1) (vii) then Section 37 cannot come in. Section 37 applies only to items which do not fall in Section 30 to 36. If a provision for doubtful debt is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of “real income theory” as explained above.”

    The complete landmark judgment is as under:-.

Bad Debts Written Off: If a provision for expense is expressly excluded from Section 36 (1) (vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of “real income theory”.

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