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Direct Tax Alert - SC reiterates that taxpayer needs to satisfy conditions specified in section 36(1)(vii) and section 36(2) of the IT Act for claiming bad debts

06 September 2022


As per section 36(2) of the Income-tax Act, 1961 (IT Act), Bad Debts written off can be allowed as deduction only if such write off was considered while computing total income – either in same fiscal year in which the write off is done or in any of the earlier fiscal year. Section 36(1)(vii) of the IT Act provides that subject to section 36(2) of the IT Act, the debt should be actually written off in the books of accounts for claiming the deduction of bad debts. Supreme Court in the case of TRF Ltd.1 has allowed the bad debts as deduction as:

  • The amount was offered as income in earlier year(s)
  • Such amount is actually written off in the books of account

In other words, the taxpayer is not required to show the steps undertaken by it to recover the debt before they are written off.

Recently, Supreme Court reiterated the law on deductibility of bad debts. We, at BDO in India, have summarized this ruling2 and provided our comments on the impact of this decision hereunder:


The taxpayer, an Indian Company, is into real estate development business, trading in transferable development rights (TDR) and finance. In the year 2007, the taxpayer gave INR 100 mn. to a builder for acquiring commercial premises. As there was no progress in the project for 2 years, the taxpayer sought return of money. As no response was received from the builder, the taxpayer wrote off the amount as bad debts. The tax officer disallowed taxpayer’s claim for bad debts. Aggrieved, the taxpayer appealed before the First Appellate Authority (CIT(A)) who confirmed tax officer’s action. However, the Tax Tribunal granted relief to taxpayer, the appeal against which was declined to be admitted  by the  Bombay High Court as there was no substantial question of  law arose. The Tax Authority appealed before the Supreme Court.


After examining section 36(2) and section 36(1)(vii) of the IT Act and relying on its earlier decisions, SC upheld the disallowance made by the Tax Officer thereby reversing the decision of HC & Tax Tribunal. While coming to this conclusion, the Supreme Court made following observation:

  • It is evident that merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii) of the IT Act, section 36(2) of the IT Act and Explanation to Section 36(1)(vii) of the IT Act would not entitle the taxpayer to claim a deduction.
  • In respect of TRF Limited’s ruling, the judgement was passed without examining the impact of Section 36(2) of the IT Act and the condition of writing off the bad debts in the accounts of the taxpayer during the previous year. However, in the ruling of Southern Technologies3 and Catholic Syrian Bank4, the conditions subject to which a taxpayer could write off a bad and doubtful debt is spelt out. Hence, Southern Technologies’ ruling attains primacy.‚Äč
  • The record  nowhere showed that the amount was advanced in the ordinary course of business. There was also no material to substantiate  the fact that the payment of INR 10 Crs was made either for purchasing constructed premises or loan. Further, there was nothing on record to suggest that the requirement of law that the bad debt was written-off as irrecoverable in the taxpayer accounts for the previous year had been satisfied.
  • The disallowance of the amount, on account of bad and doubtful debt, did not preclude a claim for deduction, on the ground that the expenditure was exclusively laid out for the purpose of business. If the expenditure relates to business, and the claim for its treatment under other provisions are unsuccessful, application of Section 37 is per se not excluded. However, the facts of the instant case is covered against the taxpayer by the decision of Southern Technologies (supra).


SC has reiterated that:

  • The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the taxpayer
  • Such bad debt or part of it written-off as irrecoverable in the accounts of the taxpayer cannot include any provision for bad and doubtful debts made in the accounts of the taxpayer;
  • No deduction is allowable unless the debt or part of it “has been taken into account in computing the income of the taxpayer of the fiscal year in which the amount of such debt or part thereof is written off or of an earlier fiscal year”, or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the taxpayer;
  • The taxpayer is obliged to prove to the Tax Officer that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the IT Act.

TRF Ltd vs. CIT (2010) 13 SCC

2 Pr.CIT vs Khyati Realtors Pvt. Ltd [SLP(Civil) No. 672 of 2020)

3 Southern Technologies Ltd vs JCIT (2010) 2 SCR 380

4 Catholic Syrian Bank Ltd vs. CIT (2012) 3 SCC 784