Vijaya Bank vs. CIT (Supreme Court)

For s. 36(1)(vii) Bad Debt, write off of individual debtor’s a/c is not necessary

The assessee made a provision for bad debts by debiting the P & L A/c and crediting the Provision for Bad debts A/c. Thereafter, the provision account was debited and the loans and advances a/c was credited. The AO denied the claim for bad debts u/s 36(1)(vii) on the ground that the individual account of the debtor had not been written off. The CIT (A) and Tribunal allowed the assessee’s claim though the High Court reversed it. On appeal by the assessee, HELD reversing the High Court:

(i) Pursuant to the Explanation inserted w.r.e.f. 1.4.1989 a mere provision for bad debt is not entitled to deduction u/s 36(1)(vii). However, in the present case, besides debiting the P&L A/c and creating a provision for bad debts, the assessee had also obliterated the said provision by reducing the corresponding amount from the debtors account in the Balance Sheet. Consequently, the figure in the loans and advances in the Balance Sheet was shown net of the provision for bad debts;

(ii) The AO’s insistence that the individual account of the debtor should be written off was not acceptable because (a) it was based on a mere apprehension that the assessee might claim deduction twice over and it was open to the AO to check whether the assessee was claiming double deduction, (b) if the individual accounts were closed, the Debtor could in the recovery suits rely on the Bank statement and contend that no amount is due and payable to the assessee and (c) the AO was empowered by s. 41(4) to tax the recovery.