The assessee was involved in the business of purchasing and selling land.  The primary issue was whether the assessee’s claim of bad debt, written off in their books of accounts, was allowable under Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.

The revenue argued that the bad debt should be written off in the assessee’s books and be bonafide, claiming the assessee did not meet Section 36 conditions of the Income Tax Act. One debtor still showed the amount as outstanding, so the assessee couldn’t claim it as bad debt. The assessee on the other hand argued that the income from a business transaction was shown as business income, and despite reminders, the amount was not recovered. The write-off was based on commercial expediency, genuine, and complied with Section 36(1)(vii) and Section 36(2) of the Income Tax Act.

The Hon’ble Tribunal held that the assessee met Section 36(2) conditions, the debt was written off as irrecoverable, and the debtor-creditor relationship existed. The Hon’ble Tribunal set aside the disallowance and allowed the assessee’s appeal.

The Hon’ble High Court upheld the Tribunal’s decision, confirming compliance with Section 36(1)(vii) and Section 36(2), and dismissed the revenue’s appeal. The Hon’ble High Court emphasized the legislative intent to avoid litigation over bad debt deductions. Ratio in PCIT v. Khyati Realtors Pvt Ltd (2022) 447 ITR 167 (SC) explained.  (AY.2009-10)