The assessee, a subcontractor, was unable to recover part of its dues from the contractor on account of disputes and had instituted recovery proceedings before the High Courts. It debited the amount to the Profit & Loss Account as bad debt allowance, made corresponding entries reducing the debtor, but did not formally close the individual ledger account since such write-off could prejudice the pending recovery proceedings. The Assessing Officer disallowed the claim treating it as a mere provision. The High Court held that although, after insertion of the Explanation to section 36(1)(vii), a mere provision for bad debts is not deductible, the assessee had, in substance, effected a valid write-off by debiting the Profit & Loss Account and correspondingly reducing the debtor’s account. The pendency of litigation justified not closing the individual ledger account. Following the decisions of the Supreme Court in

and

, the Court held that the assessee had effectively written off the debt as irrecoverable and was entitled to deduction under section 36(1)(vii). Accordingly, the substantial question of law was answered in favour of the assessee and the order of the Tribunal was set aside. (