TMI BlogBad Debts- manner of writing offX X X X Extracts X X X X X X X X Extracts X X X X ..... Bad Debts- manner of writing off - By: - CA DEV KUMAR KOTHARI - Income Tax - Dated:- 7-1-2017 - - Reference and links: Section 36 of Income-tax Act, 1961. TRF. LTD. Versus COMMISSIONER OF INCOME-TAX 2010 (2) TMI 211 - SUPREME COURT Sarangpur Cotton Manufacturing Co. Limited Versus Commissioner Of Income-Tax, Gujarat I 1982 (6) TMI 23 - GUJARAT High Court CIT Vs. General Insurance Corporation of India 2000 (9) TMI 13 - BOMBAY High Court CIT v. Union Carbide India Ltd. 1992 (1) TMI 345 - CALCUTTA HIGH COURT Commissioner Of Income-Tax Versus General Fibre Dealers 2000 (4) TMI 16 - CALCUTTA High Court CIT Vs. Hotel Ambassador 2001 (11) TMI 68 - KERALA High Court Bad-debts: Bad- debts are th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose debts which are considered as not recoverable by the enterprise as on the date of balance sheet. Depending on facts and circumstances enterprise ascertain bad-debts. Bad-debts may be written off and credited to account of debtor. If such accounting treatment is made than over a period of time such bad-debts goes out of sight and even if position of debtor improves, it may not be recovered, unless the debtor himself come forward and pay the same (we find such honest debtors also). Or As a prudential method an account in name and style provision for bad debts can be maintained. In both methods the P L account is debited and distributable profits are reduced by the amount of bad debts charged in accounts. There is alw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays possibility that a debtor who is in difficult financial conditions may improve its financials and pay fully or partly against his dues. We also fid instances of such debtors paying even with some interest in future as a gesture of co-operation of creditors in difficult times. These are ground realities of business and policy of honesty is considered to be best policy in business by most of business men. Suggestion: Author always suggest that when a bad debt is written off as write off in account of debtor or as a provision for bad debt, to keep a track of bad-debts , if they become recoverable in future or are actually recovered in future. Likewise author also suggest to keep record of liabilities written back by unilateral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of enterprise so that in case in future claim is settled or paid or when enterprise is able to pay the same the same can be paid and accounted for properly with details about unilateral write-off in earlier years. Actually write off: In view of author in both situation that is (a) amount written off in account of debtor by crediting his account and debiting bad debt account or (b) by debiting P L account and crediting provision for bad debts, there is actual write off and profits and distributable profits are reduced. So the bad debt written off should be allowed in both situations. Now provisions provide that in case a bad debt written off and allowed in any earlier year is recovered it will be treated as income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year in which recovery take place. Therefore, considering totality of provisions bad debts written off under both methods should be allowed. Ruling in case of TRF. LTD From paragraph 4 of the judgment of the Supreme Court we analyse as follows: After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. The Assessing Officer has not examined whether, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off. Authors view: As discussed earlier, as per author write off in account of debtor as well as deduction from total debtors in balance sheet for provision of bad debts both represent bad debts written off. Even in case of assessee like individual, firm AOP, society practice of deducting total of bad debts, described as provision for bad debts is followed as per generally followed accounting policies. This is for the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that even in case of assessee (other than companies) when business has grown, it is looked after by employees who can change due to attrition, and also for memory of individual (proprietor), partners, managers, it is necessary to keep a record of bad-debts written off so that track can be kept to find possibility of recovery. Evan in case of companies, if an amount of debt has become bad and there is no possibility at all of recovery, in that case companies also write off such debts by crediting account of such debtors. Therefore, there is no difference between company and other assessee. Therefore even in case of assessee (other than companies), if amount is written off and reflected as provision deducted from debtors, it should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as bad debt actually written off. There is no reason for making a difference for other assessee. Even in case of proprietor or partners, if the amount has been charged in P L account as bad debt or as provision for bad debt, the distributable profits and capital both stand reduced due to such loss accounted for and written off in P L account. From some earlier judgments: From Sarangpur Cotton Manufacturing Co. Limited Versus Commissioner Of Income-Tax, Gujarat I 1982 (6) TMI 23 - GUJARAT High Court Once the assessee has posted entries in the profit and loss account and corresponding entries are posted in the Bad Debt Reserve Account, that would be sufficient compliance with the provisions of the statutory req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement for writing off as irrecoverable the concerned debt in the books of the assessee . In the instant case, the assessee-company has posted entries in the profit and loss account and corresponding entries are posted in the Bad Debt Reserve Account. These entries coupled with deduction of ₹ 2,37,537 from advances in the balance-sheet of the assessee-company would be compliance with the condition with regard to writing off of the debt in question in its books of account for the relevant year of account. CIT v. Union Carbide India Ltd. 1992 (1) TMI 345 - CALCUTTA HIGH COURT referred in Commissioner Of Income-Tax Versus General Fibre Dealers 2000 (4) TMI 16 - CALCUTTA High Court : The next question relates to bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts, whether the claim of the assessee regarding bad debts of ₹ 4,17,830 should be allowed. Learned counsel for the assessee, Mr. Khaitan submits that the assessee has debited this amount in its profit and loss account and made provision for bad debts as doubtful debts. Learned counsel for the Revenue, Mr. Mullick, submits that there is no finding of the Tribunal that the assessee has debited this amount. Learned counsel for the assessee, Mr. Khaitan further submits that once the loan advance is debited in the profit and loss account and credited as provision for doubtful debts account, this court has allowed the claim of the assessee that it amounts to writing off the bad debts. He places reliance on the decision of this court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT v. Union Carbide India Ltd. 1992 (1) TMI 345 - CALCUTTA HIGH COURT . Though the issue is covered by the decision of this court in the case of CIT v. Union Carbide India Ltd. 1992 (1) TMI 345 - CALCUTTA HIGH COURT , but there is no specific finding that the loan advance has been debited in the profit and loss account of the assessee. Therefore, we deem it proper to direct the Tribunal to verify the facts, if the loan advance is debited in the profit and loss account, the claim of the assessee should be allowed in the light of the decision of this court in the case of CIT v. Union Carbide India Ltd. 1992 (1) TMI 345 - CALCUTTA HIGH COURT . In CIT Vs. General Insurance Corporation of India 2000 (9) TMI 13 - BOMBAY H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court also similar view was taken. In CIT Vs. Hotel Ambassador 2001 (11) TMI 68 - KERALA High Court assessee written off balance in personal account of debtor but it was not debited in P L account. In such situation it was held that requirement of write off was not complied with. That means a debit in P L account is necessary in the year in which claim is made. View of author: In view of author and also as considered by High Courts and now the Supreme Court of India, write off of debtors by debiting the P Ll account and crediting account of debtor or provision for bad debts or reserves for bad debts or , described in any other suitable manner but having debit entry in P L account and deduction from debtors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on assets side, are essential to say that a write off of debt has actually been done. In view of above discussion author feels that observation and order of the Supreme Court that In the case of companies, the provision is deducted from sundry debtors , is applicable in case of other assessee also because this method is a generally accepted accounting treatment Similarly observation and order that When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer , is also applicable in case of companies when any bad-debt is written off, as not at all possible to recover. The tax authorities should not indulge into such litigation where there is no impact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over a period of time. In case a bad debt is allowed, any recovery will be income taxable u/s 41. In case a bad debt or provision is not allowed, any recovery against it will also not be taxable as income in year of recovery. - Reply By Ganeshan Kalyani as = Nice article sir. If the receivable is doubtful then it is debited to profit and loss account as bad debt. Thus this reduces the profit and thereby the tax on income is also reduced /paid less. Later on in future the bad debt turns good then it is credited to profit and loss account and by considering it as income offered to tax. Dated: 7-1-2017 Reply By DEV KUMAR KOTHARI as = Ganeshan Kalyani With reference to your note I confirm that your understanding is correct. Dev Ku ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mar KOthari Dated: 8-1-2017 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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