In Stockpoint Share Services Private Ltd v. ACIT, Justices Antony Dominic and Dama Seshadri Naidu of Kerala High Court held that in order claim deduction in respect to bad debts under section Section 36(1)(vii) of the Income Tax Act, the assessee has to fulfill two conditions, i.e, (i) the bad debt has been written off and (ii) that the bad debt has been taken into account in computing the income of the assessee in the previous years.
In the present case, the sole contention of the assessee before the division bench was that the amount of bad debt claimed by the assessee has to be allowed as an expenditure in the year in which it was written off has to be appreciated in the light of the provisions contained in Section 36 of the Income Tax Act.
The bench noted that Section 36 provides other deductions and in terms of this provision, deductions provided for in the Section shall be allowed in respect of the matters dealt with therein in computing the income referred to in Section 28, and Clause-(vii) of Section 36(1) provides that, subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year shall be allowed as a deduction in computing the income referred to in Section 28. However, Clause-(i) of sub-section-(2) provides that, in making any deduction for bad debt or part thereof, no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year.
Remanding the matter back to the files of the assessee, the bench said that “this therefore, means that the assessee has to prove satisfaction of both Section 36(1)(vii) and Section 36 (2)(i), viz. that the bad debt has been written off and that the bad debt has been taken into account in computing the income of the assessee in any one of the years mentioned in Clause-(i) of sub-section (2) of Section 36.”
Read the full text of the Judgment below.
