Section 36(1)(vii) — Deduction for Bad Debts

Section 36(1)(vii) of the Income-tax Act, 1961 allows taxpayers to claim a deduction for bad debts that have been written off as irrecoverable in the accounts of the assessee for the previous year. This provision is significant as it provides relief to businesses by allowing them to deduct debts that are unlikely to be recovered, thereby reducing their taxable income. The statutory test requires that the debt must be written off in the books of accounts, and it must be a debt that has become bad during the relevant previous year. The burden of proof lies with the taxpayer to demonstrate that the debt has indeed become irrecoverable. In practice, this section is crucial for businesses dealing with credit sales, as it helps in managing financial losses due to non-recovery of debts.

Common Litigation Flashpoints

1. Whether the debt was actually written off in the books of accounts
2. Determination of the year in which the debt became irrecoverable
3. Classification of a debt as 'bad' or 'doubtful'
4. Disallowance of deduction if recovery efforts are not adequately demonstrated

Judgments on Section 36(1)(vii) — Deduction for Bad Debts

• T.R.F. Limited vs Commissioner of Income Tax, Ranchi — SC,
  Post-1st April 1989, it is sufficient for the assessee to write off the bad debt in its accounts to claim a deduction under Section 36(1)(vii).
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• M/s. Texas Instruments (India) Private Limited vs ACIT (LTU), Bengaluru — ITAT,
  Expenses incurred for software usage and IT support services, which do not result in acquisition of any asset or enduring benefit, are revenue in nature.
• C.I.T., Kolkata vs SMIFS Securities Ltd. — SC,
  Goodwill is an asset under Explanation 3(b) to Section 32(1) of the Income Tax Act, 1961.