In a move to bring down tax litigation, the government has relaxed the obligation on companies to prove the “irrecoverability of bad debts”.
“The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable,” the Central Board of Direct Taxes (CBDT) said in a circular issued on May 30.
It said any debt written off as irrecoverable in the books of accounts of corporates would be allowed, if it fulfils the other conditions as per the Income Tax Act.
The relaxed provision applies to taxpayers, including corporates — which shows the loans given by them as income in their profit and loss account, but not banks.
The tax department, sources said, has come across several cases where the taxpayer has failed to establish that a debt is irrecoverable, leading to litigation.
“Even after the ruling of the apex court on this issue in 2010, the revenue authorities continued to harass the assessees by asking them to establish that the debts have actually become irrecoverable, before allowing deduction on account of bad debts written off as irrecoverable in the accounts of the assesee. The CBDT has issued clarification of this litigative issue, taking another step in its movement of making India’s tax environment non-adversarial and in order to minimise litigation,” said Rakesh Nangia, managing partner at Nangia & Co.
Revenue authorities have relentlessly taken assessees to the next court following the philosophy that matters should be left to the courts for the ultimate decision. Analysts say the “must file appeal” policy has today resulted in a piquant situation — the Centre and states together account for nearly
70% of the cases clogging the three-tier justice dispensation system.
The CBDT has directed that no appeal shall be filed on this (recoverability of debt) ground and appeal already filed may be withdrawn or not pressed.
It is immediately not known how much tax litigations are pending based on bad debt.