Debt write-off, when justified

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The irrecoverability of a bad debt depends upon the facts and circumstances of each case and it is not necessary for the lender to wait till the debtor company actually goes into liquidation before writing off the loan and interest thereon and claiming the deduction under section 36(1)(vii) of the Income-tax Act, 1961. Winding up is a cumbersome process where claims of a large number of secured and unsecured creditors have to be settled, which may take a considerably long period to attain finality. The creditor companies would be justified in deciding whether any amount would be recoverable or not and make a provision for bad and doubtful debts.

In a given case the assessee could establish that there is no possibility of recovering the bad and doubtful debts depending upon the financial position of the debtor company. The assessee can make an honest judgment that the debt has become bad and should be written off. The point was considered by the Kerala High Court in CIT v Kerala State Industrial Development Corporation Ltd (289 ITR 238).

In this case, the assessee had debited an amount of Rs 27,52,651 towards provision for bad debt, which represented Rs 47,776 due from VL and Rs 27,04,875 due from VP. Both these companies were under orders of winding up. In the case of VL the assets were not sufficient to recover dues of the assessee after paying the secured debts and in the case of VP the official liquidator had advertised sale of assets and the amount realisable was expected to be Rs 45 lakh, which was to be shared between KFC, SBT and KSIDC. The assessee had debited the amounts due from these companies to the profit and loss account and claimed them as bad debt. The assessing officer however disallowed the claim.