Delhi High Court: Writing off bad debt presumed as such under Income-tax Act

The High Court of Delhi ruled in an appeal regarding the writing off of a bad debt by the assessee under u/s 36(1)(vii) of the Income-tax Act, 1961. The Court held that in the absence of evidence to the contrary, a debt written off as irrecoverable should be presumed as a bad debt. It referenced Circular No. 551 issued by the Central Board of Direct Taxes to support the legislative intent behind u/s 36(1)(vii). The Court found no substantial question of law and dismissed the appeal by the revenue.

---

---

Issues involved: Interpretation of u/s 36(1)(vii) of the Income-tax Act, 1961 regarding writing off a bad debt by the assessee.

In the present case, the High Court of Delhi considered an appeal by the revenue against an order of the Income-tax Appellate Tribunal related to the assessment year 1995-96. The main issue was the writing off of a bad debt by the assessee, governed by u/s 36(1)(vii) of the Income-tax Act, 1961.

The revenue contended that there should be evidence to prove that the debt was bad before it could be written off as irrecoverable. However, the Court opined that a prudent businessman would not write off a debt he hopes to recover. In the absence of any contrary evidence, the debt written off as irrecoverable should be presumed to be a bad debt.

The Court also referred to a previous judgment by another Division Bench of the same Court, which highlighted Circular No. 551 issued by the Central Board of Direct Taxes. The Circular aimed to eliminate litigation regarding the allowability of bad debts by amending the statute to enable assessee to write off a debt as irrecoverable and claim deduction, thus indicating the legislative intent behind u/s 36(1)(vii).

Ultimately, the Court found no substantial question of law requiring consideration and dismissed the appeal.

---