Bad debt deduction depends on actual write-off; separate company-law accounts and provisions do not defeat the income-tax claim.

Separate books maintained for company law compliance and income-tax computation were permissible, and a provision shown in corporate accounts did not defeat a bad debt claim under section 36(1)(vii) where the tax computation reflected a genuine write-off. The court also found that debiting the profit and loss account and crediting the individual debtor accounts amounted to an actual write-off, satisfying the statutory requirement. On that basis, the document states that a mere provision for doubtful debts is insufficient, but an actual write-off supports deduction.

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Issues: (i) Whether the assessee was entitled to deduction of bad debts under section 36(1)(vii) of the Income-tax Act, 1961 despite maintaining separate books for company law and income-tax purposes and making a provision in the company accounts; (ii) Whether the bad debts were actually written off in the accounts so as to satisfy the statutory requirement for deduction.

Issue (i): Whether the assessee was entitled to deduction of bad debts under section 36(1)(vii) of the Income-tax Act, 1961 despite maintaining separate books for company law and income-tax purposes and making a provision in the company accounts.

Analysis: Separate sets of books for company law compliance and for computation under the Income-tax Act were held to be permissible. The existence of a provision in the corporate accounts did not affect the claim in regular income-tax computation, because the two sets of accounts served different statutory purposes. The rejection of the claim by the assessing authority was based on an impermissible juxtaposition of the two account sets. The Department's attempt to question this position after having accepted the assessee's stand for earlier years was also held to be unjustified.

Conclusion: The assessee's claim under section 36(1)(vii) could not be disallowed merely because the company accounts contained a provision for bad debts.

Issue (ii): Whether the bad debts were actually written off in the accounts so as to satisfy the statutory requirement for deduction.

Analysis: The material showed that the bad debts were debited to the profit and loss account and the corresponding individual debtor accounts were credited, which amounted to an actual write-off. This was distinguished from a mere provision for doubtful debts. The Court applied the principle stated in the Supreme Court authorities that deduction is allowable where the debt is actually written off, but not where only a provision is created. The assessee's method was found to conform to the statutory requirement.

Conclusion: The bad debts were actually written off and the deduction was allowable.

Final Conclusion: The Department's challenge failed on both questions of law, and the appeal was dismissed with the assessee succeeding on the disputed deductions.

Ratio Decidendi: A deduction for bad debts under section 36(1)(vii) is allowable when the debt is actually written off in the accounts, and the existence of a separate provision or parallel set of company-law accounts does not defeat the claim where the income-tax computation reflects a genuine write-off.

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