VAT refund write-off treated as bad debt where the statutory refund right lapsed and amount was written off in books.

A statutory VAT refund claim arising from export sales was treated as a right that accrued on the sale but lapsed if not claimed within the prescribed period. Because the amount had been taken into account in computing earlier income and became irrecoverable by operation of law, the write-off was characterised as a bad debt rather than a business loss. The deduction was therefore allowable in principle under section 36(1)(vii) of the Income-tax Act, subject to proof that the debt had become irrecoverable by year-end and had been actually written off in the books, with the Assessing Officer required to verify those conditions.

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Issues: Whether the assessee was entitled to deduction for the VAT refund amount written off in the relevant year, and whether such claim was allowable as a bad debt under section 36(1)(vii) of the Income-tax Act, 1961 or as a business loss under section 28 of the Income-tax Act, 1961.

Analysis: The refund entitlement arose on the export sale, and the statutory framework under section 18(2) and section 18(3) of the Tamil Nadu Value Added Tax Act, 2006, read with Rule 11(2) of the Tamil Nadu VAT Rules, 2007, showed that the right to refund vested on accrual of the export sale and lapsed if not claimed within 180 days. The loss was therefore not on account of the tax payment itself, but on account of the lapse of the enforceable right to refund. Since the amount had been taken into account in computing earlier income and became irrecoverable by operation of law, the claim answered the character of a bad debt. The write-off in accounts fixed the relevant year of deduction and satisfied the statutory requirement, though the Assessing Officer still had to verify that the debt had become irrecoverable by the year-end and that it was actually written off.

Conclusion: The claim was held to be allowable in principle as a bad debt under section 36(1)(vii), not as a business loss under section 28, subject to fulfilment of the statutory conditions and verification by the Assessing Officer.

Ratio Decidendi: Where a statutory refund claim arising from business income lapses by operation of law and the amount is written off as irrecoverable in the books, the resulting deduction is governed by section 36(1)(vii) as a bad debt, provided the amount had been taken into account in computing income and is written off in the relevant year.

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