Bad debt write-off requirement under income tax law satisfied by profit-and-loss debit and reserve account credit.

Debit of the profit and loss account and credit to a bad debt reserve account was treated as sufficient writing off of debts as irrecoverable under Section 36(1)(vii) read with Section 36(2)(i)(b) of the Income-tax Act, 1961. The court examined the statutory requirement against the earlier Act and the assessee's accounting entries, and distinguished the revenue's objection that the debtor's individual account was not squared off. On that reasoning, the entries were accepted as compliance with the write-off condition, and the bad debt deduction was allowed.

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Issues: Whether a bad debt can be treated as written off as irrecoverable for the purposes of section 36(2)(i)(b) when the assessee debits the profit and loss account and credits the bad debt reserve account, without also closing the debtor's ledger account.

Analysis: The statutory requirement is that the debt must be written off as irrecoverable in the assessee's accounts for the relevant previous year. The Court held that this requirement is satisfied when the assessee's entries clearly show an abandonment of the debt as an asset, such as by debiting the profit and loss account and making a corresponding credit entry in the bad debt reserve account. The provision does not insist that the debtor's account must also be squared off or closed. The accounting mode adopted by the assessee sufficiently reflected the write-off of the debt as irrecoverable.

Conclusion: The assessee had complied with section 36(2)(i)(b) of the Income-tax Act, 1961, and the bad debt deduction was allowable.

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