Bad debt deduction under Section 36(1)(vii): recovery after year does not defeat deduction; taxability arises upon recovery.

Dispute concerns allowance of deduction for bad debts written off in accounts when amounts were recovered after the accounting year. After the 1981 amendment, requirement is limited to writing off the debt in the assessees accounts; there is no separate legal requirement to prove irrecoverability, as affirmed by precedent and CBDT guidance, so deduction claimed for the previous year was sustainible. Amounts recovered later were offered to tax in the year of recovery, preserving overall tax neutrality. Result favoured the assessee and the revenues disallowance was rejected.

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Issues: Whether the Tribunal erred in confirming the addition of Rs. 3,74,13,000 made by disallowing the claim for deduction of bad debts written off in the previous year under Section 36(1)(vii) / Section 37(1)(vii) of the Income-tax Act, 1961.

Analysis: The Court examined the effect of the amendment to Section 36(1)(vii) effective 1.4.1981 and the settled position that deduction for bad debts depends on the assessee writing off the debt in its accounts rather than proving irrecoverability. The Court relied on the Supreme Court decision in T.R.F. Ltd. v. CIT and this Court's precedent in CIT v. Star Chemicals (Bombay) P. Ltd., and noted CBDT Circular No. 551 dated 23.1.1990, to conclude that once debts are written off in the previous year, the statutory requirement is satisfied. The Court also noted that amounts recovered after the accounting year were offered to tax in the year of recovery.

Conclusion: The substantial question of law is answered in the affirmative in favour of the Assessee; the Tribunal's confirmation of the addition is unsustainable and the appeal is allowed.

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