Bad debt write-off and business loss principles applied to delete disallowance of irrecoverable balances

Amounts written off as irrecoverable debtor, driver and employee balances were treated as business loss where the assessee's earlier year had reached the same result and the Revenue showed no distinguishing facts; the disallowance was deleted. Bad debts written off under section 36(1)(vii) were also allowed because, after 1 April 1989, actual proof of irrecoverability is not required once the debt is written off in the accounts and statutory conditions are met; the disallowance on the ground of insufficient recovery efforts was deleted. The additions were therefore removed in full.

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Issues: (i) Whether the disallowance of the amount written off as debtors and miscellaneous driver or employee balances was justified. (ii) Whether the disallowance of bad debts written off under section 36(1)(vii) of the Income-tax Act, 1961 was sustainable.

Issue (i): Whether the disallowance of the amount written off as debtors and miscellaneous driver or employee balances was justified.

Analysis: The claim was examined in the light of the earlier order in the assessee's own case for a prior assessment year, where similar irrecoverable employee and driver balances were held to be business loss. The present facts were found to be identical and no distinguishing feature was shown by the Revenue. Applying the principle of consistency, the amount written off was treated as a loss incurred in the course of business.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the disallowance of bad debts written off under section 36(1)(vii) of the Income-tax Act, 1961 was sustainable.

Analysis: The claim was considered in the light of the settled position that, after 1 April 1989, it is not necessary for the assessee to prove that the debt has actually become irrecoverable. It is sufficient if the debt is written off as irrecoverable in the accounts, subject to the statutory conditions. Since the disallowance rested on the absence of proof of recovery efforts, the addition could not survive on that basis.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The additions were deleted and the appeal succeeded in full.

Ratio Decidendi: After 1 April 1989, a bad debt is allowable once it is written off as irrecoverable in the accounts, and proof of actual irrecoverability is not required.

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