Bad debt deduction requires substantive write-off, not a mere provision, and formal closure of every debtor account is unnecessary.

After the insertion of the Explanation to section 36(1)(vii), a mere provision for bad and doubtful debts is not deductible, but a debt remains allowable as a bad debt if it is written off as irrecoverable in substance. The assessee had debited the disputed debt to the profit and loss account and reflected it in the ledger as irrecoverable, and the pending recovery proceedings supported that treatment. The absence of a formal closure entry in each debtor account was not decisive where the accounts otherwise showed an actual write-off. Any later recovery would be taxable under section 41(4).

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Issues: Whether the assessee was entitled to deduction under section 36(1)(vii) of the Income-tax Act, 1961 where the disputed debt was debited in the profit and loss account and reflected in the ledger as irrecoverable, though not closed by a formal write-off entry, and whether such treatment amounted to a valid write-off after the insertion of the Explanation to section 36(1)(vii).

Analysis: The governing principle is that, after 1 April 1989, a mere provision for bad and doubtful debts does not qualify for deduction, but a genuine write-off is still allowable if the debt is treated as irrecoverable in substance. The entries made by the assessee, coupled with the pending recovery litigation, showed that the amount was in effect treated as a bad debt and not as a mere provision. The earlier and later Supreme Court authorities on the manner of write-off were applied to hold that the absence of a formal closure of the debtor's individual account was not decisive where the accounts otherwise reflected an actual write-off and any later recovery would be taxable under section 41(4).

Conclusion: The assessee's claim for deduction was allowable, and the substantial question of law was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: For deduction under section 36(1)(vii), the decisive test is whether the debt has been written off as irrecoverable in substance; a mere provision is insufficient, but a write-off shown by accounting treatment that reduces the debt as irrecoverable is valid even without a formal closure of every individual debtor account.

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