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CORPORATES and banks will not have to establish a debt as “bad debt” in order to claim tax deduction, according to a recent Supreme Court ruling. The apex court said that bad debts written off in the books of accounts of the taxpayer is sufficient ground for claiming deduction.

The issue was settled by a 1989 amendment in the Income Tax Act, which had clarified that the tax payer need not establish that the debt is irrecoverable for claiming deduction. If a bad debt is written off, the taxpayer can legitimately claim the deduction. This amendment was incorporated with the intention to reduce the number of litigation arising from disputes over whether a debt is a bad or not. But even after the amendment, tax officers insisted on proofs from tax payers for declaring a debt as bad debt. The Supreme Court judgement therefore reaffirmed the importance of the 1989 amendment, much to the relief of several corporates.

Senior chartered accountant T P Ostwal said, “The apex court’s decision will reduce the number of litigation arising from the requirement to establish that the debts are irrecoverable.”

According to Vispi T Patel of Vispi Patel & Associates, “Though the Supreme Court has not spelled it out, we believe that the debts written off need to be bonafide and should be based on commercial wisdom or expediency.”

The apex court gave this order on an appeal filed by TRF, an engineering company, which claimed deduction under section 36 (I) (vii) of Income tax Act that deals with deduction on account of bad debts.

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