The corporate sector and banks will henceforth have the onus of deciding the fate of their debt for tax treatment, with their decision binding on the department, going by a recent order of the Mumbai tribunal.
In the case of Oman International Bank, the tribunal was of the view that once the assessee had decided the debt to be bad, the department could not override it.
Earlier, the department would have asked the assessee to prove the debt to be bad. A debt goes bad when a corporate or bank finds it difficult to recover for the said year.
According to sources, this had been a landmark judgement, with most corporates and banks already quoting it for claiming deductions under bad debt.
As per Section 36 of the Income Tax Act, bad debt is deducted from profits to the extent it has not been provided for in the credit balance as provisioning for bad and doubtful debts.
Earlier, the deduction was available for the year in which the debt had gone bad. Now, the debt could be written off any year and so offered the assessee the opportunity to make the adjustments on the basis of profits, said a source.
Explaining it, the source said it gave the assessee the chance of claiming the deduction the year the profit was substantial and show the recovery of the debt the year the profit was less.
However, the Madras high court, in the South India Surgical case, has ruled just the opposite, stating that the assessee has to prove that the debt is bad. Sources felt that the treatment of bad debt might snowball into a major issue since it was a very common deduction claimed by assessees.
As per the extant guidelines, however, no deduction will be allowed unless such debt has been taken into account in computing the income and such debt is written off, representing money lent in the ordinary course of business or moneylending.
