Provision reducing asset side of balance sheet amounts to writing off bad debts in accordance with section 36 (2)

If asset side of balance sheet is reduced by provision made, it amounts to writing of the debts in accordance with the provision of section 36 (2) of the Income Tax Act, 1961

ABCAUS Case Law Citation:
ABCAUS 2554 (2018) (10) ITAT

Important Case Laws Cited/relied upon by the parties:
Vijaya Bank 323 ITR 166

The appellant company was engaged in the business of civil construction. During the course of the scrutiny assessment proceedings the Assessing Officer noticed that the asssessee has claimed deduction u/s 36(2) of the Income Tax Act, 1961 (the Act).

The Assessing Officer disallowed the same because he was of the opinion that mere making a provision in the books of account for bad debts was not allowable rather the debt must be written off.

When the matter was agitated before the first appellate authority the CIT(A) confirmed the disallowance made by the Assessing Officer stating that the claim of bad debts was not in accordance with the provision of section 36 (2) of the IT Act and therefore could not be allowed.

Aggrieved, the assessee appealed to the Tribunal.

The Tribunal opined that both the lower authorities have grossly erred in not appreciating the facts in true perspective. Both the lower authorities ignored the fact that the asset side is actually reduced by the amount of bad debts which means that the debt has been actually written of.

The Tribunal relied ipin the judgment of the Hon’ble Supreme Court where it was categorically held that if the asset side is reduced by the provision it amounts to writing of the debts.

The Tribunal directed the Assessing Officer to delete the disallowance on account of provision for bad debts.

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