QUESTION: I have read with great interest the question and answer in The Hindu dated May 16, 2011, relating to the write off of bad debts. A few clarifications would seem to be in order.
Your answer suggests that the judgment of the Supreme Court in the case of TRF Ltd v CIT; 323 ITR 397 SC followed the decision of the Supreme Court in Vijaya Bank's case reported in 323 ITR 166 SC.
Though the judgment in the case of Vijaya Bank is reported in Part 1 of 323 ITR and the judgment of TRF is reported in Part 3, it would be seen that TRF's judgment was earlier and the judgment was pronounced on February 9, 2010, whereas the judgment of Vijaya Bank was pronounced on April 15, 2010.
Obviously, the judgment in TRF could not have followed Vijaya Bank's case. Furthermore, the judgment in TRF does not contain any reference to any judgment of any court.
The write off of a bad debt does not necessarily amount to waiver, as has been rightly observed in your answer. In this respect, the answer does not contain any citation. I wish to bring to your notice the judgment of Supreme Court in the case of Salim Akbar Ali Nanji v UOI AIR 2006 SC 2218; (2006) 5 SCC 302; 131 Company Cases 675. The relevant passage occurs at para 17 of the judgment, which is as follows:
“The write off is only an internal accounting procedure to clean up the balance sheet and it does not affect the right of the creditor to proceed against the borrower to realise his dues. Moreover, it does give some benefit to the bank under the income-tax laws because after write off tax is payable only on the amount recovered as and when recovery is made”.
In view of the categorical findings of the Supreme Court, the bank's steps for recovery of a debt which has been written off are not bad.
What is applicable to the bank equally applies to any other business entity.
ANSWER: Tax Forum is obliged for the above contribution of G. Sarangan, Senior Advocate, Bangalore. There was a mistake in the answer as pointed out as regards reference to the two Supreme Court decisions. The correct position of law is that both the decisions of the Supreme Court in Vijaya Bank v CIT (2010) 323 ITR 166 (SC) and TRF Ltd. v CIT (2010) 323 ITR 397 (SC) have followed the same reasoning for the conclusion that the debit to profit and loss account and credit to the asset account would constitute write off but not where the provision is shown in the liabilities side of the balance sheet. The citation of the authority of Supreme Court decision for the proposition that write off does not by itself amount to waiver is another useful contribution by the reader.