The officer says I have not proved the debts went bad, that crediting a provision account is not a write-off, and that two of the parcels fail s.36(2) - which of those can I answer, and what is left if s.36(2) really does fail?
The client is a private limited company trading in industrial chemicals, assessed at a circle in Ahmedabad. Its AY 2023-24 return, filed on 31 October 2023, declared Rs 1,24,00,000 after writing off Rs 1,42,00,000 of debts in four parcels. Rs 62,00,000 is trade receivables on invoices of FY 2019-20 and FY 2020-21, all credited to the profit and loss account and offered to tax in those years. Rs 34,00,000 is an advance paid in FY 2021-22 to a supplier for solvent never delivered, since gone into liquidation. Rs 26,00,000 is the principal of a loan to a former distributor which carried interest that was offered to tax; the company is not a money-lender and its objects do not cover lending. Rs 20,00,000 is the unrecovered part of a Rs 50,00,000 invoice on which the customer paid Rs 30,00,000 and disputes the balance. In the accounts the whole sum was debited to the profit and loss account and credited to a provision for doubtful debts, and the balance sheet shows sundry debtors net of that provision; the individual ledgers were not closed. The order under s.143(3) dated 9 March 2026 disallows the whole claim on three grounds - that it is a provision and not a write-off, that no evidence shows any debt became bad, and that two parcels fail s.36(2) - adds Rs 18,00,000 under s.41(1) for old creditor balances, and adds the whole sum to book profit under clause (i) of Explanation 1 to s.115JB.
Split the Rs 1,42,00,000 into its four parcels on paper and run each one through s.36(2)(i) before drafting anything, because two of them pass and two do not, and they need different remedies pleaded in different grounds. A single ground asserting that the whole amount was written off invites a single order rejecting the whole amount, which is what happened at the assessment stage. The other half of the first move is to pull the signed accounts, not the draft, and check how the provision is actually presented on the face of the balance sheet - that presentation decides the officer's first ground on its own.
The library's concept page puts it plainly: the write-off is only half of it. The clause allows the deduction subject to the provisions of sub-section (2), and s.36(2)(i) sets the real precondition - the debt must have been taken into account in computing the income of the previous year or an earlier year, or it must represent money lent in the ordinary course of a business of banking or money-lending. The Rs 62,00,000 of trade receivables passes on the first limb, because the sales were credited and offered to tax, and the proof is the invoice, the ledger and the earlier year's computation together. The Rs 34,00,000 advance fails both limbs: an advance for goods never delivered was never taken into account in computing income, and the company lends nothing. The Rs 26,00,000 loan fails on the principal, because only the interest entered income and the principal is what has been written off.
The Supreme Court has held that for years after 1 April 1989 the assessee does not have to establish that the debt has in fact become irrecoverable: it is enough that it is written off as irrecoverable in the accounts. The officer's demand for legal notices, suits and recovery correspondence is therefore asking for something the clause no longer requires. What the same decision does leave with him is a narrower check - he can verify that the write-off was actually made in the books, which is why that matter was sent back rather than allowed outright, and it is the check he will fall back on once this ground is answered.
The Supreme Court has held that debiting the profit and loss account and simultaneously reducing loans and advances or debtors on the asset side, so that the year-end figure is shown net of the provision, is an actual write-off, and that closing each individual debtor's account is not required. That is this balance sheet as the scenario describes it, and the ground is short: produce the schedule reconciling gross debtors, the provision and the net figure carried to the face of the accounts, with the auditor's note. The boundary on the other side is equally clear - the Supreme Court has held that a prudential provision for non-performing assets debited under regulatory directions must be added back in computing total income, because such directions govern presentation and not deductibility.
The clause allows the deduction of any bad debt or part thereof which is written off as irrecoverable in the accounts, so the Rs 20,00,000 written off out of a Rs 50,00,000 invoice is within its words and needs no separate justification - that is taken from the statutory text, because no decision in this collection deals with a part write-off. For the advance and the loan the route is not this clause at all. The Supreme Court has held that a loss springing from the way the business is carried on is deductible under the charging provision itself: it refused the claim there as a bad debt and refused it as expenditure, and then allowed it as a trading loss, because the profits of a business cannot be computed without taking account of losses incidental to it. The library's concept page says the same, that the allowance sections are not an exhaustive statement of what may be deducted.
The Supreme Court has held the rural-provision deduction distinct and independent of the deduction for a bad debt actually written off; a High Court has held that the provision created during the same year reduces the write-off claim; a Tribunal has read the 2013 Explanation as not reaching a clause (a) bank's non-rural debts; and the library's statutory position sets the proviso, the companion condition and that Explanation out together. Every one of them turns on an assessee to whom the provision clause applies. This client is a trading company: the proviso does not touch it, there is no provision account in its computation, and none of those entries decides anything about it. Their value on this file is negative - they tell you which arguments are unavailable, and which ones the officer may wrongly import.
A Full Bench of a High Court has held that after the retrospective insertion of clause (i) with effect from 1 April 2001, a provision for diminution in the value of any asset - which is what a provision for doubtful debts is - must be added back to book profit, and that the earlier line decided under the general clause no longer governs. The difficulty on this file is that the argument on the normal computation is that the entry is a write-off and not a provision, and the book-profit argument has to be the same argument: the accounts carry debtors net, so no provision for diminution survives on the balance sheet to be added back. Say it once and identically in both places, because the two grounds will be read together.
The library's concept page sets out two conditions, not descriptions: the officer must establish that an allowance or deduction was made in an earlier assessment in respect of the very loss, expenditure or trading liability he is now taxing, and that the assessee has since obtained an amount in respect of it or a benefit by way of remission or cessation of it. Both have to be shown for each of the balances making up the Rs 18,00,000, which means the officer has to go creditor by creditor to the earlier year's purchase and the earlier year's deduction. An old balance still carried as payable in the accounts, without more, is not a cessation, and the ground should ask him to identify the year of the deduction and the event of remission for each item.
The discipline is procedural and it costs nothing. Four parcels, each with the sub-section (2) footing stated for it; the alternative under the charging provision pleaded expressly for the two that fail; the accounting characterisation as its own ground; the book-profit addition as its own ground; the creditor addition as its own ground. The reason to be strict about it is what happens if a point is not dealt with: a High Court has held that the Tribunal's rectification power is a power to amend and not to review, and that the mistake must be obvious and patent rather than one to be established by a long process of reasoning on a point on which two views are possible. A parcel folded into another parcel's ground and then passed over in the order is hard to recover afterwards.
The trade receivables parcel is usually allowed, and the accounting ground usually falls with it once the net presentation is shown - together that is Rs 62,00,000 of the Rs 1,42,00,000. The supplier advance goes as a trading loss more often than not where the liquidation is documented and the payment was in the ordinary course of buying stock. The distributor loan is usually lost, and is the parcel on which the department's argument is strongest. The part write-off is rarely contested once it is pleaded from the words of the clause. The book-profit head is genuinely uncertain and is the one most likely to be decided against the client even where the main claim succeeds. Expect at least one parcel to be remitted for verification of the books rather than allowed outright, which adds a year.
