Sanchayita Lahkar

The High Court of Kerala Division Bench of Justice A. Muhamed Mustaque and Justice Harisankar V. Menon held that closing individual debtor accounts is not a prerequisite for claiming deductions on bad debts under Section 36(1)(vii) of the Income Tax Act, 1961. The Court clarified that the provision permits taxpayers to claim deductions for debts written off in their books during the relevant financial year, even without closing each debtor’s account. Deciding appeals filed by an assessee company, the Bench set aside the Income Tax Appellate Tribunal’s contrary view and directed the Assessing Officer to re-examine the claim in accordance with the Supreme Court’s decision in Vijaya Bank v. CIT

The case concerned appeals filed by Geofin Comtrade Limited challenging the orders of the Income Tax Appellate Tribunal, Cochin Bench, related to the assessment years 2013–2014 and 2014–2015. The Tribunal had previously reversed the decisions of the first appellate authority that had favoured the assessee. The primary issue arose from Geofin Comtrade’s claim for deduction under Section 36(1)(vii) of the Income Tax Act, representing provisions for doubtful debts.

Also Read: ‘If She Really Is an Advocate, It’s Alarming’: Kerala High Court Slams Litigant for Misconduct While Dismissing Writ Petition Challenging Ex-Parte Divorce Decree as Not Maintainable

The Assessing Officer had rejected the company’s deduction claims, holding that the individual accounts of debtors had not been written off as irrecoverable, as required under the statute. Geofin Comtrade argued that the write-off had been properly made in its books, consistent with the judgement of the Supreme Court in Vijaya Bank v. Commissioner of Income Tax and Another [(2010) 323 ITR 166 (SC)]. The first appellate authority examined the company’s balance sheets and found that the provisions for bad and doubtful debts had indeed been written off in compliance with the law. It accordingly allowed the company’s appeals.

However, the Income Tax Appellate Tribunal held that the assessee’s claim could not be accepted unless the individual debtor accounts were formally closed in the separate debtor ledger. On this reasoning, it restored the disallowances made by the Assessing Officer. The company challenged this finding before the Kerala High Court, contending that the Tribunal’s interpretation was contrary to the settled law laid down by the Supreme Court.

The Court recorded that “the dispute in these appeals is with reference to the entitlement for deduction under Section 36(1)(vii) of the Act.” It noted that the provision allows deductions in respect of “any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee.” However, Explanation 1 to the clause clarifies that a mere provision for bad and doubtful debts would not suffice to claim the deduction.

Addressing the Tribunal’s insistence on the closure of individual debtor accounts, the Court referred extensively to the Supreme Court’s judgement in Vijaya Bank (supra). It recorded that the Apex Court had observed that where an assessee debits the profit and loss account and correspondingly obliterates the amount from loans and advances on the asset side of the balance sheet, such action constitutes an actual write-off. The Kerala High Court quoted the relevant reasoning, stating that “at the end of the year, it is the net figure that was available representing the bad debt,” which was accepted by the Supreme Court as fulfilling the requirement of Section 36(1)(vii).

The Court further observed that “the apprehension of the revenue that, without closing the individual debtor’s account, the assessee may claim deduction twice over can only be considered as apprehension.” It also referred to Section 41 of the Act, which provides that any subsequently recovered amount would be chargeable to tax in the year of recovery. Based on these principles, the Bench concluded that there is “no requirement for the individual debtor’s account to be closed for claiming deduction under Section 36(1)(vii).” It thus held that the Tribunal’s contrary finding could not be sustained.

Also Read: Written Grounds of Arrest Mandatory Under UAPA: Supreme Court Quashes Detention and Remand for Non-Compliance

The Bench recorded that “we are of the opinion that the matter requires to be revisited by the assessing authority with reference to the principles laid down by the Apex Court in Vijaya Bank (supra), especially with reference to the profit and loss account and the balance sheet of the assessee.”

“In the result, these appeals are allowed, setting aside the common order of the Income Tax Appellate Tribunal and remitting the matter back to the files of the assessing authority for fresh disposal as above.”

Advocates Representing the Parties:

For the Petitioners: Shri. Abraham Joseph Markos, Sri. V. Abraham Markos, Sri. Isaac Thomas, Sri. P.G. Chandapillai Abraham, Shri. Alexander Joseph Markos, Shri. John Vithayathil.
For the Respondents: Shri. Jose Joseph, Standing Counsel.

Case Title: Geofin Comtrade Limited v. Assistant Commissioner of Income Tax
Neutral Citation: 2025: KER:76303
Case Numbers: ITA Nos. 51 of 2024 and 5 of 2025
Bench: Justice A. Muhamed Mustaque and Justice Harisankar V. Menon