PR. COMMISSIONER OF INCOME TAX 6 versus KHYATI REALTORS PVT. LTD.

Citation: [2022] 7 S.C.R. 37 · Decided: 25-08-2022 · Supreme Court of India · Bench: UDAY UMESH LALIT · Disposal: Appeal(s) allowed

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Judgment (excerpt)

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PR. COMMISSIONER OF INCOME TAX 6
v.
KHYATI REALTORS PVT. LTD.
(Civil Appeal No. 5804 of 2022)
AUGUST 25, 2022
[UDAY UMESH LALIT, S. RAVINDRA BHAT AND
SUDHANSHU DHULIA, JJ.]
Income Tax Act, 1961: s.36(1)(vii) – Determination of Income
under “Profits and Gains of Business or Profession – Deduction of
Bad Debt – In the instant case, respondent-assessee sought deduction
of the amount of Rs. 10 crores in determining its income under
“Profits and Gains of Business or Profession” upon the premise
that said amount was deposited with a builder towards the
acquisition of commercial premises two years prior to assessment
year but later project did not make any progress and hence the
assessee sought refund but the builder did not pay the amount and
therefore the same has become bad debt – Claim for deduction of
bad debt – Held: The assessee nowhere showed on record that the
advance was made to the builder in the ordinary course of business
as well as the time by which the constructed unit was to be given to
it and area agreed to be purchased – The assessee failed to support
the contention that the amount was paid as a loan since it nowhere
established the duration of the advance, terms and condition
applicable and interest payable – Therefore, assessee’s claim for
deduction of ` 10 crore as a bad and doubtful debt could not be
allowed.
Income Tax Act, 1961:  Chapter IV, Part D, ss.28, 36 – Scope
– The income of every assessee has to be assessed as per Chapter
IV, Part D of the Act – s.28 deals with the chargeability of income to
tax under the head ‘Profits and Gains of Business or Profession’ –
The other deductions is given u/s.36 of the Act, which opens with the
phrase “the deductions provided for in the following clauses shall
be allowed in respect of the matters dealt with therein, in computing
the income referred to in s.28” – For the purposes of computing
income chargeable to tax, therefore, besides specific deductions,
‘other deductions’ enumerated in different clauses of s.36 can be
[2022] 7 S.C.R. 37
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SUPREME COURT REPORTS
[2022] 7 S.C.R.
allowed by the AO – Each of the deductions must relate to the
business carried out by the assessee – If the assessee carries on a
business and writes off a debt relating to the business as
irrecoverable, it would be entitled to a corresponding deduction
under clause (vii) of sub-section (1) of s.36 subject to the fulfilment
of the conditions set forth in sub-section (2) of s.36 of the IT Act.
Income Tax Act, 1961: s.36(1)(vii) – Amendment of 1989 –
Pre and Post amendment position – Before the amendment in 1989,
even in cases where the assessee had made only a provision in its
accounts for bad debts and interest thereon, without the amount
actually being debited from the assessee’s Profit and Loss account,
the assessee could still claim deduction under s.36(1)(vii) of the Act
– With effect from 1 April 1989, with the insertion of the new
Explanation under s.36(1)(vii), any bad debt written-off as
irrecoverable in the account of the assessee would not include any
‘provision’ for bad and doubtful debt made in the accounts of the
assessee – In other words, before this date, even a provision could
be treated as a write off, however, after this date,  as per the
Explanation to s.36(1)(vii), a mere provision for bad debt per se
was not entitled to deduction under s.36(1)(vii).
Allowing the appeal, the Court
HELD: 1. The income of every assessee has to be assessed
according to the statutory framework laid out Chapter IV, Part D
of the Act. That chapter deals with heads of income. Section 28 of
the Act deals with the chargeability of income to tax under the
head ‘Profits and Gains of Business or Profession’. The other
deductions that an assessee can claim are elaborated under Section
36 of the Act, which opens with the phrase “the deductions
provided for in the following clauses shall be allowed in respect
of the matters dealt with therein, in computing the income
referred to in Section 28”. For the purposes of computing income
chargeable to tax, therefore, besides specific deductions, ‘other
deductions’ enumerated in different clauses of Section 36 can be
allowed by the AO. Each of the deductions must relate to the
business carried out by the assessee. If the assessee carries on
a business and writes off a debt relating to the business as
irrecoverable, it would without doubt be entitled to a
corresponding deduction under clause (vii) of sub-section (1) o

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