Holding

The Court held that the Rs 10 crore could not be allowed as a deduction under Section 36(1)(vii) because the advance was not a debt incurred in the ordinary course of business, was not written off as an irrecoverable debt in the accounts, and therefore Section 37 could not be invoked.

Summary

The assessee, Khyati Realtors Pvt. Ltd., advanced Rs 10 crore to a builder for the purchase of commercial premises, which later stalled and the amount was written off as a bad debt in 2009. The assessee claimed a deduction under Section 36(1)(vii) of the Income Tax Act, arguing that the advance was either a business debt or a loan made in the ordinary course of its real‑estate and financing business. The Revenue contended that the advance was not a debt arising from business activities, was not written off as an irrecoverable debt in the accounts, and therefore the conditions of Section 36(2) were not satisfied; it also argued that Section 37 could not be invoked because the claim fell within the ambit of Section 36. The Supreme Court examined the statutory requirements of Sections 36(1)(vii), the post‑1989 Explanation distinguishing a write‑off from a mere provision, and the need for the debt to be incurred in the ordinary course of business. Finding no evidence that the advance met these criteria and that it was a capital expenditure rather than a business expense, the Court held that the deduction could not be allowed and that Section 37 was inapplicable. Consequently, the Revenue’s appeal was allowed, setting aside the ITAT and High Court decisions.

Issues considered

The amount advanced to the builder can be treated as a bad debt deductible under Section 36(1)(vii).
Whether the advance qualifies as a debt incurred in the ordinary course of the assessee's business or as a loan.
Whether the deduction can be claimed under Section 37 when the claim under Section 36 is disallowed.
The interpretation of the Explanation to Section 36(1)(vii) post‑1989 regarding write‑off versus provision.
Whether the assessee satisfied the conditions of Section 36(2) for claiming a deduction.

Legislation cited

Income Tax Act, 1961s. 10(2)(xi), s. 10(2)(xv), s. 28, s. 36(1)(vii), s. 36(2), s. 37

Subjects

bad debtSection 36(1)(vii)write‑offprovisionreal incomecapital vs revenue expenditureIncome Tax Actreal estate developmentadvance paymentordinary course of business

Judgment

[2022] 7 S.C.R. 37 37

PR. COMMISSIONER OF INCOME TAX 6 A
v.
KHYATI REALTORS PVT. LTD.
(Civil Appeal No. 5804 of 2022)
AUGUST 25, 2022 B
[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
C
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 D
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
E
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. F
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 G
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
H
37
38 SUPREME COURT REPORTS [2022] 7 S.C.R.

A 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.
B
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,
C 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
D 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
E 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
F 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
G 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
H corresponding deduction under clause (vii) of sub-section (1) of
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 39
REALTORS PVT. LTD.

Section 36 subject to the fulfilment of the conditions set forth in A
sub-section (2) of Section 36 of the IT Act. [Para 12][47-G-H; 48-
A-B]
2. Before the amendment in 1989, the law was that even in
cases where the assessee had made only a provision in its accounts
for bad debts and interest thereon, without the amount actually B
being debited from the assessee’s Profit and Loss account, the
assessee could still claim deduction under Section 36(1)(vii) of
the Act. With effect from 1 April 1989, with the insertion of the
new Explanation under Section 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 C
accounts of the assessee. In other words, before this date, even
a provision could be treated as a write off. However, after this
date, the Explanation to Section 36(1)(vii) brought about a change.
As a result, a mere provision for bad debt per se was not entitled
to deduction under Section 36(1)(vii). Thus, merely stating a bad D
and doubtful debt as an irrecoverable write off without the
appropriate treatment in the accounts, as well as non-compliance
with the conditions in Section 36(1)(vii), 36(2), and Explanation
to Section 36(1)(vii) would not entitle the assessee to claim a
deduction. [Para 13, 14][48-C-E; 50-B-C]
E
Catholic Syrian Bank Ltd. v. Commissioner of Income
Tax, Thrissur (2012) 3 SCC 784 : [2012] 4 SCR 739 –
relied on.
3. It is evident from the rulings of this Court that (i) the amount
of any bad debt or part thereof has to be written-off as irrecoverable F
in the accounts of the assessee for the previous year; (ii) Such
bad debt or part of it written-off as irrecoverable in the accounts
of the assessee cannot include any provision for bad and doubtful
debts made in the accounts of the assessee; (iii) no deduction is
allowable unless the debt or part of it “has been taken into account
in computing the income of the assessee of the previous year in G
which the amount of such debt or part thereof is written off or of
an earlier previous year”, or represents money lent in the ordinary
course of the business of banking or money-lending which is
carried on by the assessee; (iv) the assessee is obliged to prove
H
40 SUPREME COURT REPORTS [2022] 7 S.C.R.

A to the AO that the case satisfies the ingredients of Section
36(1)(vii) as well as Section 36(2) of the Act. [Para 17][51-G-H;
52-A-C]
T.R.F. Limited v. Commissioner of Income Tax, Ranchi
(2010) 13 SCC 532; Southern Technologies Ltd. v. Joint
B Commissioner of Income Tax, Coimbatore [2010] 2 SCR
380 – relied on.
4. In the present case, the record shows that the accounts
of the assessee nowhere showed that the advance was made by it
to M/s C. Bhansali Developers Pvt. Ltd. in the ordinary course
C of business. Its primary argument was that the amount of
` 10 crores was given for the purpose of purchasing constructed
premises. However, the amount was written-off on 28.03.2009.
As noted by the CIT(A), there was no material to substantiate
this submission, in respect of payment of the amount, the time by
which the constructed unit was to be given to it, the area agreed
D to be purchased, etc. Equally, in support of its other argument
that the amount was given as a loan, the assessee nowhere
established the duration of the advance, the terms and conditions
applicable to it, interest payable, etc. The assessee conceded
that it had received interest income for the relevant assessment
E year. However, it could not establish that any interest was paid
(or shown to be payable in its accounts) for the sum of ¹ 10 crores.
Furthermore, there is nothing on record to suggest that the
requirement of the law that the bad debt was written-off as
irrecoverable in the assessee’s accounts for the previous year
had been satisfied. Another reason why the amount could not have
F been written-off, is that the assessee’s claim was that it was given
to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable
property – it therefore, was in the nature of a capital expenditure.
It could not have been treated as a business expenditure. [Para
18][52-C-G]
G A.V. Thomas and Co. Ltd., Alleppey v. The Commissioner
of Income Tax, (Bangalore) Kerala [1963] 1 Suppl. SCR
776 – relied on.
Commissioner of Income Tax v. Mysore Sugar Co. Ltd.
[1963] 2 SCR 976; Mohan Meakin Ltd. v.
H
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 41
REALTORS PVT. LTD.

Commissioner of Income Tax 2012 (348) ITR 109 (Del); A
Harshad J. Choksi v. Commissioner of Income Tax 349
ITR 250 (Bom); IBM World Trade Corporation v.
Commissioner of Income Tax 1990 (186) ITR 412
(Bom) – referred to.
Case Law Reference B
[2012] 4 SCR 739 relied on Para 5
(2010) 13 SCC 532 relied on Para 8
[2010] 2 SCR 380 relied on Para 13
[1963] 1 Suppl. SCR 776 relied on Para 18 C
[1963] 2 SCR 976 referred to Para 20
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5804
of 2022.
From the Judgment and Order dated 30.04.2019 of the High Court D
of Judicature at Mumbai in I.T.A. No. 291 of 2017.
N. Venkataraman, ASG, S. A. Haseeb, Ms. Neela Kedar Gokhale,
H R Rao, Raj Bahadur Yadav, Advs. for the Appellant.
Ms. Kavita Jha, Vaibhav Kulkarni, Advs. for the Respondent.
E
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. Special leave granted. With consent of the counsels for the
parties, the appeal was heard finally. The Revenue has appealed a decision
of the Bombay High Court1 which affirmed an order2 of the Income Tax F
Appellate Tribunal (hereinafter, “ITAT”) which had upheld a claim by
the respondent (hereinafter, “assessee”) for writing off ` 10 crores as a
bad debt.
2. The assessee carries on real estate development business,
trading in transferable development rights (TDR) and finance. In respect G
of its return for the assessment year 2009-2010, the Assessment Officer
(hereinafter, “AO”) issued a notice under Section 143(2) of the Income
Tax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also
1
In ITA No. 291 of 2017, decided on 30.04.2019.
2
In ITA No.129/Mum/2014, decided on 04.03.2016. H
42 SUPREME COURT REPORTS [2022] 7 S.C.R.

A under Section 142(1) of the Act, calling for various details. The assessee
filed its response thereto. The scrutiny assessment was completed by
the AO under Section 143(3) on 30.12.2011, determining the total income
of the assessee at ` 87,880/-. The assessee contended that an amount
of ` 10 crores was deposited with one M/s C. Bhansali Developers Pvt.
Ltd. towards acquisition of commercial premises two years prior to the
B
assessment year in question (i.e., in 2007). It was contended that the
project did not appear to make any progress, and consequently, the
assessee sought return of the amounts from the builder. However, the
latter did not respond. As a result, the assessee’s Board of Directors
resolved to write off the amount as a bad debt in 2009. It was also
C contended that the amount could also be construed as a loan, since the
assessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011
to the AO, the assessee inter alia contended as follows:
“We submit that as per provisions of Section 36(2), in respect
of monies advanced in the ordinary course of business, the
D same allowable as bad debts even if the amount has not been
taken into account in computing the total income. This is well
accepted position in respect of write off of advances given in
the lending business. The present case fully falls within the
provisions of sec. 36(2) hence the write off of advances is
allowable u/s. 36(1)(vii).”
E
3. The AO disallowed the sum of ` 10 crores claimed as a bad
debt in determining its income under “Profits and Gains of Business or
Profession”. Aggrieved, the assessee appealed. Before the appellate
Commissioner (hereinafter, “CIT (A)”) the assessee reiterated the
contents of a letter dated 05.12.2011 written to the AO as follows:
F
“As part of our regular business activity, the company in order
to purchase certain commercial premises had made reservation
by way of bookings in the upcoming project at Old Mumbai
Pune Highway, Khapoli, which was to be developed by M/s
C. Bhansali Developers Pvt Ltd. In order to confirm the
G reservation/booking of said commercial premises, builder
insisted for advance of Rs 10 crores. Accordingly, the company
had advanced Rs 10 crores on 06.03.2007 towards reserving/
booking of the commercial premises in the said project ... Since
the said advance was for purchase of commercial property,
H there was no question of charging interest thereon...However,
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 43
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

further development about the said project of the builder is A
that the builder after taking advances from us did not proceed
in this matter and possibly siphoned the money for other
purposes. On coming to know about their non-proceeding in
the development of the said project, we had a number of
meetings with the directors of M/s C. Bhansali Developers
B
Pvt Ltd. They did not listen to our request for returning the
money…”
4. The CIT(A) confirmed the disallowance on account of bad
debts and interest. A further appeal was preferred to the ITAT, which
allowed the assessee’s plea. The Revenue sought an appeal to the
Bombay High Court under Section 260A of the IT Act. The Bombay C
High Court ruled that no question of law requiring a decision arose in the
appeal and consequently declined to entertain the Revenue’s plea.
5. The Revenue contended that Section 36(1)(vii) of the Act gives
benefit to the assessee to claim a deduction on any bad debt or part
thereof, which is written off as irrecoverable in the accounts of the D
assessee for the previous year. This benefit is subject to Section 36(2)
of the Act. It is obligatory upon the assessee to prove to the AO that the
case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2)
of the Act. It was urged that the ITAT and the High Court erred in
accepting the assessee’s contentions, which were not supported by any E
material or document. It was submitted that the assessee’s claim of
giving ` 10 crores to M/s C. Bhansali Developers Pvt. Ltd. for the
alleged project was not substantiated by any material. Additionally, the
assessee had also pleaded that the amount was given as a ‘loan’ to the
developer, which was a different plea altogether. This plea was bereft
of any material as to the terms of the loan, or the conditions of repayment, F
including interest. It was submitted that by virtue of Section 36(2) of the
Act, the AO has to be satisfied that the action of writing off is on sound
and reasonable basis, and not a device. Reliance was placed on Catholic
Syrian Bank Ltd. v. Commissioner of Income Tax, Thrissur 3 to urge
that the assessee is obligated to prove to the AO that the claim satisfies G
the ingredients of both Section 36(1)(vii) on the one hand and Section
36(2) of the Act as well.
6. The Revenue further argued that the assessee’s submission
that the amount could alternatively be deducted as an expenditure
3
(2012) 3 SCC 784. H
44 SUPREME COURT REPORTS [2022] 7 S.C.R.

A exclusively laid out for commercial purposes under Section 37 of the
Act was belated, and raised for the first time only after the order of the
CIT(A).
7. Ms. Kavita Jha, learned counsel for the assessee urged this
court not to interfere with the findings of the ITAT and the High Court.
B She highlighted that the following facts and circumstances were not in
dispute:
i) The assessee was engaged in the business of real estate
and financing.
ii) The objects clause of the Memorandum of Association of
C the assessee company reflected the business of contractors,
erectors, constructors of buildings, etc., as well as receiving
or lending money as its objects.
iii) ` 10 crores was advanced on 06.03.2007 to M/s C. Bhansali
Developers Pvt. Ltd. to acquire certain commercial premises
D and for reservation by way of bookings in their upcoming
project on the Old Mumbai-Pune Highway in Khopoli.
iv) The said ` 10 crores was written off during assessment
year 2009-10.
v) The ` 10 crores advanced to M/s C. Bhansali on 06.03.2007
E
was in the ordinary course of its business.
8. It was contended that since the builder/borrower defaulted in
repaying the amount, the respondent assessee decided to write off the
same as a bad debt under Section 36(1)(vii) read with Section 36(2) of
the Act. It was contended that after the amendment of Section 36 of the
F
Act in 1989, there was virtually no scope for the AO to scrutinize in
detail a decision to write off the debt. Counsel relied on the decision of
this court in T.R.F. Limited v. Commissioner of Income Tax, Ranchi4.
9. Ms. Jha further contended that there was nothing in the Act
which barred an assessee from claiming the benefit of Section 37 of the
G Act in a case where the expenditure was laid out or incurred exclusively
for business or commercial purposes, where it might not be successful
to establish its claim for deduction under any other head.

4
H (2010) 13 SCC 532.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 45
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

10. The learned counsel also relied on the judgment of this court A
in Commissioner of Income Tax v. Mysore Sugar Co. Ltd.5 As well as
other judgments of High Courts, such as Mohan Meakin Ltd. v.
Commissioner of Income Tax6; Harshad J. Choksi v. Commissioner
of Income Tax7 and IBM World Trade Corporation v. Commissioner
of Income Tax8 to buttress her submissions.
B
Analysis and Conclusions
11. Section 36 of the Act occurs under the heading ‘other
deductions’, and its relevant extract, for the purpose of this case, is as
follows:
“36. (1) The deductions provided for in the following clauses C
shall be allowed in respect of the matters dealt with therein,
in computing the income referred to in section 28—
***
(vii) subject to the provisions of sub-section (2), the amount D
of any bad debt or part thereof which is written off as
irrecoverable in the accounts of the assessee for the previous
year:
Provided that in the case of an assessee to which clause (viia)
applies, the amount of the deduction relating to any such debt
E
or part thereof shall be limited to the amount by which such
debt or part thereof exceeds the credit balance in the provision
for bad and doubtful debts account made under that clause:
Provided further that where the amount of such debt or part
thereof has been taken into account in computing the income
F
of the assessee of the previous year in which the amount of
such debt or part thereof becomes irrecoverable or of an
earlier previous year on the basis of income computation and
disclosure standards notified under sub-section (2) of Section
145 without recording the same in the accounts, then, such
debt or part thereof shall be allowed in the previous year in G
which such debt or part thereof becomes irrecoverable and it
5
1963 (2) SCR 976.
6
2012 (348) ITR 109 (Del).
7
349 ITR 250 (Bom).
8
1990 (186) ITR 412 (Bom). H
46 SUPREME COURT REPORTS [2022] 7 S.C.R.

A shall be deemed that such debt or part thereof has been written
off as irrecoverable in the accounts for the purposes of this
clause.
Explanation 1.—For the purposes of this clause, any bad debt
or part thereof written off as irrecoverable in the accounts of
B the assessee shall not include any provision for bad and
doubtful debts made in the accounts of the assessee.
Explanation 2.—For the removal of doubts, it is hereby
clarified that for the purposes of the proviso to clause (vii) of
this sub-section and clause (v) of sub-section (2), the account
C referred to therein shall be only one account in respect of
provision for bad and doubtful debts under clause (viia) and
such account shall relate to all types of advances, including
advances made by rural branches;….
***
D (2) In making any deduction for a bad debt or part thereof,
the following provisions shall apply—
(i) no such deduction shall be allowed unless such debt or
part thereof has been taken into account in computing the
income of the assessee of the previous year in which the
E amount of such debt or part thereof is written off or of an
earlier previous year, or represents money lent in the ordinary
course of the business of banking or money-lending which is
carried on by the assessee;
(ii) if the amount ultimately recovered on any such debt or
F part of debt is less than the difference between the debt or
part and the amount so deducted, the deficiency shall be
deductible in the previous year in which the ultimate recovery
is made;
(iii) any such debt or part of debt may be deducted if it has
G already been written off as irrecoverable in the accounts of
an earlier previous year (being a previous year relevant to
the assessment year commencing on the 1st day of April, 1988,
or any earlier assessment year), but the Assessing Officer
had not allowed it to be deducted on the ground that it had
not been established to have become a bad debt in that year;
H
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 47
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

(iv) where any such debt or part of debt is written off as A
irrecoverable in the accounts of the previous year (being a
previous year relevant to the assessment year commencing
on the 1st day of April, 1988, or any earlier assessment year)
and the Assessing Officer is satisfied that such debt or part
became a bad debt in any earlier previous year not falling
B
beyond a period of four previous years immediately preceding
the previous year in which such debt or part is written off,
the provisions of sub-section (6) of Section 155 shall apply;
(v) where such debt or part of debt relates to advances made
by an assessee to which clause (viia) of sub-section (1)
applies, no such deduction shall be allowed unless the assessee C
has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts
account made under that clause.”
Section 37 reads as follows:
D
“37. (1) Any expenditure (not being expenditure of the nature
described in sections 30 to 36 and not being in the nature of
capital expenditure or personal expenses of the assessee),
laid out or expended wholly and exclusively for the purposes
of the business or profession shall be allowed in computing
the income chargeable under the head “Profits and gains of E
business or profession”.
Explanation 1.—For the removal of doubts, it is hereby
declared that any expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by
law shall not be deemed to have been incurred for the purpose F
of business or profession and no deduction or allowance shall
be made in respect of such expenditure.”
12. 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 G
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
H
48 SUPREME COURT REPORTS [2022] 7 S.C.R.

A 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
B
be entitled to a corresponding deduction under clause (vii) of sub-section
(1) of Section 36 subject to the fulfilment of the conditions set forth in
sub-section (2) of Section 36 of the IT Act.
13. Before the amendment in 1989, the law was that even in
cases where the assessee had made only a provision in its accounts for
C 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 Section 36(1)(vii) of the Act. With effect from 1
April 1989, with the insertion of the new Explanation under Section
36(1)(vii), any bad debt written-off as irrecoverable in the account of
D 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, the Explanation to Section 36(1)(vii) brought about a change. As a
result, a mere provision for bad debt per se was not entitled to deduction
under Section 36(1)(vii). This position in law was recognized by this
E court in Southern Technologies Ltd. v. Joint Commissioner of Income
Tax, Coimbatore9:
“25. [B]y insertion (w.e.f. 1.4.1989) of a new Explanation in
Section 36(1)(vii), it has been clarified that any bad debt
written off as irrecoverable in the account of the assessee
F will not include any provision for bad and doubtful debt made
in the accounts of the assessee. The said amendment indicates
that before 1.4.1989, even a provision could be treated as a
write off. However, after 1.4.1989, a distinct dichotomy is
brought in by way of the said Explanation to Section
G 36(1)(vii). Consequently, after 1.4.1989, a mere provision for
bad debt would not be entitled to deduction under Section
36(1)(vii). To understand the above dichotomy, one must
understand “how to write off”. If an assessee debits an amount
of doubtful debt to the P&L Account and credits the asset
9
H (2010) 2 SCR 380.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 49
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

account like sundry debtor’s Account, it would constitute a A
write off of an actual debt. However, if an assessee debits
“provision for doubtful debt” to the P&L Account and makes
a corresponding credit to the “current liabilities and
provisions” on the Liabilities side of the balance sheet, then
it would constitute a provision for doubtful debt. In the latter
B
case, assessee would not be entitled to deduction after
1.4.1989.
38. The point to be noted is that the IT Act is a tax on “real
income”, i.e., the profits arrived at on commercial principles
subject to the provisions of the IT Act. Therefore, if by
Explanation to Section 36(1)(vii) a provision for doubtful debt C
is kept out of the ambit of the bad debt which is written off
then, one has to take into account the said Explanation in
computation of total income under the IT Act failing which
one cannot ascertain the real profits. This is where the concept
of “add back” comes in. In our view, a provision for NPA D
debited to P&L Account under the 1998 Directions is only a
notional expense and, therefore, there would be add back to
that extent in the computation of total income under the IT
Act.
39. One of the contentions raised on behalf of NBFC before E
us was that in this case there is no scope for “add back” of
the Provision against NPA to the taxable income of the
assessee. We find no merit in this contention. Under the IT
Act, the charge is on Profits and Gains, not on gross receipts
(which, however, has Profits embedded in it). Therefore,
subject to the requirements of the IT Act, profits to be assessed F
under the IT Act have got to be Real Profits which have to be
computed on ordinary principles of commercial accounting.
In other words, profits have got to be computed after deducting
Losses/ Expenses incurred for business, even though such
losses/ expenses may not be admissible under Sections 30 to G
43D of the IT Act, unless such Losses/ Expenses are expressly
or by necessary implication disallowed by the Act. Therefore,
even applying the theory of Real Income, a debit which is
expressly disallowed by Explanation to Section 36(1)(vii), if
claimed, has got to be added back to the total income of the
H
50 SUPREME COURT REPORTS [2022] 7 S.C.R.

A assessee because the said Act seeks to tax the “real income”
which is income computed according to ordinary commercial
principles but subject to the provisions of the IT Act. Under
Section 36(1)(vii) read with the Explanation, a “write off” is
a condition for allowance.”
B 14. It is thus evident that merely stating a bad and doubtful debt
as an irrecoverable write off without the appropriate treatment in the
accounts, as well as non-compliance with the conditions in Section
36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitle
the assessee to claim a deduction. This position was reiterated again in
Catholic Syrian Bank (supra):
C
“5. The language of Section 36(1)(vii) of the Act is
unambiguous and does not admit of two interpretations. It
applies to all banks, commercial or rural, scheduled or
unscheduled. It gives a benefit to the Assessee to claim a
deduction on any bad debt or part thereof, which is written
D off as irrecoverable in the accounts of the Assessee for the
previous year. This benefit is subject only to Section 36(2) of
the Act. It is obligatory upon the Assessee to prove to the
assessing officer that the case satisfies the ingredients of
Section 36(1)(vii) on the one hand and that it satisfies the
E requirements stated in Section 36(2) of the Act on the other.
The proviso to Section 36(1)(vii) does not, in absolute terms,
control the application of this provision as it comes into
operation only when the case of the Assessee is one which
falls squarely under Section 36(1)(viia) of the Act. We may
also notice that the explanation to Section 36(1)(vii),
F introduced by the Finance Act, 2001, has to be examined in
conjunction with the principal section. The explanation
specifically excluded any provision for bad and doubtful debts
made in the account of the Assessee from the ambit and scope
of ‘any bad debt, or part thereof, written off as irrecoverable
G in the accounts of the Assessee’. Thus, the concept of making
a provision for bad and doubtful debts will fall outside the
scope of Section 36(1)(vii) simplicitor. The proviso, as already
noticed, will have to be read with the provisions of Section
36(1) (viia) of the Act.”

H
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 51
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

15. The assessee had relied on the ruling in T.R.F. Limited (supra). A
In that judgment, this court had inter alia, observed that:
“4. This position in law is well-settled. After 1st April, 1989,
it is not necessary for the assessee to establish that the debt,
in fact, has become irrecoverable. It is enough if the bad
debt is written off as irrecoverable in the accounts of the B
assessee. However, in the present case, the Assessing Officer
has not examined whether the debt has, in fact, been written
off in accounts of the assessee. When bad debt occurs, the
bad debt account is debited and the customer’s account is
credited, thus, closing the account of the customer. In the case
of Companies, the provision is deducted from Sundry Debtors. C
As stated above, the Assessing Officer has not examined
whether, in fact, the bad debt or part thereof is written off in
the accounts of the assessee. This exercise has not been
undertaken by the Assessing Officer. Hence, the matter is
remitted to the Assessing Officer for de novo consideration D
of the above-mentioned aspect only and that too only to the
extent of the write off.”
16. This court did not examine the impact of Section 36(2) and
the condition of write off, in the accounts of the assessee during the
previous year, in T.R.F Ltd. (supra). However, the judgments in Southern E
Technologies (supra), and Catholic Syrian Bank (supra) spelt out the
conditions subject to which an assessee could write off a bad and doubtful
debt. Interestingly, Kapadia, C.J was a party to T.R.F and Catholic
Syrian Bank; he in fact authored the judgment in Southern
Technologies. Furthermore, Catholic Syrian Bank (supra) is by a bench
of three judges, whereas the other decisions are by benches of two F
Judges. In the circumstances, this Court has to accord primacy to
Southern Technologies (supra).
17. It is evident from the above rulings of this court, that:
(i) The amount of any bad debt or part thereof has to be written- G
off as irrecoverable in the accounts of the assessee for the
previous year;
(ii) Such bad debt or part of it written-off as irrecoverable in the
accounts of the assessee cannot include any provision for
bad and doubtful debts made in the accounts of the assessee;
H
52 SUPREME COURT REPORTS [2022] 7 S.C.R.

A (iii) No deduction is allowable unless the debt or part of it “has
been taken into account in computing the income of the
assessee of the previous year in which the amount of such
debt or part thereof is written off or of an earlier previous
year”, or represents money lent in the ordinary course of the
business of banking or money-lending which is carried on by
B
the assessee;
(iv) The assessee is obliged to prove to the AO that the case
satisfies the ingredients of Section 36(1)(vii) as well as Section
36(2) of the Act.
C 18. In the present case, the record shows that the accounts of the
assessee nowhere showed that the advance was made by it to
M/s C. Bhansali Developers Pvt. Ltd. in the ordinary course of business.
Its primary argument was that the amount of ` 10 crores was given for
the purpose of purchasing constructed premises. However, the amount
was written-off on 28.03.2009. As noted by the CIT(A), there was no
D material to substantiate this submission, in respect of payment of the
amount, the time by which the constructed unit was to be given to it, the
area agreed to be purchased, etc. Equally, in support of its other argument
that the amount was given as a loan, the assessee nowhere established
the duration of the advance, the terms and conditions applicable to it,
E interest payable, etc. The assessee conceded that it had received interest
income for the relevant assessment year. However, it could not establish
that any interest was paid (or shown to be payable in its accounts) for
the sum of ` 10 crores. Furthermore, there is nothing on record to suggest
that the requirement of the law that the bad debt was written-off as
irrecoverable in the assessee’s accounts for the previous year had been
F satisfied. Another reason why the amount could not have been written-
off, is that the assessee’s claim was that it was given to M/s Bhansali
Developers Pvt. Ltd. for acquiring immovable property – it therefore,
was in the nature of a capital expenditure. It could not have been treated
as a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v.
G The Commissioner of Income Tax, (Bangalore) Kerala10 this court
held as follows:
“16. Now, a question under s. 10(2)(xi) can only arise if there
is a bad or doubtful debt. Before a debt can become bad or
doubtful it must first be a debt. What is meant by debt in this
10
H [1963] Supp (1) SCR 776.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 53
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

connection was laid down by Rowlatt J., in Curtis v. J. & G. A
Oldfield Ltd., (1925) 9 TC 319 as follows :-
“When the Rule speaks of a bad debt it means a debt which is
a debt that would have come into the balance sheet as a
trading debt in the trade that is in question and that it is bad.
It does not really mean any bad debt which, when it was a B
good debt, would not have come in to swell the profits.”
17. A debt in such cases is an outstanding which if recovered
would have swelled the profits. It is not money handed over
to someone for purchasing a thing which that person has
failed to return even though no purchase was made. In the C
section a debt means something more than a mere advance. It
means something which is related to business or results from
it. To be claimable as a bad or doubtful debt it must first be
shown as a proper debt…”
19. In view of the above discussion, it is held that the assessee’s D
claim for deduction of ` 10 crore as a bad and doubtful debt could not
have been allowed. The findings of the ITAT and the High Court, to the
contrary, are therefore, insubstantial and have to be set aside.
20. The second issue relates to the admissibility of an expenditure
as a deduction, which does not fall within the provisions of Sections 28 E
to 43, and is not capital in nature, but is laid out or spent exclusively for
the purpose of business, under Section 37 of the Act. A similar provision
existed under the old Income Tax Act, 1922 as in the case of provision
for bad debts, by Section 10(2)11. This aspect was considered by this
11
Section 10(2): [S]uch profits or gains shall be computed after making the following
allowances, namely :- F
***
(xi) When the assessee’s accounts in respect of any part of his business, profession or
vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts,
due to the assessee in respect of that part of his business, profession or vocation, and
in the case of an assessee carrying on a banking or money lending business such sum in
respect of loans made in the ordinary course of such business as the Income-tax Officer G
may estimate to be irrecoverable but not exceeding the amount actually written off as
irrecoverable in the books of the assessee :
***
(xv) any expenditure (not being an allowance of the nature described in any of the
clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or
personal expenses) laid out or expended wholly and exclusively for the purpose of such
business, profession or vocations”. H
54 SUPREME COURT REPORTS [2022] 7 S.C.R.

A court in The Commissioner of Income Tax v. The Mysore Sugar Co.,
Ltd.12 The assessee there was engaged in production of sugar. It used
to advance monies to cane growers in consideration of supply of
sugarcane. Due to drought, the cane growers could not repay amounts
advanced. The assessee claimed the outstanding to be bad debts, and
sought to write them off. This was not allowed; the Income Tax Officer
B
held the expenditure to be capital in nature. The High Court however,
set aside that determination. This court confirmed the view of the High
Court. However, the court also examined the argument whether in such
eventualities, the expenditure could be claimed to be exclusively laid out
for the purpose of business (under the provision corresponding to Section
C 37(1) of the Act). This court held as follows:
“7. The tax under the head “Business” is payable under s.
10 of the Income-tax Act. That section provides by sub-s. (1)
that the tax shall be payable by an assessee under the head
“profits and gains of business, etc.” in respect of the profits
D or gains of any business, etc. carried on by him. Under sub-
s. (2), these profits or gains are computed after making certain
allowances. Clause (xi) allows deduction of bad and doubtful
business debts. It provides that when the assessee’s accounts
in respect of any part of his business are not kept on the cash
basis, such sum, in respect of bad and doubtful debts, due to
E the assessee in respect of that part of the his business is
deductible but not exceeding the amount actually written off
as irrecoverable in the books of the assessee. Clause (xv)
allows any expenditure not included in cls. (i) to (xiv), which
is not in the nature of capital expenditure or personal expenses
F of the assessee, to be deducted, if laid out or expanded wholly
and exclusively for the purpose of such business, etc. The
clauses expressly provided what can be deducted; but the
general scheme of the section is that profits or gains must be
calculated after deducting outgoings reasonably attributable
as business expenditure but so as not to deduct any portion
G of an expenditure of a capital nature. If an expenditure comes
within any of the enumerated classes of allowances, the case
can be considered under the appropriate class; but there may
be an expenditure which, though not exactly covered by any

12
H 1963 (2) SCR 976
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI 55
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]

of the enumerated classes, may have to be considered in A
finding out the true assessable profits or gains. This was laid
down by the Privy Council in Commissioner of Income-tax v.
Chitnavis I.L.R. (1932) IndAp 290 and has been accepted by
this Court. In other words, s. 10(2) does not deal exhaustively
with the deductions, which must be made to arrive at the true
B
profits and gains.
8. To find out whether an expenditure is on the capital account
or on revenue, one must consider the expenditure in relation
to the business. Since all payments reduce capital in the
ultimate analysis, one is apt to consider a loss as amounting
to a loss capital. But this is not true of all losses, because C
losses in the running of the business cannot be said to be of
capital. The questions to consider in this connection are : for
that was the money laid out? Was it to acquire an asset of an
enduring nature for the benefit of the business, or was it an
outgoing in the doing of the business? If money be lost in the D
first circumstances, it is a loss of capital, but if lost in the
second circumstances, it is a revenue loss. In the first, it bears
the character of an investment, but in the second, to use a
commonly understood phrase, it bears the character of current
expenses.
E
21. It is apparent that this court was satisfied that the disallowance
of the amount, on account of bad and doubtful debt, did not preclude a
claim for deduction, on the ground that the expenditure was exclusively
laid out for the purpose of business. The court applied the test of whether
the expense was incurred for business, or whether it fell into the capital
stream. In the facts of the case, the tests were satisfied – the expenditure F
was for the purpose of business, and did not fall in the capital stream.
22. The assessee had relied on a few High Court judgments which
have ruled that even if a claim for deduction under Section 36(1) is not
allowed, the possibility of its exclusion under Section 37 cannot be ruled
out. This court is of the opinion that as a proposition of law, that enunciation G
is unexceptional, since the heads of expenditure that can be claimed as
deduction are not exhaustive – which is the precise reason for the
existence of Section 37. Therefore, in a given case, if the expenditure
relates to business, and the claim for its treatment under other provisions
are unsuccessful, application of Section 37 is per se not excluded. H
56 SUPREME COURT REPORTS [2022] 7 S.C.R.

A 23. This court is of the opinion however, that in the facts of this
case, the judgment in Southern Technologies (supra) on this issue (where
the claim of bad and doubtful debt was disallowed) is appropriate, and
applicable. The relevant extract of the said judgment is as follows:
“44. As stated above, Section 36(1)(vii) after 1.4.1989 draws
B a distinction between write off and provision for doubtful
debt. The IT Act deals only with doubtful debt. It is for the
assessee to establish that the provision is made as the loan is
irrecoverable. However, in view of Explanation which keeps
such a provision outside the scope of “written off” bad debt,
Section 37 cannot come in. If an item falls under Sections
C 30 to 36, but is excluded by an Explanation to Section 36 (1)
(vii) then Section 37 cannot come in. Section 37 applies only
to items which do not fall in Section 30 to 36. If a provision
for doubtful debt is expressly excluded from Section 36 (1)
(vii) then such a provision cannot claim deduction under
D Section 37 of the IT Act even on the basis of “real income
theory” as explained above.”
24. In view of the foregoing discussion, the Revenue’s appeal has
to succeed. The impugned judgment of the High Court and the order of
ITAT are hereby set aside. The appeal is allowed, in the above terms,
E without order on costs.

Devika Gujral Appeal allowed.
(Assisted by : Mahendra Yadav, LCRA)

F

G

H