Kerala High Court Overturns Tribunal's Ruling on Bad Debt Deduction

High Court Directs Reassessment of Geofin Comtrade's Case in Light of Supreme Court's Vijaya Bank Judgment

In a significant ruling on October 14, 2025, the Kerala High Court set aside the decision of the Income Tax Appellate Tribunal, which had denied Geofin Comtrade Limited's claim for deductions on provisions for doubtful debts. The Tribunal had previously insisted on the formal closure of individual debtor accounts for such deductions to be valid. This decision has now been overturned by the High Court, directing the matter back to the assessing authority for reevaluation, adhering to the Supreme Court's principles laid down in the Vijaya Bank case.

The appeals were heard by a division bench comprising Mr. A. Muhamed Mustaque and Harisankar V. Menon, JJ. The case revolved around the interpretation of Section 36(1)(vii) of the Income Tax Act, 1961, which concerns the deduction of bad debts. Geofin Comtrade Limited had sought deductions for the assessment years 2013-2014 and 2014-2015, which were initially disallowed by the Tribunal on the grounds that the individual debtor accounts had not been formally closed.

The High Court referenced the Supreme Court's ruling in Vijaya Bank v. Commissioner of Income Tax, where it was clarified that the formal closure of individual debtor accounts is not necessary if the bad debts are removed from the assets side of the balance sheet. The Supreme Court had emphasized that such an approach amounts to an actual write-off, thus complying with Section 36(1)(vii) of the Income Tax Act.

The Kerala High Court found the Tribunal's insistence on formal account closure unsustainable and noted that the fear of potential double deduction is unfounded, as recovered amounts would be taxed under Section 41 of the Act. The High Court has now remanded the case for fresh assessment, ensuring that the principles from the Vijaya Bank decision are duly considered.

This ruling underscores the judiciary's role in interpreting tax laws and provides clarity on the requirements for claiming deductions on bad debts, aligning them with the Supreme Court's precedents.

Bottom Line:

Income Tax Act, 1961 - Section 36(1)(vii) - Deduction for bad debts - Individual debtor's account need not be closed for claiming deduction under Section 36(1)(vii) - Tribunal's requirement of formal closure of individual debtor account cannot be sustained as per the principles laid down by the Supreme Court in Vijaya Bank case.

Statutory provision(s): Income Tax Act, 1961 - Section 36(1)(vii)

Geofin Comtrade Limited v. Asstt. Cit, Corporate Circle1(1), (Kerala)(DB) : Law Finder Doc Id # 2795226