The Kerala High Court in CIT v. Kerala State Industrial Development Corporation Ltd. (2007) 209CTR371 held that it is not necessary for the assessee to wait till the debtor company actually goes into liquidation before writing off the loan and then to claim deduction under section 36(1) (vii). The decision has opened a new route for the corporate world. Thus the show of mere possibility of recovery may not come into the way of companies anymore after this notable decision of the High Court.
In this case the debtor company was recommended for wining up by the BIFR It was found that the assets held by the company were inadequate to even pay the secured creditors. Also the balance sheet indicated acculturated loss position. The assessee wrote off the debts as bad debts in its accounts. The AO alleged that the claim is premature and admissible only when the dues from the borrower companies are finally settled.
Taking clue from the Calcutta High Court ruling in Dr. N K Brahmachari v. CIT (1992) 104CTR209 the Kerala High Court held that winding up proceedings is a cumbersome process where claims of a large number of secured and unsecured creditors have to be settled, which may take a considerably long period to attain finality. The creditor company in a given case could form a conscious judgment of its own as to whether any amount would be recoverable or not and make a provision for bad and doubtful debts. The Court held that the assessee can make an honest judgment that the debt has become bad be written off and