Appellate Tribunal Inland Revenue (ATIR) has ruled that a bad debt is a debt which is uncollectable and a permissible deduction for tax purposes in arriving at taxable income under the Income Tax Ordinance 2001. It is reliably learnt that ATIR, while dismissing Federal Board of Revenue (FBR) Appeals, has decided that a deduction is permitted if a business account receivable subsequently becomes worthless providing the income arising from debts was previously included in income. The deduction is allowed only in the year of worthlessness.
Sources told Business Recorder that a state-owned company has defended the appeals preferred by the FBR against relief allowed by the first appellate authority in case of bad debts disallowed by the FBR.
ATIR order states "The taxpayer had claimed bad debts amounting to Rs.13,306,000 and Rs.48,867,000 which were disallowed by the learned Additional CIR due to the sole reason that the taxpayer had not fulfilled legal formalities and no evidence was provided to support that it made adequate recovery arrangements. Before resolving the controversy, it is important to look into certain basic concepts relating to the impugned subject in common parlance, income tax statute and cases law. First of all we will examine what is `debt' bad debts' and what it implies? It is appropriate to reproduce the provisions of the Income Tax Ordinance, 2001 governing Bad Debts. Section 29 of the Ordinance. The word 'Debt' has been defined in subsection (15) of section 2 of the Income Tax Ordinance, 2001 as well as in various legal dictionaries, thesaurus and cases law. Debt which is unlikely to be paid (for example, because of probable or actual financial failure of the debtor). Bad Debts may usually be treated as losses and written off against reserves for such debts". Bad Debt is debt which is uncollectable; a permissible deduction for tax purposes in arriving at taxable income. A deduction is permitted if a business account receivable subsequently becomes worthless providing the income arising from debts was previously included in income. The deduction is allowed only in the year of worthlessness.
In other words, a debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 2(15) of the Ordinance. A debt exists when a certain sum of money is owing from one person to another. 'Debt' denotes not only the obligation of the debtor to pay, but also the right of the creditor to receive and enforce payment.
"We have observed that said bad debts were written off in the accounts after duly considering the feasibility of recovery as the companies from whom amounts were due had been liquidated and no recovery was possible to be made under any stretch of imagination. We have also perused the conditions laid down in Section 29 of the Ordinance for writing off bad debts and found that all the legal formalities were duly fulfilled by the respondent taxpayer but the learned Additional CIR had failed to bring anything on record for disallowing the bad debts in question.
"All the companies from whom the debts were to be recovered had been liquidated, on the other hand, the respondent taxpayer is also remained sick and no function had been performed since many years. Hectic efforts have been made by the state owned respondent taxpayer but it was not possible to make recovery of the debts in question. The action on the part of learned CIR (Appeals) to delete the additions on this account is well founded and legally justified, needs no interference. Appeals of the Revenue are dismissed being devoid of any merit," ATIR ordered.
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