The Central Board of Direct Taxes, Ministry of Finance issued Circular No. 12/2016, dated 30th May 2016, wherein the government has relaxed obligations on assessee to prove 'irrecoverability of Bad Debts'. CBDT clarified that the legislative intent behind the Direct tax Laws (Amendment) Act, 1987 was to eliminate litigation on the issue of allowability of bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. CBDT in this regard, referred to the Hon'ble Supreme Court's judgment in the case of TRF Ltd., dated 09.02.2010 wherein it was stated that "After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1)(vii) of the Income Tax Act, it is not necessary for assessee to establish that the debt , in fact has become irrecoverable; it is enugh if the bad debt is written off as irrecoverable in the books of accounts of assessee."
Further, CBDT stated that in view of the said judgment, claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Income Tax Act, 1961 if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in the section 36(2) of the Income tax Act, 1961 which deals with deductions from the total income.
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