Section 36(1)(vii) of the Income Tax Act

For a bad debt claim under Section 36(1)(vii) of the Income Tax Act, it is sufficient for the assessee to write off the debt as irrecoverable in its books of accounts; proof that the debt has actually become irrecoverable is not required after the amendment to the section.

The application of Rule 8D of the Income Tax Rules is not mandatory for disallowing expenditure incurred to earn exempt income under Section 14A. The Assessing Officer must first record objective satisfaction explaining why the assessee's own computation of such disallowance is incorrect before applying Rule 8D.

The mixed fund theory is affirmed, holding that no disallowance of interest expenditure under Section 14A can be made if the assessee possesses sufficient non-interest bearing funds, such as capital and reserves, to cover investments made in tax-free securities.

The amount of provision for bad and doubtful debts is reduced from loans for tax purposes.

Provisions for liabilities made on a scientific and rational basis are allowable as a deduction when following the mercantile system of accounting, even if their actual quantification and discharge are deferred to a future date.

The case concerns the allowability of deductions for provisions made under Section 36 of the Income Tax Act, 1961, especially those related to bad and doubtful debts. It distinguishes such deductions from the recognition of interest income on non-performing assets (NPAs).

Liabilities accrued on a notional basis are allowable as deductions under the mercantile system of accounting even if their exact quantification or discharge is deferred to a future date or if the demand itself is disputed.

Amendments to tax law that impose new obligations or change existing legal positions apply prospectively, even if stated to be "for the removal of doubts." The judgment also clarifies that deductions under Section 43B are allowed only on actual payment, overriding the mercantile system of accounting.

A cardinal principle of tax law is that the law in force for the relevant assessment year applies unless expressly or necessarily provided otherwise. A retrospective tax provision stated to be 'for the removal of doubts' is not presumed retrospective if it alters or changes the law as it earlier stood.

For a bad debt deduction under Section 36(1)(vii), the debt must be actually written off as irrecoverable in the assessee's accounts, distinct from merely making a provision for bad and doubtful debts. The assessee bears the onus to satisfy the conditions under both Section 36(1)(vii) and Section 36(2) of the Income-tax Act.