KL Ltd. demerged its cement division to create MN Ltd (resulting company) and KL Ltd (demerged company). The scheme of demerger involved debts (receivables) of KL Ltd. taken over by MN Ltd. However, later such debts turn

The facts of the case are similar to a case decided by Supreme Court in CIT vs. Veerabhadra Rao (T), K. Koteswara Rao & Co (1985) 155 ITR 152 (SC) . In this case the Supreme Court observed that if a business, along with its assets and liabilities, is transferred by one owner to another, there was no reason as to why the debts so transferred should not be entitled to the same treatment in the hands of the successors. In this case, it was decided that where due to demerger, the debts of the demerged company have been taken over by the resulting company and later if such debt or part thereof turns out to be bad, such bad debt will be allowed as a deduction to the resulting company. Hence MN Ltd can claim the bad debts as deduction in its books, subject to the following conditions- The amount of such bad debt or part thereof should be written off as irrecoverable in the accounts of MN Ltd for the previous year. The amount of deduction relating to any such debt or part thereof shall be restricted to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.