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December 2022

Debts and their Treatment

By Dr. Anup P. Shah, Chartered Accountant
Reading Time 15 mins
INTRODUCTION

The Black’s Law Dictionary, 6th Edition, defines a debt as a sum of money due by certain and express agreement; a specified sum of money owing to one person from another, including not only an obligation to pay but right of creditor to receive and enforce payment. The relation between a debtor and a creditor is the result of a debt. However, would the treatment of a debt in the books of account have any legal bearing? Would the treatment impact the tax position of the debtor or the creditor? Let us examine some of these facets.


MEANING UNDER IBC, 2016

The Insolvency and Bankruptcy Code, 2016 (“the Code”) deals with the insolvency resolution of debtors who are unable to pay their debts. The trigger point of the Code is a default by the debtor. A default is defined u/s 3 to mean non-payment of a debt when it has become payable and is not so paid by the debtor. Thus, the entire Code pivots on a debt and its default. If there is no default of a debt, then the Code does not come into play. The Supreme Court in Dena Bank vs. C. Shivakumar Reddy, [2021] 129 taxmann.com 60 (SC) has held that under the scheme of the Code, the Insolvency Resolution Process begins, when a default takes place, in the sense that a debt becomes due and is not paid.

Section 3 of the Code define
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