Deduction of Non-Repaid Credit (January 26th, 2010)
1.1Within the framework of its business the taxpayer extends
credit to its customers to cover fees, taxes and other payments related to the
1.2The credit bears interest.
1.3The taxpayer uses the accrual method of accounting but
files income tax returns on a cash basis.
1.4Part of the credit extended by the taxpayer to its
customers was not repaid despite collection attempts including the retaining of
lawyers and resort to the execution of judgments ("Unpaid Credit”).
Should the Unpaid Credit be deducted
in computing the taxable income of the taxpayer?
3.1The question under consideration was not dealt with, as
such, by the Income Tax Ordinance or by the judicial precedents. Resort to the
general principles of taxation applicable to the deduction of expenses,
including the principle of allowing deductions for the preservation of capital
and the rule of allowing incidental expenses, leads to the conclusion that the
Unpaid Credit is deductible as an ordinary expense.
3.2Our conclusion was reinforced by generally accepted
according principles; English precedents on similar (although not identical)
matters; the rules applicable to the deduction of payments under a monetary
guaranty and losses incurred as a result of theft or disasters. These
precedents and rules lent weight to our conclusion that the Unpaid Credit was
an ordinary deductible expense.