Section 36(1)(vii) : Bad Debts written off:
- Bad debts should be written off in the books of A/c’s of Assessee in the P.Y. in which deduction is claimed.
- The debt should have been taken into account for computing income for Previous Year or earlier Previous Year No need to prove that the debts have become bad debt.
- Where the amount of such debt has been taken into account in computing the income for Previous Year or earlier Previous Year (on the basis of ICDSS without recording the same in the accounts). Such debt shall be allowed in the previous year in which such debt becomes bad and It shall be deemed that such debt has been written off as irrecoverable in the accounts.
Particulars | Allowed/ Not Allowed |
Actual Bad-Debts Related to Sales | Allowed |
Acttual Bad-debts Related to Loan | Not Allowed |
Provision for Bad-Debts [Except for Banks] | Not Allowed |
Bad-Debts Recovery:
Where deduction has been allowed in respect of bad debts, recovery shall be taxable as PGBP in the year of recovery. This shall apply even if the business or profession is not in existence in the previous year in which recovery has been made.
Example:
Local Searchee Ltd. sold goods of Rs. 1,50,000 on credit to Onlinesolves.Ltd during the previous year 2017-18. Despite all efforts,Local Searchee Ltd could not recover the money and finally the amount of Rs. 1,50,000 was written off in the accounts of Local Searchee Ltd. during the previous year 2018-19. This amount of Rs. 1,50,000 was allowed as deduction for the assessment year 2019-20. In the previous year 2019-20, Local Searchee Ltd.could recover Rs. 25,000 from Onlinesolves.Ltd out of the amount written off. This amount of Rs. 85,000 shall be treated as an income in the assessment year 2019-20.
Firm claims Bad debts and there after Firm Dissolved:
Partner recovered bad debts Section 41(4) NOT applicable because it is applies only if assessee who claims the bad debts and assessee who recover is same.
Debts of a Discontinued Business Not Deductible :
No allowance can be claimed in respect of bad debts of a business which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted even from profits of a separate existing business.
Allowable in the hands of Successor –
In some cases (e.g., one of the partners taking over business of the firm with all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad debt is written off in the books of account of the successor.
The amount of any bad debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under:—
- Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
- It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
If there is a bad debt on account of sale made, it will be allowed as a deduction because sale has been treated as income. Similarly, in the case of a money lending business if interest is not realizable it will be allowed as a deduction because it has been treated as income either of current year or earlier year. However, there is one exception to this rule, where bad debt will be allowed even if such debt, which has become bad, has not been treated as an income. In the case of money lending business, interest is an income. If that income is not realizable, it can be treated as a bad debt. However, in this case even the money which was lent, if not realized, can be treated as a bad debt as per condition (b) above.
Thus, the following are the requisite conditions for allowance of a debt as bad debt:
- It must be a debt or part thereof;
- Such debt must be revenue in nature;
- Such debt must have taken into account in computing the income of the assessee or it represents money lent in the ordinary course of business of banking or money lending which is carried on by assessee;
- Such debt must be incidental to the business or profession of the assessee;
- Such debt must have been written off as irrecoverable in the accounts of the assessee for the previous year.
