Bad debt written off claim deduction section 36(1)((vii) of income tax act

Bad debts section 36(1)(vii) amount of any debt or part is allowable as deduction subject to the following conditions:

(a) the debt has been taken into account in calculating the income of the taxpayer of that previous year or of an earlier previous year, or represent money lending account in the ordinary course of business of banking or money lending which is carried on by the taxpayer; and

(b) it has been written off as irrecoverable in the accounts of the taxpayer for that previous year.

BAD DEBT WRITTEN OFF CLAIM DEDUCTION UNDER SECTION 36(1)(vii) OF INCOME TAX ACT | SECTION 36(1)(vii) INCOME TAX ACT | CASE LAW OF BAD DEBT WRITTEN OFF

BAD DEBT SECTION 36(1)(vii)

Any debt or part thereof, which becomes bad under section 36(1)(vii) shall be allowable as deduction.

Taxpoint:

It is the taxpayer, who regulate whether a debt has become bad or not and the Assessing Officer (AO) can never insist the taxpayer for production of proof that the debt had became bad.

CONDITIONS

(1) The debt which is claimed as bad debt, must be incidental to the business or profession of the taxpayer. There must be a close nexus between the debt and the business of the taxpayer.

Example:

Bad debt come up out of advances made by a lawyer to his client to assist him in buying land and properties is not admissible as bad debt. As it is not the business of lawyer to supply loans. Such loss is not allowed in any provision of the act under income tax act.

(2) The debt has been considered as income of the taxpayer of that previous year or of an earlier previous years.

Example:

Advance given to supplier for purchase of raw-material later forfeited, is not allowable as deduction under this section [section 36(1)(vii)], this is because the same has never been a part of income. However, deduction can be claimed under section 37(1).

Exception:

Bad debt come up due to lack of money or insolvency of borrower is allowable as deduction provided money has been lent in ordinary course of money lending business (even though such money lending account had never been a part of income).

(3) It must have been written off in the accounts of the taxpayer.

Taxpoint:

Provision for bad debt is not allowable as deduction. Provision for bad debt shall not be taken as bad debt written off.

Exception:

Otherwise the amount of such debt has been taken into account in computing the income of the taxpayer of the previous year in which the amount of such debt becomes irrecoverable or of an earlier previous year on the premise of notified Income Computation and Disclosure Standards (ICDS) without recording an equivalent in the accounts, then, such debt shall be allowed in the previous year during which such debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in the accounts.

(4) Business must be carried on during the previous year or any a part of the previous year.

Taxpoint:

Bad debt of a discontinued business is not allowable as deduction even though the taxpayer has any other business continued.

(5) It must be of a revenue nature.

Taxpoint:

Bad debt come up due to insolvency of a debtor for sale of an asset or property (not goods) is not allowable as deduction.

NOTES

(a) bad debt isn't allowed as deduction to the taxpayer who maintains accounts on cash basis.

(b) Bad debts are also allowed in the hands of inheritor of the business.

RECOVERY OF BAD DEBTS SECTION 41(4)

As per section 41(4) recovery of bad debts, where a deduction has been allowed in respect of a bad debt or part thereof, under section 36(1)(vii), then, if the amount subsequently recovered on any such debt or part thereof is larger than the difference between the debt or a part of debt and therefore the amount so allowed, the excess shall be deemed to be profits and gains income under the head of business or profession.

MATHEMATICALLY

Amount recovered ******

Less: debt claimed – debt allowed as deduction ******

Taxable bad debt recovery ******

Note: Such bad debt recovery shall be taxable amount irrespective of the fact whether the business is continued or discontinue.