Bad Debts

Sales made to A 100000

A paid only 30000 in full settlement

In this case,70000 is bad debts

 

Provision for Bad Debts

Sales made to A 100000

It is expected that only 30000 can be recovered from A

In this case,70000 is Provision for bad debts

  Treatment in Income Tax

Normal Business

Banks/Financial Institutions

No Deduction for  Provision For Bad Debts

Deduction for Provision

Available at Specified Percentage (10%/5%)

 

Deduction for Actual Bad Debts

Written off in Books

Deduction for Actual Bad Debts

Less Provision for Bad Debts in books is available

 

Example:

Suppose Actual Bad debts is 80000

but provision made of 70000

,then balance 10000 allowed here 

 

 

For Normal Assessees(Except Banks/Financial Institutions)

  • Bad Debts allowed as deduction if written off as irrecoverable in books of accounts
  • However, provision for bad debts not allowed as deduction

  

New Amendment

If amount was taken into computation as per Income Disclosure Standards

But not recorded in books of accounts,

And such amount later becomes unrecoverable,

It shall be deemed that it has become irrecoverable in books of accounts for the purpose of this sub-section

and bad debts allowed for the same. 

 This may be of the current year or any previous year

Earlier Provisions

New AMENDMENT

Unascertained Income is not recognized in books of accounts

Example

Interest Charged on overdue payments

Unascertained Income is recognized in books of accounts if there is reasonable certaininty regarding its collection

If amount not recoverable, Bad debts could not be booked

 

If amount not recoverable , there can be 2 cases

 

1.If amount was taken into computation as per Income Disclosure Standards

Bad debts can be booked

 

2. If amount was not taken into computation as per Income Disclosure Standards

Bad debts cannot be booked

Hence, Bad Debts were allowed as deduction only if they were written off in books of accounts,

Hence, Bad Debts were allowed as deduction if they were taken into computation as per Income Disclosure Standards

(even if they were not written off in books of accounts)

 

 

  Bad Debts and Provison for Bad Debts - Important Sections Of PGBP

 


Bad Debts For Banks/Financial Institutions

They get deduction for both Provision for Bad debts and Bad debts

 Provision for Bad Debts is allowed as follows

Type of Bank % of PGBP before claiming this deduction
Scheduled Bank  
Rural Branches 10%
Other Branches 5%
   
Other Banks like 5%
Foreign Bank
Public Financial Instituition
State Financial Corporation
State Industrial Corporation

 

Bad Debts Deduction

Actual Bad Debt

less

Provison for Bad Debt

allowed under this section

Example: Suppose Actual Bad debts is 7% but provison made of 5%,then balance 2% allowed here 

  1. Practical Income Tax
  2. Corporate Income Tax

About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 8 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .