Deduction for bad debt and provision for bad and doubtful debt.
31(1)
The amount mentioned in column C of the Table below, in respect of any provision for bad and doubtful debts made by the assessee specified in column B thereof, shall be allowed as a deduction in computation of income chargeable under section 26.
| Sl No. | Specified assessee | Amount of deduction |
|---|---|---|
| 1. | (a) A scheduled bank, other than a bank incorporated by or under the laws of a country outside India; or (b) a non-scheduled bank; or (c) a co-operative bank, other than— (i) a primary agricultural credit society; or (ii) a primary co-operative agricultural and rural development bank. | (a) not more than 8.5% of the total income of the tax year computed before making any deduction under this clause and Chapter VIII, and an additional amount up to 10% of the aggregate average advances made by rural branches computed in the manner as prescribed; (b) for an assessee mentioned in clauses (a) and (b) of column B, at its option, an additional amount in excess of clause (a) of this column but not more than the income from redemption of securities as per a scheme framed by the Central Government, when such income has been disclosed in the return of income under the head “Profits and gains of business or profession”. |
| 2. | (a) A bank incorporated by or under the laws of a country outside India; or (b) a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation; or (c) a non-banking financial company. | Not more than 5% of the total income of a tax year computed before making any deduction under this clause and Chapter VIII. |
31(2)
Any amount of bad debt, or part of it, in the tax year in which such amount is written off as irrecoverable in the accounts of the assessee, shall be allowed as deduction in computation of income chargeable under section 26, subject to the following conditions:––
- (a) it has been taken into account in computing the income of the assessee of the tax year in which it is written off, or any earlier tax year, or represents the money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee;
- (b) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the tax year in which the ultimate recovery is made;
- (c) where it relates to an assessee to which sub-section (1) applies,–– (i) only that amount which exceeds the credit balance in the provision for bad and doubtful debts account made under that sub-section shall be allowed as deduction; (ii) it shall be allowed only when the assessee has debited such amount in that tax year to the provision for bad and doubtful debts account made under that sub-section; and
- (d) the account referred to in clause (c) shall be only one such account under sub-section (1) and such account shall be related to all types of advances, including advances made by rural branches.
31(3)
For the purposes of this sub-section (2),––
- (a) any bad debt or part of it written off as irrecoverable shall not include any provision for bad and doubtful debt;
- (b) any amount of bad debt or part of it, which has been taken into account in computing the income of the assessee of the tax year in which the amount of bad debt or part of it becomes irrevocable or of an earlier tax year, as per income computation and disclosure standards notified under section 276(2) without recording it in the accounts, shall be allowed as a deduction in computing the income of the assessee of the tax year in which it becomes irrecoverable and such bad debt or part of it shall be deemed to be written off as irrevocable in the accounts for the purposes of sub-section (2)
Explanation
Section Summary:
This section deals with the tax treatment of bad debts and provisions for bad and doubtful debts. It allows taxpayers, particularly those in banking or money-lending businesses, to claim deductions for debts that have become irrecoverable or for provisions made to account for potential bad debts. The section ensures that such deductions are allowed only under specific conditions, maintaining consistency with income computation principles.
Key Changes:
- Clarification of Deduction Rules: The new law provides clearer guidelines on how and when bad debts and provisions for bad and doubtful debts can be deducted.
- Specific Conditions for Deduction: The section introduces detailed conditions under which bad debts can be written off and deducted, ensuring alignment with income computation standards.
- Treatment of Recovered Amounts: If a previously written-off debt is partially recovered, the section specifies how the deficiency should be treated for tax purposes.
- Provisions for Banking Businesses: The law explicitly addresses the treatment of provisions for bad and doubtful debts for banks and money-lending businesses, including rural branches.
Practical Implications:
For Businesses (Especially Banks and Money Lenders):
- Businesses can claim deductions for bad debts only if the debt was previously included in their income or represents money lent in the ordinary course of business.
- Provisions for bad and doubtful debts must be carefully managed, as deductions are allowed only for amounts exceeding the credit balance in the provision account.
- Rural branches’ advances are included in the provision account, ensuring uniform treatment across all types of advances.
For Taxpayers:
- Taxpayers must ensure that bad debts are written off in their accounts and meet the conditions specified in the law to claim deductions.
- Recovered amounts from previously written-off debts must be accounted for, and any deficiency must be deducted in the year of recovery.
Compliance Burden:
- Businesses must maintain accurate records of bad debts and provisions, ensuring they align with the conditions outlined in the law.
- The provision account must be consolidated, covering all types of advances, including those from rural branches.
Critical Concepts:
- Bad Debt: A debt that is considered irrecoverable and is written off in the taxpayer’s accounts.
- Provision for Bad and Doubtful Debts: An amount set aside to cover potential losses from debts that may not be recovered.
- Irrecoverable Debt: A debt that is deemed uncollectible and is written off in the accounts.
- Income Computation and Disclosure Standards (ICDS): Standards notified under Section 276(2) that govern how income is computed and disclosed for tax purposes.
Compliance Steps:
Documentation:
- Maintain detailed records of bad debts written off, including the date and reason for write-off.
- Ensure that provisions for bad and doubtful debts are accurately recorded in a single account covering all advances.
Reporting:
- Claim deductions for bad debts only if they meet the conditions specified in the law.
- Adjust the provision account to reflect any recoveries or deficiencies in the year they occur.
Alignment with ICDS:
- Ensure that bad debts and provisions are accounted for in compliance with the Income Computation and Disclosure Standards.
Examples:
Example 1: Bad Debt Write-Off:
- A bank lends ₹10 lakh to a customer. Due to the customer’s bankruptcy, ₹5 lakh is deemed irrecoverable. The bank writes off ₹5 lakh as a bad debt in its accounts. The bank can claim a deduction for ₹5 lakh in the tax year the debt is written off, provided it meets the conditions in Section 31(2).
Example 2: Provision for Bad and Doubtful Debts:
- A bank sets aside ₹20 lakh as a provision for bad and doubtful debts. At the end of the year, the credit balance in the provision account is ₹15 lakh. The bank can claim a deduction for ₹5 lakh (₹20 lakh - ₹15 lakh) under Section 31(1).
Example 3: Partial Recovery of Bad Debt:
- A bank writes off ₹10 lakh as a bad debt and claims a deduction. Later, it recovers ₹3 lakh from the debtor. The deficiency of ₹7 lakh (₹10 lakh - ₹3 lakh) can be deducted in the year of recovery under Section 31(2)(b).
This section ensures that businesses, especially banks and money lenders, can account for bad debts and provisions in a structured manner, while maintaining compliance with tax laws.