What is bad debt and income tax deduction provision


Bad debts are the expenses for any business which reduces the value of net receivable. In other words any debts which neither are nor received called bad debts. Generally the business goes on credit. The person whom we give the credit is called debtors. If any debtors fail to pay the credit, he is called bad debts. So it’s an expense for the business and reduces the net receivable or debtors. The income tax treatment of the bad debts is as follows.
Deduction of bad debts is allowed in accordance with the following provisions.
Condition of the allowance.
1-      Relationship of the debtor or creditor: - a bad debt presupposes the existence of the debt and thereafter a relationship of the debtor and creditor is essential. Unless there was an admitted debt and it become irrecoverable, it can not be written off as bad debt.
2-      Bad debt be written off in accounts: - a claim for bad debts is to be allowed in the year in which such bad debt is actually written off by the assesses in the accounts as irrecoverable. No deduction is allowed for bad debts on the basis of provision for bad and doubtful debts.
3-      Debt is taken into account in income computation or represents money lent in the business of banking or money lending.
4-      Final adjustment of bad debts: - the deduction of bad debts under mercantile systems is initially claimed on estimate basis and adjustments are made in the light of final recovery.
5-      No allowance for bad debt of a discounted business: - no deduction is allowed for a bad debt of a business, which has been discounted before the commencement of the accounting year. Such a bad debt can’t be deducted from the profits of a separate existing business. An assessee can claim the deduction for a bad debt of a business, which is carried on by the assessee in the accounting year.
6-      The right to claim a bad debts is attached to the business and not the particular assessee. So the successor entitled to write of predecessor bad debts.
Provisions for bad and doubtful debts made by a schedule or non schedule banks of India.
Bank having no branch in rural area (where the population not exceeding 10000):- if there is no branch deduction is allowed in following manner
-          provision made for bad and doubtful debts
-          7.5 of gross total income          whichever is less is the amount of deduction
Bank having branch in rural area: - deduction is allowed in following manner
-          provision made for bad and doubtful debts
-          7.5% of gross total income
-          10% of the aggregate average advance (the amount of advance made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year is to be aggregate separately) made by the rural branches, whichever is less is the amount of deduction.
For the assessment year 2007-2008, the deduction under Section 36(1) of income tax act is now available to the cooperative bank other than a primary agriculture credit society or a primary cooperative agriculture and rural development bank.
Further deduction up to income from redemption of securities: - from the assessment year 2004-05 and onwards such bank is allowed further deduction as its option for is amount not exceeding the income derived from the redemption of securities in accordance with a scheme framed by the central government.
Provision for bad debt and doubtful debts made by a bank, incorporated outside India.
Deduction is allowed in following manner
-          provision made for bad and doubtful debts
-          5% of gross total income, whichever is less is the amount of deduction.
Provision for bad debts and doubtful debts made by a public financial institution, or a state financial corporation or state industrial corporation: - deduction for any such institution or corporation is allowed in the following manner.
-          provision made for bad and doubtful debts
-          5% of gross total income, whichever is less is the amount of deduction.
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