Section 36(1)(vii) Bad Debts allowable under IT Act

Allowed as deduction subject to the following conditions:

(a) The debts or loans should be in respect of a business which was carried on by the assessee during the relevant previous year.

(b) The debt should have been taken into account in computing the income of the assessee of the previous year in which such debt is written off or of an earlier previous year or should represent money lent by the assessee in the ordinary course of his business of banking or money lending.

(i.e point(b) simply means that the debtors must be recognized in the books before w/off either in PY or earlier PYs) 

Provision for Doubtful debts banks and financial institutions etc.:[Sec 36(1)(viia):

Banks & financial institutions are allowed deduction in respect of provsion made for doubtful debts.Other assessees are not allowed deduction for the same.

Limits within which deduction allowed in respect of provision for doubtful debts
Bank  Type	Deduction	Remarks
1.Indian Banks	7.5% of adjusted total  income       + 10% of aggregate average  advances made by rural  branches	-Indian bank means any bank other than foreign banks, i.e. banking company incorporated in India. -Adjusted Total income means – Gross total Income before deduction under this section[i.e. Sec 36(1)(viia)]. -Average aggregate advances(See Note-1)
2.Foreign banks	5% of adjusted total  income	-Adjusted Total income means – Gross total Income before deduction under this section[i.e. Sec 36(1)(viia)]
3.Public Financial  institutions, State  Financial Corporation	5% of adjusted total  income	-Adjusted Total income  means – Gross total Income before deduction under this section[i.e. Sec 36(1)(viia)]

Note-1 Average aggregate advances is worked out as under:

Step-1 Separately take advances made by every rural branches.

Step-2 Calculate average advances of a branch i.e. Advances made divided by no. of months o/standing.

Step-3 Sum up the average advances by every branch.   

Proviso & explanation to Sec 36(1)(vii)

- Under section 36(1)(vii), bad debt actually written off as irrecoverable in the books of account of the assessee is deductible.

- Proviso to Sec 36(1)(vii) provides that  in the case of entities for which provision for bad and doubtful debts is allowable under section 36(1)(viia), deduction for bad debts written off under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia).

- Further, no deduction shall be allowed unless the assessee has debited the amount of such debt or part of such debt in that previous year to the provision for bad and doubtful debts account made under section 36(1) (viia).

- In the case of an assessee to which section 36(1)(viia) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances.

[Explanation to Sec 36(1)(viia)]

Example:

S.no.	Particulars	Amount(in lacs)
1.	Provision for bad and doubtful debts under section 36(1)(viia) upto A.Y.2014-15	100
2.	Gross Total Income of A.Y.2015-16 [before deduction under section 36(1)(viia)]	800
3.	Aggregate average advances made by rural branches of the bank	300
4.	Bad debts written off (for the first time) in the books of account (in respect of urban advances only) during the previous year 2014-15	210

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2015-16.

Solution     

Computation of Bad debts allowed u/s 36(1)(vii)

	Particulars	Amount
	Bad Debts w/off for FY 14-15	210
Less:	Balance in Provision for doubtful debts u/s 36(1)(viia)	190
	Bad debts allowed u/s 36(1)(vii)	20

Note-1

Calculation of provision for doubtful debts

	Particulars	Amt.(in lacs)
1	Balance in Provision for doubtful debts u/s 36(1)(viia)
	Opening Balance in Provision for doubtful debts A/c	100
Add:	Provision for FY 14-15(deduction allowable for FY 14-15)
	7.5% of gross total income	60
	10% of aggregate average advances by rural branches	30
	Balance in Provision for doubtful debts u/s 36(1)(viia)	190

Recovery of bad debt subsequently taxed as deemed income[Sec 41(4)]-

- If a deduction has been allowed in respect of a bad debt under section 36(1)(vii), and subsequently the same is  recovered in part or full then the amount so recovered is taxable as deemed income under the business income head.

- Such deemed income  same  will be chargeable as  business income of the previous year in which it is recovered, whether or not the business or profession in respect of which the deduction has been allowed is in existence at the time.