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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
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Normal Business |
Banks/Financial Institutions |
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No Deduction for Provision For Bad Debts |
Deduction for Provision Available at Specified Percentage (10%/5%)
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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
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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
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Earlier Provisions |
New AMENDMENT |
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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 |
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If amount not recoverable, Bad debts could not be booked
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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 |
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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) |
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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
