A debt that has actually become irrecoverable and is written off as bad in the accounts of the assessee for the relevant tax year is deductible in computing business income, provided the debt (or its equivalent) was earlier taken into account in computing the assessee's income of an earlier year, or represents money lent in the ordinary course of a money-lending or banking business. Following a significant legislative change, the taxpayer is no longer required to affirmatively prove that the debt has, in fact, become irrecoverable — a bona fide write-off in the books is itself sufficient compliance, shifting the practical focus of any dispute to whether the write-off was genuine and whether the debt genuinely arose from a transaction already recognised as income.

A mere general provision for doubtful debts, without an actual write-off against the individual debtor's account, does not qualify for deduction as a bad debt — the distinction between writing off a debt (reducing the corresponding debtor balance in the books to reflect that recovery is not expected) and merely providing for a possible future loss (retaining the debtor balance but creating an offsetting provision) remains legally significant, notwithstanding that specified categories of provisions (such as those made by banks and specified financial institutions) receive separate, distinct statutory treatment.

Relevant Case Laws

TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) — held that after the relevant legislative amendment, it is not necessary for the assessee to establish that the debt has, in fact, become irrecoverable in the relevant year — it is sufficient if the debt is written off as bad in the assessee's accounts, materially easing the taxpayer's evidentiary burden compared to the earlier regime.

Vijaya Bank v. CIT (2010) 323 ITR 166 (SC) — clarified that for a write-off to be genuine, it is not necessary for the assessee to close the individual debtor's account in the books entirely; it is sufficient if the debt is effectively written off by reducing the loans and advances (or debtors) account on the asset side of the balance sheet, with a corresponding reduction reflected in the profit and loss account, so long as the overall effect is a genuine reduction of the corresponding asset rather than a mere notional provision.

Frequently Asked Questions

Q. Must a business prove a debtor is actually insolvent to claim a bad debt deduction?

A. No — following TRF Ltd., a bona fide write-off in the accounts is sufficient; the assessee is no longer required to independently establish the debt has, in fact, become irrecoverable.

Q. Is a general provision for doubtful debts (without a specific write-off) deductible?

A. Generally no, for most businesses — a general provision that does not correspond to an actual write-off against a specific debtor's account is treated as a mere provision, not a deductible bad debt, subject to distinct rules for banks and specified financial institutions.

Q. Does the debt have to relate to a sale or service already offered as income in an earlier year?

A. Yes, in most cases — unless the debt arises from money lent in the ordinary course of a money-lending or banking business, it must correspond to an amount already taken into account in computing income of an earlier year for the deduction to be available.

Q. Is it necessary to fully close the debtor's individual ledger account to claim the deduction?

A. No — following Vijaya Bank, it is sufficient that the debt is effectively written off by an appropriate reduction in the relevant asset account with a corresponding debit to the profit and loss account, even without closing the individual debtor's sub-ledger account entirely.

Precautions to Be Taken

1.      Ensure the write-off is reflected as an actual reduction in the relevant debtors/loans and advances account, with a corresponding charge to the profit and loss account, rather than merely as an internal note or a general contingency provision.

2.      Maintain a clear trail linking each written-off debt back to the original transaction (invoice, sale, or loan) and confirm that the corresponding amount was included in taxable income of an earlier year.

3.      Where debts are written off in bulk (for example, following a portfolio review), retain the underlying board approval or management decision authorising the write-off, along with the basis for identifying the specific debts involved.

4.      Distinguish clearly, in your accounting policy and in the tax computation, between debts actually written off (claimed as a deduction) and a general provision for doubtful debts (not claimed, or claimed only under the distinct rules applicable to eligible financial institutions).

5.      If a written-off debt is subsequently recovered, ensure the recovery is offered to tax as income in the year of recovery, since a bad debt allowed in one year and later recovered creates a corresponding taxable receipt.

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