A deduction is allowed in respect of the debt of the business and profession which have actually become irrecoverable in the previous year. The loans advanced by banking or money-lending concerns if they are irrecoverable in full or part thereof, a deduction is allowed. The eligibility of the deduction depends upon the existence of debt which is irrecoverable under law or through the help of courts.
The following conditions are laid down in the Act u/s 36(2) which are to be fulfilled before any allowance regarding bad debts is allowed :
(a) The debt or loan should be in respect of business or profession of the assessee and relates to the relevant accounting year. Any debt which is not incidental to assessee’s business or profession, no deduction is allowed in case of such a debt. It has been held in a case [Girdhari Lal Gian-chand v. C.I. T. (1917) 79 1. T.R. 561 (Allahabad)] that a debt due from retired partners if it has become irrecoverable cannot be written off and claimed as deduction since it is a capital loss:
(b) The deduction shall be allowed in respect of only those debts which have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year or should represent money lent in the ordinary course of the business of banking or money-lending. a
(c) The debt or loan or part thereof, a deduction about which is claimed as bad debts, must have become actually bad in the accounting year.
The point simply demands that so long as there is a hope of recovering the debt, it cannot be treated as bad debt and so no deduction can be allowed. Deduction is allowed in case of only those debts which have become irrecoverable in the previous year. Any debt which has some possibility of recovery and till this possibility persists, the debt cannot be said to have become irrecoverable [C.I.T. v. Sankara Ayyar (1951) 20 I.T.R. 597 (S.C.)].
(d) The deduction will be allowed in respect of only those bad debts which have been written off in the books of accounts of the assessee in the previous year in which the deduction is so claimed.
Bad debts of a discontinued business.
Bad debt of a business which has been discontinued before the commencement of the accounting year, cannot be claimed as deduction from the profit of the continuing business of the assessee.
U/s 36(2)(iii) if bad debt already written off in the books of accounts but actually not allowed as deduction by A.O. on the ground that the debt has still the possibility of recovery, any such debt or part thereof shall be allowed as deduction in the year in which it actually becomes irrecoverable.
U/s 36(2)(iv) where any such debt or part of debts is written off as irrecoverable in the accounts of the previous year and the Assessing Officer is satisfied that such debt or part has become a bad debt in any earlier previous year not falling beyond a period of which previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply. It means that the assessment made for these years shall be re-opened and total income shall be recomputed after allowing the claim for bad debts.
Bad debts Recovered. [Section 41(4)].
If in any previous year, the debt becoming bad is written off and a deduction was claimed but if later on the same debt is recovered in full or in part thereof, the amount so recovered will be treated as the income of the year in which it is received or recovered.
In another case where a part of debt was written off or allowed by the Assessing Officer as bad debt and the remaining portion was left as recoverable and if some money is received from the debtor, the amount received up to the recoverable part will be treated as normal realisation of debt. If in the final adjustment, the amount recovered is less than the amount presumed to be recoverable, the deficiency will be allowed as deduction in that previous year. If, on the other hand, the money received is more than the recoverable amount, the excess will be treated as the income of the year of receipt of such money.
Bad debts Recovered but disallowed earlier.
If in any previous year, the debt written of as bad was disallowed by the Assessing Officer and later on the debt in full or in part is realised, the amount so realised shall not be treated as income in the year of realisation because the amount recovered was taxed when it was disallowed as bad debt by the Assessing Officer.