# Section 36(1)(vii) - Bad Debts

## Allowability

Type	Treatment
Actual Bad Debts	Allowed
Provision for Bad Debts	Not Allowed (except to Banks u/s 36(1)(viia))

## Conditions for Actual Bad Debt

### For General Business

Bad debts must be related to the business of the assessee — Allowed.
Bad debts arising from loans given — Not Allowed (since lending is not the business).

### Exception: Lending / Money-Lending Business

For an assessee engaged in lending/banking business, bad debts arising from loans ARE allowed (since loans are their business).

## Conditions for Write-Off

Bad debt must be written off in the Books of Account in the year in which the assessee decides it is irrecoverable.
No need to actually prove the debt is bad — mere write-off in BOA is sufficient (post Supreme Court ruling in TRF Ltd.).

## Provision for Bad Debts - Banking Sector Exception

Banks and certain financial institutions get a separate deduction for provision for bad and doubtful debts under Section 36(1)(viia).

Worked example

### Example 1

Example 1: A trader sells goods on credit worth ₹5,00,000 to a customer who later goes bankrupt. The trader writes off ₹5,00,000 as bad debt in books. → Allowed u/s 36(1)(vii).

### Example 2

Example 2: A trader gives a personal loan of ₹3,00,000 to a friend who fails to repay. Loan is written off. → NOT allowed (not related to business; trader is not in lending business).

### Example 3

Example 3: A Bank's loan to a defaulting borrower is written off. → Allowed (lending is its business).

⚠️ Common exam mistakes

Claiming deduction for 'provision' for bad debts — only actual write-off is allowed (except for banks).
Allowing bad debt from a non-business loan as deduction.
Trying to prove the debt is actually bad — post TRF Ltd. decision, only write-off in BOA is required.
Forgetting that the debt must have been considered in computing income of the assessee in any previous year (e.g., taxed as revenue earlier).

Reference: Section 36(1)(vii) and 36(1)(viia) — Income Tax Act, 1961

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