## Bad Debts — Sec. 36(1)(vii)

A bad debt arises when an amount receivable becomes irrecoverable. The Act distinguishes between actual bad debts (allowed) and provisions (generally not allowed).

### Actual Bad Debts vs. Provisions

```

Bad Debts

/ \

Actual Bad Debt Provision for Bad Debt

| |

┌────┴────┐ NOT Allowed

| | (Except Banks)

Sales Loan

| |

Allowed NOT Allowed

(Except Money

Lending Business)

```

### Conditions for Allowability

1. The debt must be written off in the books in the previous year for which deduction is claimed.

2. The debt must have been taken into account in computing income of the current or any earlier previous year (i.e., it must have been booked as income), OR represent money lent in the ordinary course of money-lending business.

### Recovery of Bad Debts — Sec. 41(4)

If bad debts written off earlier are later recovered:

The recovery is taxable under PGBP in the year of recovery.
Amount Taxable = Recovery in excess of the portion NOT written off

In other words: total debt minus what was previously written off = the cushion. Recoveries up to that cushion are not taxable; anything above is taxed.

Worked example

### Example 1

Example: Total debt = ₹1,00,000. Of this, ₹60,000 was written off (deduction taken u/s 36) and ₹40,000 was NOT written off.

Case	Bad Debt Recovery	Taxable Amount
Case I	₹35,000	Nil (less than 40,000 not-written-off)
Case II	₹45,000	₹5,000 (45,000 − 40,000)

Reasoning: Only recoveries beyond the un-written-off portion represent recovery of amounts previously deducted, so only those are taxable.

⚠️ Common exam mistakes

Claiming a provision for bad debts as deduction — generally not allowed except for scheduled banks.
Claiming bad debts on loans given by a non-money-lender — only money-lending businesses can deduct bad debts on loans.
Forgetting to write off the debt in books — mere identification as 'bad' is not enough; an actual write-off entry is required.
Treating the entire recovered amount as taxable, instead of only the excess over the not-written-off portion.

Bare-Act text Section 36(1)(vii) read with Section 36(2) and Section 41(4) · Income-tax Act, 1961 · click to expand

Section 36(1)(vii): Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.

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Bad Debts [Sec. 36(1)(vii)]

Worked example

⚠️ Common exam mistakes