Section 31: deduction for bad debt and provision for bad and doubtful debt

Provision for bad and doubtful debts (Section 31(1))

Section 31(1) allows a deduction, computed as per a Table in the section, for a provision for bad and doubtful debts made by specified categories of assessees - essentially banks, co-operative banks and certain financial institutions.

For a scheduled bank (other than one incorporated outside India), a non-scheduled bank, or most co-operative banks, the deduction is not more than 8.5% of the total income of the tax year (computed before this deduction and before Chapter VIII deductions), plus an additional amount of up to 10% of the aggregate average advances made by rural branches, computed in the prescribed manner.

For a bank incorporated outside India, a public financial institution, a State Financial Corporation, a State Industrial Investment Corporation, or a non-banking financial company, the deduction is not more than 5% of the total income of the tax year (computed before this deduction and before Chapter VIII deductions).

Bad debts actually written off (Section 31(2))

Separately, Section 31(2) allows any amount of bad debt (or part of it) as a deduction in the tax year in which it is written off as irrecoverable in the assessee's accounts, subject to conditions:

• The debt must have been taken into account in computing the assessee's income of that tax year or an earlier tax year, or must represent money lent in the ordinary course of a banking or money-lending business carried on by the assessee.
• If the amount ultimately recovered on the debt is less than the difference between the debt and the amount already deducted, that further deficiency is deductible in the year the ultimate recovery is made.
• For assessees who also claim the Section 31(1) provision deduction, only the amount of written-off bad debt that exceeds the credit balance in the provision account is allowed as a deduction, and it is allowed only when the assessee has actually debited the bad debt to that provision account; only one such provision account is recognised, covering all types of advances including those by rural branches.

Clarifications under Section 31(3)

A provision for bad and doubtful debts is not itself treated as a bad debt "written off" for the purposes of Section 31(2).

Where a bad debt (or part of it) has already been taken into account in computing income for the year it became irrecoverable (or an earlier year) as per the applicable income computation and disclosure standards, without formally recording it in the accounts, it is still allowed as a deduction in the year it becomes irrecoverable, and is deemed to have been written off in the accounts for Section 31(2) purposes.

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