Guidelines on Provision for Bad debts

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This discussion clarifies the guidelines for making provisions for bad debts in companies. It explains that while a provision for bad debt itself is not a tax-deductible expense, it must be recorded if a debt is written off as irrecoverable. The Supreme Court ruling and CBDT Circular No. 12/2016 provide specific conditions that must be met for a debt write-off to be admissible under tax law.

Chaitanyaa

Chaitanyaa (Querist)

04 May 2022 Sir,

What are the extant guidelines regarding the provision for bad debts. Whether every Company needs to pass this entry or any condition is there for the this provision. Also whether provision for bad debts is a tax deductible expense?

Regards

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

04 May 2022 Provision for bad debt is not a tax-deductible expenses.
Provide it based on percentage of bad debts of previous 5 years average.

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Saurabh Anokhchand Jain

Saurabh Anokhchand Jain (Expert)

28 May 2022 The CBDT has issued Circular No. 12/2016 dated 30th May 2016 in which it has stated that in accordance with the law laid down by the Supreme Court in TRF Ltd. vs. CIT 323 ITR 397, claim for any debt or part thereof in any previous year shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.

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