Write off income shown on accrual basis

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An individual who declared interest income on an accrual basis is seeking to offset unpaid interest and principal amounts (bad debts) against other income sources like business or rental income. While generally bad debts can be claimed as business expenses, there's a question about claiming losses from a discontinued money lending business against current income. The discussion suggests that while an initial claim might be disallowed if the debt is deemed recoverable, it can be allowed later when it's definitively unrecoverable, even if from a past business.

Anu

Anu (Querist)
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09 March 2024 Assessee is an individual who has business income, house property income and also has lent hand loans and declared interest income on accrual basis and filed IT returns. Due to covid, a number of borrowers were unable to repay interest or principal.

Profit and loss account was not given. Few incidental expenses were claimed and net income was offered for tax in the past years.

Since assessee has paid tax on income not earned, he wants to set off such losses against other income like business / rental income. Is there a provision in Income Tax to claim the bad debts in interest receipts, so that assessee can claim the unrealised interest income?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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09 March 2024 Yes, bad debts write off can be claimed as business expenses

Anu

Anu (Querist)
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11 March 2024 After covid, the assessee has stopped moneylending business. At present, there is no interest income against which loss can be claimed. Can he claim the bad debts from moneylending business (now stopped) against other business income?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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12 March 2024 Yes, you can claim it from other business income.

Anu

Anu (Querist)
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12 March 2024 Thanks for your quick response. If there any case law or section number which specifically allows the losses of past business to be set off against current year business income, can you please give reference of the same?

Anu

Anu (Querist)
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15 March 2024 Please give reference

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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15 March 2024 Please see the link...

https://cleartax.in/s/bad-debt-doubtful-debt
...

Anu

Anu (Querist)
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15 March 2024 Thanks, the assessee's moneylending business was discontinued in 2020-21. Assessee's interest and some principal was not paid back. Hence business was discontinued.

The link says bad debts from discontinued business cannot be claimed from other business income in current year.

Please confirm if my understanding is correct.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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15 March 2024 Your understanding is wrong it's not allowed at that time by AO, as he felt it's recoverable, but later it will be allowed when finally not recoverable.

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