Cash loans written off procedure accepted

Hi Kollipara,

Your query is about whether the accounting treatment of writing off cash loans through ledger adjustments(between creditors and debtors) will be accepted under Income Tax Act.

Let me explain:

Context:

• You have cash loans given to debtors and cash loans taken from creditors showing in ledger balances.

• Instead of actual repayments, you have passed adjustment entries by transferring ledger balances between creditors and debtors.

• You want to know if such write-off or adjustment entries passed in books will be accepted for Income Tax purposes.

Key Points:

1. Income Tax Treatment of Loans Written Off:

   • Under the Income Tax Act, loans written off can be disallowed as expenses unless you can prove the loan is bad and irrecoverable.

   • Merely passing an accounting adjustment entry without actual recovery or legal proof of bad debt may not be accepted by the tax authorities.

2. Adjustment of Loan Balances between Creditors and Debtors:

   • Transferring ledger balances to adjust loans does not mean the underlying debt is extinguished for tax purposes.

   • For tax purposes, the loan should be genuinely settled or written off with supporting documents like waiver agreements or legal evidence.

3. Books vs. Tax Records:

   • Accounting treatment is guided by Accounting Standards and prudence but Income Tax Department has its own rules.

   • Even if books show adjusted or written-off loans, the Income Tax Department may disallow it unless adequately substantiated.

4. Acceptability under Income Tax Act:

   • If loan write-offs are done without proper legal or documentary evidence, the Income Tax Department may treat the loan as outstanding and disallow expenses related to such write-offs.

   • For loans given, the bad debts written off are deductible only if they are actually irrecoverable and written off in the books in the year of loss.

Summary:

Recommendations:

• Maintain proper documentation for loan write-offs: agreements, waivers, or legal notices.

• If adjustment entries are passed, ensure that underlying debts are legally waived or settled.

• Consult your tax advisor to prepare supporting evidence for Income Tax Department scrutiny.