Write off of unsecured loan to a Firm

Tax queries 147 views 2 replies

Sathish Karunakaran

ACA

618 Points Joined March 2007

I have lent an unsecured advance to a partnership firm which is loss-making now and filed a insolvency petition in the court. It is almost certain my money will not get repaid as the firm holds no assets in the balance sheet. Lending money is not my business activity.

Please advise can I claim deduction towards the write-off of the unsecured advance on which I have declared interest income under the head 'Income from other sources' in earlier years when the loan was performing and active?

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9000 Points Joined December 2011

Claiming Deduction for Write-Off of Unsecured Advance As you've lent an unsecured advance to a partnership firm that's now in insolvency proceedings and likely won't repay the loan, you can claim a deduction for the write-off.

Conditions for Claiming Deduction - *Income from Other Sources*: Since you've declared interest income from the loan under

"Income from Other Sources" in earlier years, you can claim a deduction for the write-off. - *Loan Becoming Irrecoverable*: You'll need to demonstrate that the loan has become irrecoverable.

The firm's insolvency petition and lack of assets in the balance sheet can serve as evidence. Section 57 of the Income-tax Act You can claim the deduction under Section 57 of the Income-tax Act, which allows deductions for expenses incurred to earn income from other sources. Although the loan itself isn't an expense, the irrecoverable amount can be considered a loss incidental to the earning of interest income.

Claim the Deduction You can claim the deduction in the year the loan becomes irrecoverable, which appears to be the current year given the insolvency proceedings. Ensure you maintain documentation, such as: -

*Loan agreement*: Details of the loan provided to the partnership firm. - *Insolvency petition*: Copy of the insolvency petition filed by the firm. -

*Balance sheet*: Copy of the firm's balance sheet showing no assets.

Sathish Karunakaran

ACA

618 Points Joined March 2007

Sir, thank you for advising on the query!

According to IT Act, write-off of irrecoverable advances can be claimed as deduction only if the bad debt is incidental to the business of assessee and deducted under the head 'Income from Business or Profession'. Since lending is not my primary business activity (though am employed and have income from Salaries), kindly advise can I still claim deduction of the write-off under the head 'Income from other source'.

Thanks in advance.