Section 31 — Bad Debt Deductions | ITA 2025

Section 31 — DEDUCTION FOR BAD DEBT AND PROVISION

Section 31 prescribes deductions for bad debts written off (general assessees) and provision for bad and doubtful debts (banks / financial institutions, subject to caps). The substantive rule for general assessees: write-off in books is sufficient (post-FA 1989, codified by SC in TRF Ltd.); for banks / FIs, a percentage-cap-based provision deduction is allowed.

Statutory text — Income-tax Act, 2025

Marginal note — Deduction for bad debt and provision for bad and doubtful debt

(1) The amount mentioned in column C of the Table below, in respect of any provision for bad and doubtful debts made by the assessee specified in column B thereof, shall be allowed as a deduction in computation of income charge- able under section 26.

TABLE Sl. Specified assessee Amount of deduction No.

A B C 1. (a) A scheduled bank, other (a) not more than 8.5% of the total than a bank incorporated income of the tax year computed by or under the laws of a before making any deduction under country outside India; or this clause and Chapter VIII, and an additional amount up to 10%

(b) a non-scheduled bank; or of the aggregate average advances

(c) a co-operative bank, other made by rural branches computed than— in the manner as may be prescribed;

(i) a primary agricultur-

(b) for an assessee mentioned in clauses al credit society; or

(a) and (b) of column B, at its option,

(ii) a primary co-opera- an additional amount in excess of tive agricultural and clause (a) of this column but not more rural development than the income from redemption of bank. securities as per a scheme framed by the Central Government, when such income has been disclosed in the return of income under the head “Profits and gains of business or profession”. 2. (a) A bank incorporated by or Not more than 5% of the total income of under the laws of a country a tax year computed before making any outside India; or deduction under this clause and Chapter VIII.

(b) a public financial institu- tion or a State Financial Corporation or a State Industrial Investment Corporation; or

(c) a non-banking financial company.

(2) Any amount of bad debt, or part of it, in the tax year in which such amount is written off as irrecoverable in the accounts of the assessee, shall be allowed as deduction in computation of income chargeable under section 26, subject to the following conditions:—

(a) it has been taken into account in computing the income of the assessee of the tax year in which it is written off, or any earlier tax year, or repre- sents the money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee;

(b) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the tax year in which the ultimate recovery is made; and

(c) where it relates to an assessee to which sub-section (1) applies,—

(i) only that amount which exceeds the credit balance in the provision for bad and doubtful debts account made under that sub-section shall be allowed as deduction;

(ii) such amount shall be allowed only when the assessee has debited any amount of bad debt or part thereof in that tax year to the provision for bad and doubtful debts account made under that sub-section; and

(iii) the aforesaid account shall be only one such account under sub-sec- tion (1) and such account shall be related to all types of advances, including advances made by rural branches.

(3) For the purposes of sub-section (2),—

(a) any bad debt or part of it written off as irrecoverable shall not include any provision for bad and doubtful debt;

(b) any amount of bad debt or part of it, which has been taken into account in computing the income of the assessee of the tax year in which the amount of bad debt or part of it becomes irrecoverable or of an earlier tax year as per income computation and disclosure standards notified under section 276(2) without recording it in the accounts, shall be allowed as a deduction in computing the income of the assessee of the tax year in which it becomes irrecoverable and such bad debt or part of it shall be deemed to be written off as irrecoverable in the accounts for the purposes of sub-section (2). Other deductions.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 31	INCOME-TAX ACT, 1961
Bad debts actually written off	1961 s. 36(1)(vii) — same
Provision for bad and doubtful debts (banks / FIs)	1961 s. 36(1)(viia) — same
s. 36(2) condition — debt was earlier income or business advance	1961 s. 36(2) — preserved

JUDICIAL EVOLUTION — Write-off Sufficient (TRF Ltd.)

The Supreme Court in TRF Ltd. v. CIT, (2010) 323 ITR 397 (SC), settled the long-running debate. Post FA 1989 amendment to s. 36(1)(vii), the assessee need NOT prove that the debt has actually become bad; mere write-off in the books suffices.

HELD: After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. (per TRF ¶ 8).

JUDICIAL EVOLUTION — Section 36(2) Condition

Vijaya Bank v. CIT, (2010) 323 ITR 166 (SC) — ruled on s. 36(2) requirement that the bad debt MUST have been earlier taken into account in computing PGBP income (i.e., earlier accounted as receivable / income). Mere advance / loan write-off doesn't qualify unless tied to PGBP receivable.

JUDICIAL EVOLUTION — Provision for Bad Debts (HCL Comnet)

CIT v. HCL Comnet Systems & Services Ltd., (2008) 305 ITR 409 (SC) — provision for bad debts is NOT an unascertained liability for s. 115JB MAT computation; cannot be added back to book profits. Direct application of s. 31 logic — provision is allowable on actuarial basis for banks / FIs.

DEPARTMENTAL PRACTICE

Form 3CD Item 19 — auditor reports bad debts written off, with a separate column for write-offs not satisfying s. 36(2) condition. For banks / FIs claiming s. 36(1)(viia), the percentage-cap is on rural-branches advance / aggregate-non-rural-advance; verify with RBI prudential norms and Form 3CD reconciliation.

PLANNING NOTES

(i) For bad debts, write-off in books is sufficient (post-1989 TRF) — no separate 'establish bad' analysis needed. (ii) Verify s. 36(2) condition — debt MUST be tied to PGBP receivable / advance; pure loans (e.g., to suppliers in advance) require additional documentation. (iii) For banks / NBFCs, use the s. 36(1)(viia) percentage-cap mechanism alongside actual write-offs; both are usable in same year.

CROSS-REFERENCES

Section 26 — PGBP charge.
Section 27 — Manner of computing PGBP.
Section 32 — Other deductions.
Section 35 — Amounts not deductible.

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