Bad and doubtful debt deductions - Clause 31 of the Income Tax Bill, 2025 vs. Section 36 of Income Tax Act, 1961

Clause 31 Deduction for bad debt and provision for bad and doubtful debt.

Income Tax Bill, 2025

Introduction

Clause 31 of the Income Tax Bill, 2025, introduces provisions for deductions related to bad debts and provisions for bad and doubtful debts. This clause is significant as it aims to update and refine the existing framework under which financial institutions can claim deductions. The clause is part of a broader legislative effort to modernize tax laws, aligning them with contemporary business practices and economic realities. This analysis will provide an in-depth examination of Clause 31, its objectives, and its implications, followed by a comparative analysis with Section 36 of the Income-tax Act, 1961.

Objective and Purpose

The primary objective of Clause 31 is to provide a structured approach for financial institutions to claim deductions on bad debts and provisions for bad and doubtful debts. The legislative intent is to ensure that the tax framework reflects the economic realities faced by banks and financial institutions, thereby promoting financial stability and resilience. Historically, provisions for bad debts have been a contentious issue, with debates around the extent and manner of deductions permissible. Clause 31 seeks to address these issues by providing clear guidelines and criteria for deductions.

Detailed Analysis

Sub-clause (1): Deduction for Provision for Bad and Doubtful Debts

This sub-clause specifies the percentage of total income that certain financial institutions can claim as a deduction for provisions made for bad and doubtful debts. The specified assessees include scheduled banks, non-scheduled banks, and co-operative banks, with varying deduction limits based on their classification. The provision allows for a deduction of up to 8.5% of the total income and an additional 10% for advances made by rural branches.

Sub-clause (2): Deduction for Bad Debts Written Off

This sub-clause outlines the conditions under which bad debts written off can be claimed as deductions. It emphasizes that the debt must have been accounted for in the assessee's income in the current or previous tax years. Additionally, it provides guidelines for situations where the recovery of such debts is partial, allowing for the deduction of deficiencies in the year of recovery.

Sub-clause (3): Exclusions and Special Conditions

Sub-clause (3) delineates what constitutes a bad debt and clarifies that provisions for bad and doubtful debts are not included in the definition of bad debts. It also provides for deductions based on income computation and disclosure standards, ensuring that deductions align with recognized accounting practices.

Practical Implications

Clause 31 has significant implications for financial institutions, particularly in terms of tax planning and compliance. By providing clear guidelines on deductions, the clause aids in reducing ambiguity and potential disputes with tax authorities. Financial institutions will need to ensure that their accounting practices align with the provisions of this clause to maximize allowable deductions.

Comparative Analysis with Section 36 of the Income-tax Act, 1961

Provisions for Bad and Doubtful Debts

Both Clause 31 and Section 36(1)(viia) provide for deductions related to provisions for bad and doubtful debts. However, Clause 31 offers a more refined approach by specifying deduction limits based on the type of financial institution and the nature of advances, particularly emphasizing rural branches.

Bad Debts Written Off

Section 36(1)(vii) and Clause 31(2) both address deductions for bad debts written off. Clause 31 introduces additional conditions, such as the requirement for debts to have been accounted for in income computations, aligning with modern accounting standards.

Conditions and Exclusions

Clause 31 provides a more detailed framework for exclusions and conditions under which deductions can be claimed, compared to Section 36. This includes specific provisions for partial recoveries and the treatment of provisions versus actual bad debts.

Conclusion

Clause 31 of the Income Tax Bill, 2025, represents a significant advancement in the legislative framework governing deductions for bad debts and provisions for bad and doubtful debts. By providing clear guidelines and aligning with contemporary accounting practices, it offers a robust framework for financial institutions to manage their tax liabilities effectively. As the Bill progresses through legislative processes, stakeholders should remain engaged to ensure that the final provisions meet the needs of the financial sector while safeguarding fiscal interests.

Full Text:

Clause 31 Deduction for bad debt and provision for bad and doubtful debt.

Dated: 7-3-2025