AO's Query on Bad Debt Claim – Need Guidance on Documentation, Income Tax

[Ramanathan Seshan]

Dear Experts,

During the assessment proceedings, the Assessing Officer (AO) has raised a query regarding our claim of bad debts as an expense in the income tax return (ITR). The AO is asking us to prove when the related income was originally offered to tax, since we are now writing it off as bad debt. We had claimed the amount as a bad debt under allowable expenses in the ITR, and now need to substantiate this claim. Could anyone please guide on how to effectively address this—what kind of documentation or proof would be acceptable to the AO to justify the bad debt claim?

Regards,

S Ram

Posts / Replies

[YAGAY andSUN]

In response to the Assessing Officer's (AO) query regarding the claim of bad debts, it is essential to substantiate that the related income was originally offered to tax in the year it was accrued or received. As per Section 36(1)(vii) of the Income Tax Act, 1961, a bad debt can be allowed as a deduction if the same has been previously included in the income of the taxpayer. To effectively address the AO’s query, you must provide the following evidence:

(i) documentary proof such as financial statements or ledgers indicating that the relevant amount was recognized as income in a prior assessment year,

(ii) copies of relevant invoices, payment receipts, or contracts that confirm the transaction and the nature of the debt,

(iii) bank statements showing any earlier receipts related to the debt, and

(iv) correspondence or other records demonstrating that reasonable efforts were made to recover the debt, but recovery was unsuccessful.

These documents will help establish that the debt was indeed income in a prior period, thereby justifying the claim under Section 36(1)(vii) as a bad debt expense in the current year.

[Ramanathan Seshan]

Dear Yagay-sir,

Thanks for your detailed response. Can you please elaborate as to how to highlight in the financials that the same had been offered to income in previous years ?

Regards,

S Ram