Bad debt deduction under the provision account is limited by the opening balance and adjusts with Section 36(1)(viia) recomputation.

Section 36(1)(vii) permits a bad-debt deduction only to the extent the write-off exceeds the credit balance in the provision for bad and doubtful debts account under Section 36(1)(viia). The relevant credit balance is the opening balance brought forward on 1 April of the accounting year. If the deduction under Section 36(1)(viia) is recomputed at a lower figure because total income is reduced, the corresponding availability under Section 36(1)(vii) must be adjusted accordingly, subject to the statutory ceiling of 5% of total income. On that basis, the assessee could claim the balance of the bad debts written off after allowing the amount admissible under Section 36(1)(viia).

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Issues: Whether, in computing deduction for bad debts written off, the credit balance in the provision for bad and doubtful debts account under Section 36(1)(vii) is the opening balance as on 1 April of the relevant year, and whether a reduction in the deduction under Section 36(1)(viia) alters the deduction allowable under Section 36(1)(vii).

Analysis: The proviso to Section 36(1)(vii) limits the deduction for bad debts to the amount exceeding the credit balance in the provision for bad and doubtful debts account maintained under Section 36(1)(viia). The relevant credit balance is the opening balance brought forward on the first day of the accounting year. Where the deduction under Section 36(1)(viia) is recomputed at a lower figure because the total income stands reduced, the corresponding amount available under Section 36(1)(vii) is to be adjusted accordingly, while keeping the deduction under Section 36(1)(viia) within the statutory ceiling of 5% of total income.

Conclusion: The assessee was entitled to claim the balance of the bad debts written off under Section 36(1)(vii) after allowing the amount admissible under Section 36(1)(viia), and the Revenue's challenge to that treatment failed.

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