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

Income-tax Act, 2025 [As Passed]

At a Glance

Clause 31(Old Version) of the Income Tax Bill, 2025 sets out when provisions for bad and doubtful debts and actual bad debts written off are allowable as deductions u/s 26 (Profits and gains of business or profession). It prescribes differential percentage limits for specified classes of financial institutions and banks, conditions for write-off claims, and rules on a single provision account. The provision principally affects banking and financial-sector assessees and taxpayers engaged in money-lending; effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 31 of the Income Tax Bill, 2025 (Profits and gains of business or profession). The clause addresses deductions in computing business/professional income for (i) provisions for bad and doubtful debts made by specified assessees and (ii) amounts of bad debt written off as irrecoverable.

Coverage: The clause distinguishes classes of assessees-scheduled and non-scheduled banks, cooperative banks (with exclusions), foreign banks, public financial institutions, State Financial Corporations/Industrial Investment Corporations, and non-banking financial companies (NBFCs)-and prescribes the maximum deductible amounts for provisions. It also sets conditions for when a written-off bad debt qualifies as a deduction and provides rules on the accounting treatment necessary to claim the deduction.

Definitions/explanations: The text itself defines the qualifying assessees and specifies the percentage limits; no further definitions (e.g., of "total income" or "aggregate average advances") are provided within the clause. "Not stated in the document." regarding any definitions beyond those included.

Statutory Provision Mode

Text & Scope

The Old Version operates on two distinct but related heads:

• Sub-section (1): Permits specified assessees to claim as a deduction a stated percentage of their total income (computed before certain deductions) as provisions for bad and doubtful debts. For scheduled banks, non-scheduled banks and most co-operative banks the limit is "not more than 8.5% of the total income of the tax year computed before making any deduction under this clause and Chapter VIII" plus "an additional amount up to 10% of the aggregate average advances made by rural branches computed in the manner as prescribed." An elective additional amount (income from redemption of securities under a Central Government scheme) is allowed up to income disclosed under the head "Profits and gains of business or profession" for scheduled and non-scheduled banks. For foreign banks, public financial institutions, State Financial Corporations/Industrial Investment Corporations, and NBFCs the limit is "not more than 5% of the total income" computed similarly.
• Sub-sections (2) and (3): Set out when amounts written off as irrecoverable are deductible, subject to conditions. Important ingredients include (a) previous inclusion in computing income or being money lent in ordinary course of banking/money-lending business; (b) recovery treatment where partial recovery occurs; and (c) for assessees claiming the sub-section (1) provision the deduction of written-off amounts is restricted to amounts exceeding the credit balance in the provision account and is allowed only when the assessee has debited the relevant amount to that provision account. Sub-section (3) clarifies that a written-off bad debt does not include any provision for bad and doubtful debt and treats certain unrecorded amounts taken into account under specified accounting standards as deemed written off for purposes of sub-section (2).

Interpretation

The legislative text signals an intent to allow specified financial sector entities predictable, percentage-based deductions for provisioning while tightly linking actual write-offs to account entries and prior income computation. The clause distinguishes between a statutory headroom for provisions (sub-section (1)) and the separate deduction of actual irrecoverable debts (sub-section (2)), thereby preserving the primacy of book/accounting entries and prior tax treatment. The limitation that deductible written-off amounts cannot duplicate amounts already provided for (credit balance in the provision account) aims to prevent double dipping.

Exceptions/Provisos

Notable carve-outs and conditions in the Old Version:

• Co-operative banks: exclusions for primary agricultural credit societies and primary co-operative agricultural and rural development banks from the cooperative-bank category in (1)(c) - these are not eligible under that clause.
• Elective additional amount for scheduled and non-scheduled banks limited to income from the redemption of securities under a Central Government scheme and only where disclosed under the specified head.
• Deduction of written-off bad debts for assessees using the provision in sub-section (1) is confined to amounts exceeding the credit balance in the provision account and must correspond to debits to that same account in the tax year.

Illustrations

• Example 1: A scheduled bank with total income (pre-deduction) of INR 100 crore may claim a provision deduction up to INR 8.5 crore; if it has rural branches with aggregate average advances such that 10% of those advances equals INR 2 crore, it may additionally claim up to INR 2 crore as provided under the rural-branch head (subject to manner of computation prescribed).
• Example 2: An NBFC with total income (pre-deduction) of INR 10 crore may claim provisions up to INR 0.5 crore (5%). If it writes off a specific debt of INR 30 lakh as irrecoverable in the year and that debt had not been covered by the provision account (i.e., exceeds the credit balance), then the write-off may be claimed as a deduction subject to the conditions of sub-section (2).

Interplay

The Old Version expressly references "income computation and disclosure standards notified u/s 276(2)" for treatment of certain items not recorded in accounts; no other Rules/Notifications/Circulars are cited within the clause. Interaction points: the clause implicitly interacts with accounting practices and other provisions governing total income computation (e.g., Chapter VIII references), and with any Central Government scheme that generates income from redemption of securities referred to in sub-section (1)(1)(b). Specific cross-references are limited to section 276(2) and Chapter VIII; further interactions are "Not stated in the document."

Differences between Section 31[As Passed] and Clause 31 (Old Version)

• Prescription phrasing for rural-branch advance computation: The As Passed version uses the phrase "computed in the manner as may be prescribed" while the Old Version uses "computed in the manner as prescribed."
  • Practical impact: The As Passed language is marginally more clearly enabling of future subordinate legislation (explicitly permitting prescription); the Old Version's phrasing is functionally similar but marginally less explicit about rule-making power. This is a drafting nuance rather than a substantive policy change.
• Wording on allowance conditional on debiting provision account: The As Passed text (sub-section (2)(c)(ii)) specifies "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." The Old Version (clause (2)(c)(ii)) states "it shall be allowed only when the assessee has debited such amount in that tax year to the provision for bad and doubtful debts account made under that sub-section."
  • Practical impact: The As Passed wording explicitly links the allowance to debiting "any amount of bad debt or part thereof" and thereby clarifies that an actual debit of bad debt to the provision account (not merely an arbitrary entry) is necessary. The Old Version's "such amount" could be read more narrowly or more circularly; the As Passed wording reduces interpretive ambiguity.
• Single-account requirement placement and wording: In the Old Version the requirement for a single account appears as clause (2)(d): "the account referred to in clause (c) shall be only one such account..." In the As Passed version this is integrated as (2)(c)(iii): "the aforesaid account shall be only one such account under sub-section (1) and such account shall be related to all types of advances, including advances made by rural branches."
  • Practical impact: The As Passed language more tightly links the single-account rule to the other clauses in (2)(c) and adds the explicit phrase "aforesaid account" and the explicit inclusion of rural branches in the same provision; functionally the Old Version already required a single account but the As Passed improves cohesion and clarity.
• Correction of terminology in sub-section (3)(b): The Old Version uses the term "irrevocable" in one place ("becomes irrevocable") whereas the As Passed uses "irrecoverable."
  • Practical impact: This appears to be a corrective editorial change to align terminology with the rest of the section (which consistently uses "irrecoverable" elsewhere). The change avoids potential confusion; it does not appear to alter substantive scope where "irrecoverable" is intended.
• Minor introductory phrasing: The Old Version's heading to sub-section (3) reads "For the purposes of this sub-section (2)," while the As Passed reads "For the purposes of sub-section (2)," - a minor drafting harmonisation without substantive effect.

Practical Implications

• Compliance and risk areas: Financial institutions must maintain a single provision-for-bad-and-doubtful-debts account (covering all advances) and must ensure that debits to that account in the relevant tax year align with claimed deductions for written-off debts. Failure to maintain the single account or to debit the account appropriately may result in disallowance of write-off deductions. The elective additional amounts (rural branch advance percentage; redemption income) require documentation and disclosure in the return of income.
• Record-keeping/evidence points: The text requires debiting of amounts to the provision account and prior inclusion in income computation in earlier years or treatment under notified income computation standards; thus, contemporaneous accounting entries, reconciliations of the provision account, disclosure in the return of income, and records evidencing scheme redemptions (where the elective additional amount is claimed) will be material.

Key Takeaways

• Clause 31 (Old Version) separates a capped, percentage-based provision deduction for specified financial assessees from deduction for actual debts written off as irrecoverable.
• Scheduled/non-scheduled banks and most cooperative banks get a higher provision ceiling (8.5% of pre-deduction total income) with a possible rural-branch add-on; foreign banks, PFIs, SFCs, SIICs and NBFCs are capped at 5%.
• Actual bad-debt write-offs are deductible only if conditions are met: prior tax treatment/accounting alignment and, for those utilising sub-section (1), amounts must exceed the provision account credit and must have been debited to that account in the tax year.
• The clause mandates a single provision account related to all advances, including rural branches.
• The Old Version contains wording (e.g., "irrevocable") that the As Passed rectifies to "irrecoverable," and the As Passed improves clarity on certain conditions and prescription powers.

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Full Text:

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

Provision for bad debts limits deductions for financial entities and ties write-off claims to provision account debits. Section 31 separates a capped, percentage-based deduction for provisions for bad and doubtful debts available to specified financial assessees from separate deductibility of actual irrecoverable debts. Written-off debts are deductible only if previously taken into account for income computation or advanced in the ordinary course of business; for those claiming the percentage provision the deduction is limited to amounts exceeding the provision account credit and is permitted only where the relevant bad debt or part thereof has been debited to the single provision account in the tax year.