Dharma g, follow the simple logic., and solve your problem, and no need to worry about the quantum of amount whatever it may be. Amounts of figure doesn't matter if u r right. While calculating the income tax for the year ended 14-15 you had considered the cancelled bill as income and so much amount of tax you had paid. We are humans, and commit mistakes too while doing things. For mistakes there are solutions also. By the way cancelled bill means no debtors means fake debtors, and clear thing is that you are never gonna get money also convey that in eye of accounts we say it as bad debts. So my suggestion is you write off cancelled bill and allow the expense during financial year 15-16. Journal Entry is debit the bad debts so much of amount of cancelled bill and credit the debtors. If u r really scared of scrutiny of IT department, you please collect the letter and confirmation from your debtors and maintain the schedule of debtors. I hope this may help you. I am this much confident because, I had solved this type of problems many times. U can contact me for further clarification on my mail id. Nirajbista9 @ gmail.com

Dharma g, follow the simple logic., and solve your problem, and no need to worry about the quantum of amount whatever it may be. Amounts of figure doesn't matter if u r right. While calculating the income tax for the year ended 14-15 you had considered the cancelled bill as income and so much amount of tax you had paid. We are humans, and commit mistakes too while doing things. For mistakes there are solutions also. By the way cancelled bill means no debtors means fake debtors, and clear thing is that you are never gonna get money also convey that in eye of accounts we say it as bad debts. So my suggestion is you write off cancelled bill and allow the expense during financial year 15-16. Journal Entry is debit the bad debts so much of amount of cancelled bill and credit the debtors. If u r really scared of scrutiny of IT department, you please collect the letter and confirmation from your debtors and maintain the schedule of debtors. I hope this may help you. I am this much confident because, I had solved this type of problems many times. U can contact me for further clarification on my mail id. Nirajbista9 @ gmail.com

Definitely claim bad debt, why because you had considered this amount as income during last year and paid income tax on it. Without income paying tax is not justifiable no, that's why u paid tax and now you claim expense to settle. If u have no sufficient income to claim such expense you also can claim bad debts on part during the number of years as your management think fit.

@ ish kumar sharma: As per section-36(1)(vii) & 36(2) of The Income Tax Act, 1961, amount of any debt or part is allowed as deduction subject to the following conditions (which are not the exact extract of the said section but only an interpretation of law contained in that section):

1. There must be a proper admitted “Debt”
2. “Debt” must be incidental to the business or profession of the assessee
3. “Debt” must have been taken into account in computing assessable income of the assessee of that previous year or of an earlier previous year or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee
4. “Debt” must have been written-off in the books of account of the assessee in the previous year in which it is to be claimed

 

As per section-37(1) of The Income Tax Act, 1961, in order to claim deduction, the following conditions should be satisfied (which are not the exact extract of the said section but only an interpretation of law contained in that section):

1. The expenditure should not be of the nature described under section-30 to 36
2. It should not be in the nature of capital expenditure
3. It should not be personal expenditure of the assessee
4. It should have been incurred in the previous year
5. It should be in respect of business or profession carried on by the assessee
6. It should have been expended wholly & exclusively for the purpose of such business
7. It should not have been incurred for any purpose which is an offence or is prohibited by any law

 

Now, there can be two possible situations with corresponding solutions as follows:

1. If your company didn’t provide the services at all, as of result of which you have cancelled the invoice (which was issued before providing the services)

The adjustment should have been done in the same Financial Year, i.e., 2014-15 by passing a reverse entry. But your company should have bear the service tax liability initially as per the Point of Taxation Rules, 2011, which will be the “date of issue of invoice” or “date of payment”, whichever is earlier & in your case POT will be date of issue of invoice. Though later, you can make self-adjustment of service tax if fulfilled the conditions as per Rule 6(3) of The Service Tax Rules, 1994. Now, to correct the error in the next Financial Year, i.e., 2015-16, neither you can claim it as “bad debt” as it was never a proper admitted “Debt” at all in the previous Financial Year 2014-15 as per the requirement (1), stated above, of Section-36(1)(vii) & 36(2) nor you claim it as “prior period expenditure” as per AS-5, as then it will be disallowed on account of non-fulfillment of condition (4), as stated above, of Section-37(1) of the IT Act, 1961. You can refer  to ITA No.5708/Mum/2009 – Assessment Year-2004-05 in the case of  M/s. Tipco Industries Ltd. Vs. The ACIT. Hence, it is advisable to revise your ITR, provided you have filed it within due date as specified u/s-139(1) of The Income Tax Act, 1961 in the Assessment Year 2015-16.

     B. If your company had already provided the services, but couldn’t be able to recover the due amount, as a result of which you have cancelled the invoice (which was issued after providing the services)

           In this situation, you can easily claim “bad debts” as all the conditions of section-36(1)(vii) & 36(2) gets fulfilled, as already suggested by all. And as far as service tax is concerned, your company should have followed the Point of Taxation Rules, 2011 for paying service tax accordingly.

 

Hope your doubt is cleared now…

 

 

It can not said as bad debts. As per my opinion the entry made earlier should be reversed i.e. income debit and debtors credit. It is just mistake and will be covered under AS- 5 disclosure requirement as prior period items. Mere accouting mistake can not be treated as bad debts.

Dear all

we paid service tax and income tax both thereon and services were actually rendered and the same were not as per requirement of the client, hence they refused to make the payment for the same. Now???

Ok Sir, then this seems to be the third possible case now..since your company has already provided the service but the payment has not been received not due to their inability to pay or for reasons of their faults but due to not matching with the standards as per the contract right?? Then I don't think this can be claimed as "bad debt" u/s-36(1)(vii) as again the possibility of being a proper admitted "debt" is missing.. So, as per my opinion, you should file a revise return, provided retun has been filed by due date as per sec-139(1) for the A.Y. 2015-16 as claiming "prior period expenditure" may be disallowed by the Assesing Officer u/s-37(1) for the reasons which I have already mentioned above along with the case citation.

But still, since it seems to be a debatable issue now, I would like to request other Experts of CCI to throw light on this querry by referring some more case law from which the clear intention of the law can be interpreted more precisely...

I will repeat my answer again.... Mr ish Kumar jii...... That while preparing financial statement you should show such item as prior period item by debiting profit and loss account and give prior disclosure of such fact in notes to account....... Secondly, while preparing tax audit report ( assuming tax audit applicable as per 44AB) you should state such fact under clause 22(b) in firm 3CD....

For IT you can move sec 154 an for account this is a simple return what you receive. Bad dabt seems illogical . Plz. Also refer to your auditor the matter . Than after plz. Also provide the what your auditor suggest about this

For IT you can move sec 154 an for account this is a simple return what you receive. Bad dabt seems illogical . Plz. Also refer to your auditor the matter . Than after plz. Also provide the what your auditor suggest about this