KARACHI: Federal Board of Revenue (FBR) shall allow reduction in tax liability against bed debts where loans are irrecoverable, officials said.
FBR officials said that a person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely:—
(a) the amount of the debt was –
(i) previously included in the person’s income from business chargeable to tax; or
(ii) in respect of money lent by a financial institution in deriving income from business chargeable to tax;
(b) the debt or part of the debt is written off in the accounts of the person in the tax year; and
(c) there are reasonable grounds for believing that the debt is irrecoverable.
The officials said that the amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written off in the accounts of the person in the tax year.
Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person receives in cash or kind any amount in respect of that debt, the following rules shall apply, namely:
(a) where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction under this section, the excess shall be included in the person’s income under the head “Income from Business” for the tax year in which it was received; or
(b) where the amount received is less than the difference between the whole of such bad debt and the amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing the person’s income under the head “Income from Business” for the tax year in which it was received.
