Accounting treatment : Bad Loans : wether deductible expense?

Question

Ours is a private limited company primarily into Advertising business and have advanced unsecured loan to a firm to the tune of Rs. 10,00,000/-
This loan has turned bad and no chances of recovery.
What is the accounting treatment to write-off this bad loan?
Is this expense of Rs. 10 lakh deductible expense from Income tax point of view.

Please guide me on the above issue

Answer 1

It all depends on why the loan was made. Was it made in the ordinary course of business? Was it incurred wholly and exclusively in the production of income? I presume the answer is No.

Without knowing more, I would say the bad debt is not deductible for tax purposes. Your company is not a money lender or a financial institution whose activity is to make loans.

Accounting treatment is simply
Dr Bad debt written off (loan)
Cr Unsecured loan receivable

Tax treatment is to add back this expense to taxable income cos it's not deductible. For deferred tax purposes this would give rise to a permanent difference.