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MCQ Self Challenge # 0055 on Taxability of recovery of bad debts

 

Taxability of recovery of bad debts

 

Dear Professional Seniors & Friends,
Warm Greetings!

Here is the Next post of #MCQ on concept based practical professional knowledge on taxability of amount subsequently recovered which has been claimed as bad debt in a unique manner to be self answered by participants. The detailed answer of these MCQs shall be posted next day for the self assessment of the participants.

MCQ 55.1: Rs 1,00,000 is recoverable from a debtor Mr A. The assessee writes off Rs 40,000 as bad debt in the previous year 31.03.2010. Subsequently, in the previous year 31.3.18, Rs 70,000 is recovered from Mr. A but the business of the assessee is not in existence in the F.Y. 2017-18. Which among the following is correct?
A) Rs 70,000 will be taxable in assessee’s hand.
B) Rs 10,000 will be taxable in assessee’s hand.
C) No amount is taxable in assessee’s hand.
D) Rs 70,000 will be taxable in assessee’s hand in F.Y. 2009-10.

MCQ 55.2: A firm had claimed and was allowed bad debt of Rs 1,00,000 in F.Y. 2017-18. The firm was dissolved and was taken over by a partner Mr. A. The partner Mr. A recovers Rs 1,00,000 bad debt in the F.Y. 2018-19.
A) Rs 1,00,000 will be taxable in Firm’s hand.
B) Rs 1,00,000 will be taxable in A’s hand.
C) Rs 1,00,000 will not be taxable in anyone’s hand.
D) AO has discretion to tax such recovery in anyone’s hand.

Have a Nice Day!

Sincere Regards
CA Sanjay Kumar Agrawal
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———–Answer MCQ Self Challenge # 0055———–

 

Dear Professional Seniors & Friends,

Warm Greetings!

 

This post of MCQ is on provisions relating to taxability of amount subsequently recovered which has been earlier claimed as bad debts.

 

Answer to MCQ 55.1: B) Rs 10,000 will be taxable in assessee’s hand.

 

Answer to MCQ 55.2: C) Rs 1,00,000 will not be taxable in anyone’s hand.

 

Practical Analysis for MCQ 55.1 :-

  1. As per Section 41(4) of Income Tax Act, where a deduction has been allowed in respect of bad debt, then if the amount is subsequently recovered, the amount shall be deemed to be profits and gain of business or profession and accordingly chargeable to income tax.
  2. The amount so chargeable to income tax will deemed to be income of the previous year in which it is recovered.
  3. This will apply even if the business or profession in respect of which deduction has been allowed is not in existence.

 

Based on the above analysis, correct answer MCQ 55.1: B) Rs 10,000 will be taxable in assessee’s hand.{70000-(100000-40000)}

 

Practical Analysis for MCQ 55.2 :-

  1. In the case of P.K. Kaimal, it was held that for the applicability of Section 41(4), the assessee who claimed the deduction of bad debt and the assessee who recovers the bad debt must be the same.
  2. If the firm is dissolved and the business is discontinued by an erstwhile partner, then any recovery made by the partner towards bad debt will not attract section 41(4) since the assessee has changed.
  3. In the present case, Rs 1,00,000 is not taxable in the hands of firm or the partner and the same is a capital receipt in the hands of partner.

 

Based on the above analysis, correct answer MCQ 55.2: C) Rs 1,00,000 will not be taxable in anyone’s hand.

 

(Disclaimer: The objective of the MCQ post is just to discuss the concept, it may happen, by change of facts, the answer may be different. Please do not treat this as professional opinion; you can definitely have your own opinion.)

 

Sincere Regards!

CA Sanjay Kumar Agrawal

Mobile: 9810116321

 

To access MCQ posts regularly, please Join Telegram Channel:
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Linkedin: https://www.linkedin.com/in/ca-sanjay-kumar-agrawal/

 

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