Start with the earlier allowed amount
For a non-bank company settling a written-off trade debt in FY 2025–26, apply the Income-tax Act, 1961 for AY 2026–27. Section 41(4) applies where a deduction under section 36(1)(vii) was allowed. Compare the subsequent recovery with the difference between the relevant debt or part and the deduction allowed. The recovery above that difference is deemed income from business or profession in the recovery year, even if the business has ceased. The statutory test is not simply whether the ledger describes the receipt as a bad-debt recovery.
Read the applicable text: Income Tax Department, section 41(4) Income Tax Department, section 36 Income Tax Department, Form 3CD downloads CBDT Notification 49/2026, ITR-6.
Reconstruct the same debt or part
Link the original trade invoice and income, write-off entry, tax claim, intimation or assessment changes, and subsequent payments. Compare amounts on a consistent debt basis. Do not use the full customer balance if the earlier allowance relates only to a defined part, and do not substitute an accounting expected-credit-loss provision for an actual tax allowance. For instalments of the same debt, track how much of the statutory baseline is used and any amounts already included as taxable income.
Separate an interim collection from a final deficiency
Section 36(2)(ii) addresses a deductible deficiency when ultimate recovery is less than the relevant debt less the amount deducted. Establish that the recovery is ultimate on the facts, such as under a completed enforceable settlement; an open instalment is not evidence of the ultimate shortfall. Retain the settlement, closure evidence and calculation. If the statutory conditions are met, deduct the deficiency in the previous year of ultimate recovery. Do not claim a deficiency on an open instalment.
Map the report and return without repeating the amount
If tax audit applies, reconcile the section 41 computation to Form 3CD clause 25 and the section 41 amount to notified ITR-6 Part A-OI item 14. Schedule BP item 20 is the section 41 deemed-income line. Trace what already enters the P&L starting figure and what is separately brought into the business computation, and verify the final utility preview. Do not put the same taxable recovery in the starting profit and again in a way that taxes it twice. Item 14 serves the section 41 disclosure and may also contain other qualifying section 41 amounts.
Close the file by invoice and settlement
Show gross recovery, statutory baseline, taxable recovery, prior inclusions, any ultimate deficiency and the difference from book income. Analyse interest, fees, GST components and mixed settlements separately where relevant. This article does not address banks' special deduction and provisioning rules.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Full prior allowance
A ₹6 lakh debt was fully allowed as a bad-debt deduction. The baseline is nil and a subsequent ₹2 lakh recovery gives ₹2 lakh under section 41(4).
Illustrative example 2: Part of the debt was allowed
The relevant debt is ₹10 lakh and ₹7 lakh was allowed. A ₹5 lakh ultimate recovery exceeds the ₹3 lakh baseline by ₹2 lakh. That ₹2 lakh is deemed business income on these facts.
Illustrative example 3: Equality at the baseline
The relevant debt is ₹8 lakh, the allowance ₹5 lakh and final recovery ₹3 lakh. There is no excess and no deficiency; neither a section 41(4) addition nor a deficiency is produced on these assumptions.
Illustrative example 4: Deficiency on ultimate recovery
A ₹9 lakh debt had a ₹5 lakh allowance. An evidenced final settlement yields ₹2.50 lakh. The baseline is ₹4 lakh and the deficiency for section 36(2)(ii) review is ₹1.50 lakh; deemed recovery income is nil.
Illustrative example 5: Two recovery periods
A ₹12 lakh debt had a ₹9 lakh allowance. Assume ₹2 lakh was previously recovered and ₹4 lakh is now recovered. Cumulative recovery of ₹6 lakh exceeds the ₹3 lakh baseline by ₹3 lakh. With no prior section 41(4) inclusion, the current taxable excess is ₹3 lakh on the assumed allocation to the same debt.
Illustrative example 6: Tie the final computation to book profit
The books credit ₹4 lakh and the supported section 41(4) amount for that same receipt is ₹2.50 lakh. If the full credit is already in the starting profit and the balance is a non-taxable principal recovery on these facts, the net bridge for the receipt is a ₹1.50 lakh reduction, leaving ₹2.50 lakh taxable once.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify each recovered debt or part | Invoice and settlement identifiers |
| 2 | Trace the original business income | Prior books and tax computation |
| 3 | Verify actual write-off and allowance | Ledger, filed return and operative order |
| 4 | Establish the statutory baseline | Debt less earlier allowed amount |
| 5 | Reconcile prior and current recoveries | Bank, creditor and debtor records |
| 6 | Identify ultimate settlement status | Discharge and closure evidence |
| 7 | Calculate taxable excess or deficiency | Sections 41(4) and 36(2)(ii) working |
| 8 | Reconcile audit and return disclosures | Form 3CD clause 25 and Part A-OI 14 |
| 9 | Check business income once | Schedule BP item 20 and starting-profit bridge |
| 10 | Preserve closing exposure | Debt-level roll-forward and reviewer sign-off |
Sixteen practitioner FAQs
1. Does the full receipt become taxable automatically?
No. Apply the statutory baseline and excess test.
2. What if the prior write-off was fully allowed?
The baseline is zero for that debt or part.
3. What if the write-off was never allowed?
The section 41(4) prerequisite is not met on that basis; analyse the receipt separately.
4. Can a book provision be the prior allowance?
No. Trace the deduction actually allowed under the relevant provision.
5. Which year includes the excess?
The year of recovery under section 41(4).
6. Does business closure remove the charge?
No. The section applies even if the business is no longer in existence.
7. Can the customer ledger be used without invoice matching?
Use the relevant debt or part; customer-level totals can conceal different bases.
8. Should an unfinished payment plan establish a deficiency?
No. Determine ultimate recovery on the evidence.
9. Which provision addresses a final deficiency?
Section 36(2)(ii), subject to its conditions.
10. Where is the audit disclosure?
Form 3CD clause 25 where applicable.
11. What does Part A-OI item 14 capture?
Amounts chargeable under section 41, including applicable amounts other than these recoveries.
12. Which Schedule BP line identifies section 41 deemed income?
Item 20 in the notified AY 2026–27 form.
13. Should a P&L credit be added again without review?
No. Verify the business computation includes the taxable amount once.
14. What if a settlement includes interest?
Separate the principal and interest and analyse their respective tax treatment.
15. How are instalments tracked?
Maintain cumulative debt-level recovery, prior inclusions and the remaining baseline.
16. Does this cover tax year 2026–27 receipts after March 2026?
No. This scope is FY 2025–26 and AY 2026–27 under the 1961 Act.
Official sources
Income Tax Department, section 41(4) Income Tax Department, section 36 Income Tax Department, Form 3CD downloads CBDT Notification 49/2026, ITR-6 CBDT cross-reference for Form 3CD clause 25