Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible.

1. Deduction for Bad Debts [Section 36(1)(vii)]

A bad debt is a debt that has become irrecoverable and is written off from the books of accounts. The following conditions must be satisfied for claiming a deduction:
✅ The debt must have been included as income in earlier years.
✅ The debt must be related to the business or profession carried on by the taxpayer.
✅ The debt should be actually written off in the books of accounts in the year in which the deduction is claimed.

🔹 Important: Writing off the debt in the books of accounts is mandatory—mere provision for bad debts will not be allowed as a deduction.

2. Deduction for Provision for Doubtful Debts [Section 36(1)(viia)]

Normally, a provision for doubtful debts (i.e., expected bad debts that may occur in the future) is not deductible. However, an exception exists for banks, financial institutions, and NBFCs:

• Scheduled Banks & Cooperative Banks: Deduction up to 8.5% of total income (before deductions) and 10% of rural advances.

• NBFCs: Deduction up to 5% of total income on provisions for doubtful debts.

3. When Bad Debt Recovery is Taxable [Section 41(4)]

If a bad debt, which was earlier allowed as a deduction, is subsequently recovered, it must be offered as income in the year of recovery.

4. Key Judicial Decisions & Practical Considerations

• The Supreme Court (T.R.F. Ltd. case) has ruled that if a bad debt is written off in the books, the deduction cannot be denied merely because the assessee failed to prove irrecoverability.

• Businesses should document communication with the debtor (reminders, legal notices) to substantiate the claim in case of scrutiny.

Conclusion

• Bad debts actually written off in the books are allowed as a deduction.

• Provision for doubtful debts is generally not allowed, except for certain financial institutions.

• Recovered bad debts must be offered as income in the year of recovery.

For businesses, maintaining proper records and ensuring compliance with Section 36(1)(vii) & (viia) is crucial for claiming these deductions.

Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:

1. Advertisement for Political Purposes

Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.

2. Advertisements Resulting in Capital Expenditure

If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.

3. Expenses That Are Prohibited by Law

Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.

4. Personal Advertisement Expenses

If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.

5. Non-Compliance with TDS Requirements

If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.

6. Excessive or Unreasonable Advertisement Expenses

If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.

Conclusion
To ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.

Yes, if a company has appointed personnel exclusively for implementing its CSR activities, the expenditure incurred on these personnel (such as salaries, wages, and related benefits) can be included as part of the CSR expenditure. Here’s what you need to know:

Key Points:

• Exclusive Engagement:
  The staff must be exclusively engaged in CSR-related activities. Their work should directly contribute to the implementation, monitoring, or administration of CSR projects.

• Direct Attribution:
  Only those expenses that are directly attributable to CSR activities can be included. This means that if an employee is working solely on CSR projects, their compensation, travel, and other expenses may be counted as part of CSR spending.

• Proper Documentation:
  It’s crucial to maintain clear records and segregate these costs in your accounts. Proper documentation will help substantiate that these expenditures are solely for CSR purposes if ever reviewed by regulators.

• Compliance with CSR Mandates:
  Even though these personnel costs are allowed as CSR expenditure, they must still fall within the overall CSR spending limits and guidelines set under Section 135 of the Companies Act, 2013.

CSR (Corporate Social Responsibility) activities are primarily undertaken for social welfare rather than for profit-making. However, in some cases, a CSR initiative might generate a surplus or profit. Here’s how such profits should be treated:

1. Separation from CSR Mandated Spend

• CSR Obligation Remains Unchanged:
  Even if a CSR project generates a profit, the company’s obligation to spend at least 2% of its average net profit on CSR (as per Section 135) remains unaffected.
• No Set-Off:
  The profits earned from CSR activities cannot be set off against the mandated CSR expenditure.

2. Treatment as Business Income

• Ordinary Business Income:
  Any profit arising from a CSR activity is treated as ordinary business income of the company.
• Taxation:
  Such profits are subject to tax in the usual manner, just like income from any other business venture.

3. Reinvestment Option

• Reinvestment in CSR:
  Although the profits must be taxed as business income, companies may choose to reinvest these funds in further CSR initiatives.
• No Special Tax Benefit:
  Reinvesting the profit does not provide an additional tax deduction specifically for the fact that it originated from a CSR activity.

Key Takeaways

• Mandatory CSR Spend Unaffected:
  Even if a CSR project is profitable, the company must still meet the prescribed CSR spending obligation.
• Separate Accounting:
  Profits from CSR activities should be accounted for as part of the company’s overall business income.
• Taxation as Usual:
  These profits are taxed at the applicable corporate tax rates.

Section 135 of the Companies Act, 2013 lays down the provisions for Corporate Social Responsibility (CSR). It specifies which companies are required to undertake CSR activities, along with the extent of expenditure. Here’s what you need to know:

Who Is Covered Under Section 135?

A company is required to comply with Section 135 if, in any financial year, it satisfies any one of the following thresholds based on its immediately preceding financial year:

• Net Worth:
  The company’s net worth is ₹500 crores or more.
• Turnover:
  The company’s turnover is ₹1,000 crores or more.
• Net Profit:
  The company’s net profit is ₹5 crores or more.

Key Points:

• Applicability to Both Public and Private Companies:
  Both public and private companies meeting these financial thresholds must adopt a CSR policy and spend at least 2% of their average net profit (calculated over the preceding three financial years) on eligible CSR activities.

• CSR Committee:
  Such companies must form a CSR Committee (which must include at least one independent director) to oversee CSR activities and ensure transparency.

• Exclusions:
  Certain companies, like dormant companies or those falling under specific exemptions, may not be required to comply with CSR provisions even if they meet the financial criteria.

• Year-by-Year Assessment:
  The CSR obligation is determined annually based on the financial performance of the company in the immediately preceding financial year. If a company falls below the threshold in subsequent years, the CSR mandate does not apply for those years.

Summary Table

If any one of these criteria is met in the immediately preceding financial year, the company is obligated to implement CSR activities as per Section 135.

Conclusion

Section 135 applies to companies (both public and private) that meet the above financial thresholds. If a company qualifies, it must form a CSR Committee, develop a CSR policy, and spend at least 2% of its average net profit (from the past three years) on projects listed under Schedule VII of the Act.