Income Tax Ordinance, 2001 — Section 29: Bad debts

29. Bad debts.— (1) 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.

(2)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.

(3)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 1 The words “Central Board of Revenue” substituted by the Finance Act, 2007. 2 The words “Central Board of Revenue” substituted by the Finance Act, 2007. 81 Chapter III – Tax on Taxable Income 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.