Bounced Cheque in Your Books: Income Tax and GST Treatment

The cheque came back. Your ledger shows the invoice as received, the bank statement shows a return memo, and the customer has stopped answering calls. Three separate questions now need answers: does the sale stay in turnover, can the GST already paid be adjusted, and when does the balance become a bad debt. The bounced cheque income tax treatment is not the same as the GST treatment, and neither of them depends on whether your section 138 complaint eventually succeeds.

Why a Bounced Cheque Does Not Cancel the Sale

A return memo proves that a payment instruction failed. It does not prove that the supply failed. Under section 128 of the Companies Act, 2013 books must be kept on the accrual basis, and business income under section 145 of the Income-tax Act, 1961 is computed by the method regularly employed, which for most trading entities is accrual. Revenue on the invoice was recognised when the right to consideration arose, normally the invoice date.

GST follows the invoice, not the bank. Section 12 of the CGST Act, 2017 fixes the time of supply of goods at the earlier of the invoice date and the date of payment, and a cheque is not payment until it is honoured. The output tax therefore belongs to the month of the invoice whatever happens later. Only a return of goods, or a genuine deficiency in value or quantity, supports a credit note under section 34. A dishonoured cheque is not a ground for one.

In the books, the deposit of the cheque created a debit to the bank. On dishonour that entry is reversed and a debit raised against the customer. Sales are not reduced, and the invoice stays in GSTR-1 as reported.

One invoice, followed to the end

A Rajkot manufacturer of machined components raises invoice RC/1126 dated 12 August 2025 on a Pune buyer: taxable value ₹4,00,000, IGST at 18% of ₹72,000, total ₹4,72,000. A cheque dated 10 November 2025 is deposited on 11 November and returned on 14 November with "funds insufficient". Nothing is paid afterwards. The seller sends a demand notice under section 138 of the Negotiable Instruments Act, 1881, files a complaint, and eventually writes the debt off in its books on 31 March 2027.

The IGST went out with the August 2025 return. The buyer claimed credit of ₹72,000 in September 2025. The 180-day window measured from the invoice date closed on 8 February 2026. The write-off belongs to FY 2026-27, not to the year in which the cheque bounced.

GST: Reversal When Payment Is Not Received in Time

There is no provision in GST law that lets a supplier recover output tax already paid because the customer never paid. Bad debt is not a ground for refund or for a fresh credit note. The ₹72,000 stays with the government. What does change is the buyer's input tax credit.

Rule 37 of the CGST Rules, 2017 applies to the recipient. Where credit has been availed, the recipient must pay the supplier within 180 days of the invoice date; if payment is not made, the credit attributable to the unpaid value is reversed in the return for the period in which the window expires, along with interest under section 50. The rate notified under that section is 18% per annum, and interest runs from the date the credit was availed to the date of reversal.

In the example, the buyer's 180 days end on 8 February 2026 and the reversal of ₹72,000 should appear in that month's return with interest for the period from September 2025. In practice many buyers miss this because the supplier's ledger and the buyer's tax team never speak to each other. A supplier who sends a written intimation that the cheque has bounced, quoting the invoice and the amount, does two useful things: it puts the buyer on notice of its Rule 37 obligation, and it builds the file you will need if the transaction is questioned.

Two clarifications that are often missed. Rule 37 applies to services as well as goods. And where the recipient is liable to pay under reverse charge, the 180-day condition does not apply.

Reversing the Reversal If Money Is Later Recovered

Rule 37(4) allows the recipient to re-avail the credit when the payment is finally made, and the amount is then reported in the return for the period of payment. That is the buyer's relief, not yours, but it matters commercially: a buyer facing a ₹72,000 reversal and interest has a real incentive to settle.

For the supplier, later recovery does not create fresh output tax, because the tax was never reversed. Watch the interaction with section 16(4), which sets a time limit for availing credit. Rule 37(4) permits re-availment, but where the payment arrives years after the invoice, the buyer may find the route blocked by that limitation. Confirm the position on your specific dates before promising anyone that the credit can be reclaimed.

Bounced Cheque Income Tax Treatment: Writing Off an Irrecoverable Debt

Section 36(1)(vii) allows a deduction for a bad debt written off in the accounts as irrecoverable. Section 36(2)(i) sets two conditions: the debt must have been taken into account in computing the income of the assessee in that or an earlier previous year, and it must arise in the course of business. An invoiced sale on the accrual basis satisfies both.

The operative act is the write-off. A provision for doubtful debts is not enough for a normal trading company; the amount must actually be written off in the books of the year in which the deduction is claimed. A provision is only relevant where the assessee falls within the proviso to section 36(1)(vii), which limits the deduction for entities covered by section 36(1)(viia). There is no requirement that the assessee prove the debt had become irrecoverable independent of the write-off, which is what the Supreme Court held in CIT v. T.R.F. Ltd., (2010) 3 SCC 536. The write-off must be backed by a board resolution where the assessee is a company, and the amount must be identified invoice by invoice.

For a taxpayer on the cash system, in a profession say, the receipt was never taken into income, so there is no debt to write off and nothing to deduct.

If the customer pays after the deduction, section 41(4) brings the recovery back into business income in the year of receipt. Keep the file open. A written-off debt that is later collected and not offered to tax is a routine assessment addition.

Documents That Support the Write-Off

The deduction survives scrutiny on paperwork, not on intention. Assemble these before the assessing officer asks:

• Original cheque return memo from the bank, with the return date and reason

• Original invoice, e-way bill and proof of delivery or service acceptance

• Ledger extract showing the debit, the reversal on dishonour and the written-off entry

• Board resolution or partner authorisation approving the write-off, with the invoice-wise schedule

• Demand notice under section 138 of the Negotiable Instruments Act with postal and tracking proof

• Copy of the complaint, court acknowledgment and any subsequent orders

• Record of follow-up emails, calls and any settlement correspondence

Two documents are worth preparing even if they are not strictly required: a written intimation to the buyer about the dishonour and the GST reversal consequence, and a note recording why the debt was treated as irrecoverable in the year chosen rather than an earlier one.

Coordinating the Tax Position With the Cheque Case

The criminal case and the tax positions run on separate tracks. A section 138 complaint must ordinarily follow a demand notice within 30 days of the return memo, and the complaint itself must be filed within the limitation set by section 142. Nothing in the Income-tax Act makes a pending complaint a precondition to the write-off, and equally, an acquittal in the criminal case does not bar the civil recovery suit for the money.

What does matter is consistency. If you have treated the debt as good in the balance sheet for the year of dishonour and continued to press for recovery, you cannot then write it off in an earlier year. The year of write-off should be the year in which you concluded the amount was irrecoverable and recorded that decision, and the reasoning should be capable of being explained on its own facts.

Common mistakes

• Reducing turnover or issuing a credit note because the cheque bounced.
• Assuming somebody else will reverse the GST, when Rule 37 places the duty squarely on the buyer.
• Claiming a bad debt in the year of dishonour while the write-off entry is passed a year later.
• Making a provision for doubtful debts and claiming it as a write-off.

Before 31 March, reconcile every unreconciled invoice where a cheque was returned, pass the write-off entries you intend to claim, obtain the board approval with an invoice-wise annexure, and write to the buyer setting out the dishonour and the 180-day consequence under Rule 37. That single letter, sent with the return memo attached, is often the cheapest step in the whole recovery effort.

This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.