ITAT Allows Bad Debt Write-Off w/o Proof of Irrevocability, Protects Legitimate Transactions [Read Order]

In a recent case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that writing off bad debt in the books is enough for deduction, without the need to prove irrecoverability.

Goenka Trading, a registered partnership firm, is engaged in diamond and commodity trading, as well as share trading and futures & options transactions. The assessee filed its income tax return, reporting a loss of ₹5.94 crore. The return was selected for scrutiny assessment by the Assessing Officer (AO).

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During the assessment, the AO noted that the assessee had claimed a bad debt write-off of ₹13 crore. The assessee claimed the loss was due to the collapse of the National Spot Exchange Limited (NSEL).

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The AO, referring to an Economic Offence Wing’s (EOW) report, stated that NSEL was declared illegal and was suspended for engaging in fictitious trading transactions, causing massive losses to the investors.

AO also observed that the assessee failed to provide documentary evidence proving efforts to recover the amount; therefore, AO disallowed the bad debt claim.

Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeal) ( CIT(A) ), Delhi, which ruled in its favor. The revenue, dissatisfied with the decision, appealed before the ITAT, Mumbai.

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The assessee’s counsel,  Fenil Bhatt, pleaded that the bad debt was genuinely incurred due to the sudden suspension of NSEL operations. He argued that the assessee entered into transactions before the suspension of NSEL, and the loss resulted from external circumstances beyond its control. 

He relied on the Supreme Court ruling in T.R.F. Ltd. vs. CIT (2010), which clarified that an assessee is not required to prove that a debt has become irrecoverable to claim a deduction, as long as it is written off in the books of accounts as per Section 36(1)(vii) of the Income Tax Act, 1961.

He pointed out Central Board of Direct Taxes (CBDT) Circular No. 12/2016, which confirmed that bad debts are deductible if written off under Sections 36(1)(vii) and 36(2) of the Income Tax Act, 1961.

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Bhangepatil Pushkaraj Ramesh, counsel representing the department, pointed out that since the NSEL is declared as illegal, the assessee’s claim of bad debt can’t be allowed.

The counsel added that the assessee failed to comply with the Accounting Standard-5 (AS-5) and pleaded before the court to reverse CIT(A)’s order.

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After hearing both sides, the Tribunal, led by  Sunil Kumar Singh (Judicial Member) and Narendra Kumar Billaiya (Accountant Member), noted that the assessee suffered the loss because of external circumstances that were beyond its control.

The Bench dismissed the appeal of the revenue, highlighting the case of T.R.F. Ltd. vs. CIT (2010) and CBDT Circular No. 12/2016, and held that an assessee need not prove a debt is irrecoverable; its write-off in the books is sufficient for deduction.

To Read the full text of the Order CLICK HERE

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