The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) allowed the deduction of bad debts stating that written off in the books of accounts were sufficient compliance with the provisions of Section 36(1)(vii) of the Income Tax Act, 1961 and no further requirement to prove the irrecoverability of the debts.
Ishan Equipments Pvt. Ltd., the assessee engaged in the business of engineering and fabrication filed its income tax return declaring a total income of Rs. 1,51,43,170. The assessee officer completely scrutinized the assessment and disallowed the bad debt deduction because sufficient documentation was not provided during the assessment proceedings.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The assessee claimed a deduction of Rs. 24,50,304 as bad debts written off in its books. These debts included amounts due from two clients BGR Energy System Pvt. Ltd. (Rs. 3,51,265) and SIMON India Ltd. (Rs. 20,99,039).
The assessee explained that these debts were written off after settlement agreements with the clients, and the amounts were included in the assessee’s income in earlier years. However, none of the explanations were considered.
On appeal, the CIT(A) partially allowed the appeal but the disallowance of bad debts of Rs. 24,50,304 was upheld. Dissatisfied with the decision, the assessee filed a second appeal before the ITAT.
The assessee’s counsel claimed that the debts were genuinely written off in its books in the financial year 2017-18, which fulfills the requirements under Section 36(1)(vii) of the Income Tax Act. The assessee’s counsel cited the Supreme Court Ruling in TRF Ltd. vs. CIT, which held that after April 1, 1989, it is sufficient to write off the debts in the books and there is no need to prove that the debt is irrecoverable.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
On the contrary, revenue counsel argued that the assessee failed to provide sufficient documentary evidence to substantiate the bad debts claim during the assessment process.
The two-member bench comprising T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) reviewed the assessee’s evidence, which included ledger accounts and minutes from settlement meetings with the debtors. These documents showed that the amounts were genuinely written off after settlement agreements were reached with BGR Energy System Pvt. Ltd. and SIMON India Ltd.
The tribunal found that the Supreme Court’s ruling in TRF Ltd. vs. CIT clearly states that it is not necessary to prove that the debt is irrecoverable if it has been written off in the books.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
Therefore, the tribunal concluded that the assessee had met all the conditions under Section 36(1)(vii) of the Income Tax Act. The tribunal held that the disallowance of bad debts by the AO was unjustified and deleted the addition of Rs. 24,50,304. The assessee’s appeal was allowed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
