The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) allowed the Louis Berger Group Bad Debts deduction claim citing debts were written off as per Section 36(1)(vii) of the Income Tax Act, 1961
Louis Berger Group Inc., the assessee is a U.S.-based consultancy firm operating in India, filed its income tax return for the assessment year 2020-21, declaring a loss of Rs. 9,06,07,960. During the assessment, the Assessing Officer ( AO ) noted that the assessee had written off Rs. 11,22,24,005 as bad debts owed by Louis Berger Consulting Pvt. Ltd ( LBCPL ) which had not been recovered.
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The assessee had paid Rs. 42.64 crores as consultancy fees to Louis Berger Consulting Pvt. Ltd ( LBCPL ) without adjusting the amounts owed by LBCPL against these consultancy payments. The AO issued a show-cause notice questioning why this bad debt should be allowed when the assessee had ongoing transactions with LBCPL, suggesting that the deduction was an attempt to evade taxes.
Consequently, the assessing officer disallowed the bad debts deduction claim relying on the High Court decision in CIT vs. Abhinandan Investment Ltd., where a transaction lacking clear business purpose was disallowed.
The assessee challenged the AO’s decision arguing that the bad debt write-off was made following the requirements of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, which requires debts to be written off in the books of accounts.
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The assessee’s counsel argued that the receivables from LBCPL related to past projects could not be recovered, whereas the consultancy fees related to ongoing projects, and the accounts were maintained on a project-wise basis. The counsel further argued that both the legal conditions for claiming bad debts, writing off the debt, and recognition of the debt in prior income were satisfied.
The two-member bench comprising Saktijit Dey ( Vice-President ) and Rifaur Rahman ( Accountant Member) noted that the assessee had complied with all the requirements of Section 36(1)(vii) and Section 36(2) of the Income Tax Act. Specifically, it is no longer necessary for the assessee to prove the irrecoverability of the debt as it is sufficient if the debt is written off in the books of accounts.
The tribunal referred to the Supreme Court’s ruling in TRF Ltd. v. CIT (323 ITR 397), which clarified that after April 1, 1989, once the debt is written off as irrecoverable, it should be allowed as a deduction.
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The tribunal acknowledged that the AO’s concerns were more about the business decision of not adjusting receivables against payables but emphasized that as long as the statutory conditions were met, the deduction must be allowed. Therefore, the tribunal allowed a deduction for bad debts written off.
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