Written off Bad Debt Allowable as Deduction u/s 36(1)(vii) of Income Tax Act: ITAT strikes Ad-Hoc Expense Disallowance [Read Order]

A Division Bench of the Income Tax Appellate Tribunal (ITAT) struck down ad-hoc expense disallowance and ruled that written off bad debt is allowable as deduction under Section 36(1)(vii) of Income Tax Act, 1961.

The assessee is a partnership firm and engaged in the business of manufacturing engineering products. The return filed by the assessee was selected for scrutiny under CASS and notice under Section 143(2) of the Income Tax Act was issued. The assessee appeared and furnished the details called for by the AO.

The AO based on the details furnished by the assessee, had treated the unsecured loans as income under Section 68 of the Income Tax Act. Similarly, the bad debts as well as the difference in the loss of the exchange has been disallowed by the AO.

As against the said order, the assessee filed an appeal before the CIT(A). The CIT(A) had accepted the claim of the assessee insofar as addition was made under Section 68 of the Income Tax Act. Insofar as the disallowance of the bad debts, the CIT(A) had confirmed the said disallowance. Hence the present appeal was filed.

Also Read: Selective Comparison of Expense Heads across AYs Cannot Justify Disallowance without Evidence: ITAT

At the time of hearing, the Authorised Representative for the assessee submitted that the bad debts were written off in the books of assessee and therefore it is an eligible one for claiming deduction. Similarly, the assessee had incurred the various expenses but unfortunately the authorities had confirmed a portion of the said expenses as not allowable which is not correct.

The counsel also filed a paper book enclosing the supporting documents in respect of the bad debts as well as the expenses incurred by the assessee. It was also submitted that the various documents enclosed in the paper book were already filed before the AO as well as before the CIT(A) but they have not considered the same and therefore prayed that the said records may be taken on file and the appeal may be allowed on that basis.

The Departmental Representative submitted that the assessee had not established that the bad debts are written off in the books of the assessee and therefore the disallowance made by the AO is in order. Similarly, the assessee had not furnished the proofs for incurring the expenses and therefore the disallowance is in order.

The Tribunal comprising Prashant Maharishi, Vice President and Soundararajan K., Judicial Member noted that the amended section 36(1)(vii) also does not insist for any proof from the borrower and it is enough if the assessee had written off the said dues in their books of accounts.

“In the facts of the present case, we find that the assessee had written off the said debts from the two entities and also written off the bad debts amounting to Rs. 81,783/- due from others and the assessee had also proved the said fact by producing the ledger account of the bad debts. In such circumstances, we are of the view that the assessee is entitled for deduction under Section 36(1)(vii) of the Act on the bad debts written off by them” the Bench noted.

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