Writing Off Bad Debt Sufficient for Deduction Without Proving Irrecoverability: ITAT
The tribunal upheld the assessee’s claim, stating that writing off the debt in the accounts was sufficient for the deduction
The Delhi Bench of Income Tax Appellate Tribunal(ITAT) ruled that writing off bad debt in the accounts is sufficient for claiming a deduction, without the need to prove its irrecoverability. Flair Exports Pvt. Ltd.,appellant-assessee, filed its income tax return on September 30, 2015, declaring an income of ₹3,05,02,810. The case was selected for manual scrutiny based on Central Board...
The Delhi Bench of Income Tax Appellate Tribunal(ITAT) ruled that writing off bad debt in the accounts is sufficient for claiming a deduction, without the need to prove its irrecoverability.
Flair Exports Pvt. Ltd.,appellant-assessee, filed its income tax return on September 30, 2015, declaring an income of ₹3,05,02,810. The case was selected for manual scrutiny based on Central Board of Direct Taxes(CBDT) guidelines. A notice under Section 143(2) dated September 30, 2016, was issued and served on time.
During the proceedings, the assessee submitted the required details. The Assessing Officer(AO) computed the total income at ₹3,71,08,043, including the disputed additions. The Commissioner of Income Tax(Appeals)[CIT(A)] partly allowed the appeal but confirmed an addition of ₹56,74,032.
The assessee appealed before the tribunal.
The assessee's counsel argued that the appeal was about whether the ₹56,74,302 written off as bad debt was allowable and whether the CIT(A) was right in treating it as speculative.
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The counsel explained that the assessee had been involved in investing in securities, earning interest from Inter-Corporate Deposits (ICD)s, capital gains, and commodity trading since FY 2012-13. In July 2013, a scam on the National Spot Exchange Limited(NSEL) platform was exposed, involving brokers and NSEL officials. The assessee, trading through Phillip Commodities India Pvt. Ltd., had an outstanding advance of ₹2,27,89,517 with the broker. Since recovery seemed unlikely, the assessee wrote off 25% of the amount in FY 2013-14 (relevant to AY 2014-15). After recovering ₹93,390 through a court-appointed committee, another 25% (₹56,74,032) was written off during the year under appeal.
The AO disallowed the write-off, calling it premature, as the government was pursuing recoveries. The AO also referred to a CBDT circular warning against bogus losses. However, the counsel argued that the assessee’s transactions were genuine business advances, not bogus claims.
The counsel pointed out that the AO had allowed a similar 25% write-off in AY 2014-15. Although the Principal Commissioner of Income Tax(Pr. CIT) later directed the AO to withdraw the claim, the ITAT quashed the Pr. CIT’s order, relying on its decision in the assessee’s own case and a similar case involving M/s U.K. Paints India Ltd., where the write-off was allowed.
The counsel clarified that no commodity trading took place during the year under appeal, as it had stopped after the 2013 scam. The loss came from business advances, not trading, making the speculative classification irrelevant.
During the hearing, the assessee counsel submitted ITAT Delhi orders in cases where business losses from NSEL transactions were allowed under Section 28, as they were incidental to business operations. The counsel also cited the Chowdry Associates vs. ACIT case, where the ITAT held that consistent treatment of income as business income made the losses allowable.
Additionally, the counsel referred to the ITAT Chennai order in Megh Sakariya International P. Ltd. vs. DCIT, which ruled that once a bad debt was written off, it had to be allowed as a deduction. The counsel relied on the Supreme Court’s judgment in TRF Ltd. vs. CIT (2010), which held that after 01.04.1989, writing off a bad debt was sufficient for deduction without proving its irrecoverability.
The two member bench comprising Sudhir Pareek(Judicial Member) and Shamim Yahha(Accountant Member) relying on judicial precedents,held that the assessee did not need to prove the debt was irrecoverable. Writing it off in the accounts was enough to claim the deduction. It concluded that the assessee's claim had merit.
In short,the appeal filed by the assessee was allowed.
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