Bangalore ITAT: Book Write-Off Sufficient for Bad Debt Deduction; Arbitrary Ad-Hoc Expense Disallowance Deleted

Case Overview

Case: Excel Wirecut Inc. Vs ACIT
Forum: Income Tax Appellate Tribunal, Bangalore
Assessment Year: 2013-14
Order Date: 03rd June, 2026

The Bangalore Bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in favour of a partnership firm engaged in manufacturing engineering products, addressing two critical issues — deductibility of bad debts written off in books of account and the unsustainability of ad-hoc percentage-based disallowance of business expenses. The Tribunal not only condoned a delay of 687 days in filing the appeal but also granted complete relief to the assessee on both substantive grounds.

Background of the Case

Excel Wirecut Inc., a partnership firm involved in manufacturing engineering products, filed its return of income for Assessment Year 2013-14 on 01/10/2013. The case was selected for scrutiny under CASS, following which a notice under Section 143(2) was issued on 04/09/2014, and subsequently a notice under Section 142(1) was also served.

During the course of assessment proceedings, the Assessing Officer (AO) made several additions and disallowances, including:

  • Treatment of unsecured loans as income under Section 68 of the Income Tax Act, 1961
  • Disallowance of bad debts claimed by the assessee
  • Disallowance of foreign exchange loss difference
  • Denial of PF and ESI contributions on the ground that payments were made beyond the prescribed due dates under the respective Acts
  • Disallowance under Section 40(a)(ia) for non-deduction of TDS
  • Ad-hoc disallowance of 25% of expenses relating to transportation, transport charges, and vehicle maintenance on the ground that supporting vouchers were not produced

Proceedings Before CIT(A)

The assessee appealed before the Commissioner of Income Tax (Appeals), who provided partial relief:

  • The addition made under Section 68 was deleted — the CIT(A) accepted the assessee's explanation regarding unsecured loans
  • The bad debt disallowance was confirmed — the CIT(A) upheld the AO's view that copies of ledger accounts of all relevant parties were not submitted
  • The foreign exchange loss was allowed
  • Disallowances of ESI and PF contributions were confirmed
  • The disallowance under Section 40(a)(ia) on account of non-deduction of TDS was reversed in favour of the assessee
  • The ad-hoc expense disallowance was reduced from 25% to 10% — however, no analytical basis was provided for arriving at this reduced percentage

Aggrieved by the confirmation of bad debt disallowance and the continued (though reduced) ad-hoc expense disallowance, the assessee filed a further appeal before the Tribunal.

Delay Condonation: 687-Day Delay Condoned

Before addressing the merits, the Tribunal was required to consider whether the substantial delay of 687 days in filing the appeal could be condoned.

The assessee filed a separate application explaining the reasons for the delay. The grounds cited included medical exigencies pertaining to one of the partners and his daughter, supported by detailed medical records placed on record.