ITAT Mumbai Allows Bad Debts & Deletes Additions on 26AS Mismatch and Commission Expenses

Background of the Dispute

The appeal before the Income Tax Appellate Tribunal, Mumbai, arose from the challenge filed by the revenue against the order passed by the National Faceless Appeal Centre, Delhi (Ld. CIT(A)) under Section 250 of the Income Tax Act 1961 for Assessment Year 2021-22. The Ld. AO had framed the assessment under Section 143(3) read with Section 144B on 26.12.2022.

The revenue contested the deletion of three major additions by the Ld. CIT(A):

  • Disallowance of bad debts of Rs. 3,61,20,866
  • Addition on account of mismatch between contract receipts as per books and Form 26AS of Rs. 12,03,004
  • Disallowance of commission expenditure of Rs. 2,98,000

The Tribunal examined each of these issues separately and ultimately upheld the order of the Ld. CIT(A), dismissing the revenue’s appeal.

Issue 1: Allowability of Bad Debts under Section 36(1)(vii)

Revenue’s Objection

The first ground raised by the revenue was that the Ld. CIT(A) allegedly accepted the assessee’s claim of bad debts of Rs. 3,61,20,866 without, in the revenue’s view, proper and independent verification of:

  • Orders of the National Company Law Tribunal (NCLT)
  • Resolution plans
  • Other supporting documentation to conclusively prove that the debt had actually become irrecoverable, particularly when the claim arose in the context of proceedings under the Insolvency and Bankruptcy Code, 2016.

The revenue argued that such verification was necessary before allowing deduction under Section 36(1)(vii).

Facts Considered by CIT(A)

The assessee, a jewellery concern, had supplied goods to M/s SRS Jewells (a unit of SRS Ltd.) in AY 2018-19. The corresponding sale value was recognized and credited to income in that earlier year.

During the relevant Assessment Year 2021-22:

  • The assessee wrote off an amount of Rs. 3,61,20,866 in its books as bad debts in respect of SRS Jewells.
  • The assessee had already filed an application as an operational creditor before the NCLT under the Insolvency and Bankruptcy Code, 2016 on 18.10.2018 to recover this amount.

The Ld. AO rejected the bad debt claim mainly on the contention that the assessee did not furnish:

  • Any copy of an NCLT order, or
  • Any correspondence or documentary trail linking the alleged bad debt to the NCLT process,

and therefore concluded that irrecoverability was not established.

The Ld. CIT(A) examined the provisions of Section 36(1)(vii) as amended with effect from 01.04.1989, and noted:

Post-amendment, for claiming deduction of bad debts under Section 36(1)(vii), it is not necessary for the assessee to prove that the debt has actually become irrecoverable. It is sufficient if the assessee writes off the amount as bad debt in its books of account, subject to conditions under Section 36(2).

The Ld. CIT(A) relied on:

  • The judgment of the Hon’ble Supreme Court in T.R.F. Ltd. vs. CIT [2010] 190 Taxman 391 (SC)
  • CBDT Circular No. 12/2016 dated 30.05.2016, particularly para 3, where CBDT clarified that the purpose of the 1989 amendment was to remove the requirement of proving irrecoverability and to curb avoidable litigation around bad debt claims

Relevant extract of Section 36(1)(vii) (post amendment) was also reproduced and applied.

The Ld. CIT(A) noted that:

  • The debt related to earlier years in which the income had already been offered to tax
  • The amount of Rs. 3,61,20,866 was actually written off in the Profit & Loss Account in AY 2021-22
  • The assessee had initiated legal recovery proceedings before NCLT, which, if anything, further corroborated the commercial decision to write off the amount

On these facts and the settled law, the Ld. CIT(A) allowed the claim of bad debts and deleted the disallowance.

ITAT’s Findings on Bad Debts

The Tribunal observed that: