Retention Money Written Off as Bad Debt Upheld; Related-Party Rent Disallowance Quashed Without Evidence of Excess: ITAT Ahmedabad
Case Overview
Case Name: RKC Infrabuilt Private Limited Vs ITO (ITAT Ahmedabad)
Appeal Number: ITA No: 2105/Ahd/2026
Date of Order: 12/10/2026
Assessment Year: 2020-21
Forum: Income Tax Appellate Tribunal, Ahmedabad
Background and Context
RKC Infrabuilt Private Limited, a works contractor holding "AA" category registration with the State Government's Roads and Buildings Department, filed an appeal before the ITAT Ahmedabad challenging an order passed by the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre (NFAC), New Delhi, dated 18.03.2026 under Section 250 of the Income Tax Act, 1961, pertaining to Assessment Year 2020-21.
The appeal centered on two primary disallowances that had been confirmed at both the assessment stage and first appellate stage:
- Bad debts written off — ₹36,95,988
- Rent payments to related companies — ₹4,80,000
Additionally, ancillary grounds related to penalty initiation under Section 270A and interest levies under Section 234A, Section 234B, and Section 234C were raised.
Issue 1: Bad Debt Disallowance of ₹36,95,988
Factual Background
The assessee, engaged in executing government road and building contracts, had received work orders from the Roads & Buildings (R&B) Division. In line with standard contractual practice, the R&B Division withheld a portion of the amounts payable as retention money — primarily due to the assessee having sought time extensions for project completion. The relevant contracts were executed between 2001 and 2007.
In its books of accounts, the assessee recorded the full invoice value as revenue in the respective years, while the withheld portion was parked separately as a receivable — classified under deposit accounts such as time deposits, security deposits, and miscellaneous deposits. The R&B Division ultimately forfeited these amounts and credited them to government revenue.
Despite this forfeiture, the assessee continued pursuing recovery through negotiations. It was only during Financial Year 2019-20, relevant to Assessment Year 2020-21, that the assessee finally wrote off the outstanding amount of ₹36,95,988 as a bad debt in its books of accounts.
Assessing Officer's Position
In response to a notice under Section 142(1) dated 26-11-2021, the assessee furnished details of the bad debts written off. The Assessing Officer (AO) disallowed the claim, observing that the amounts appeared under deposit accounts in the balance sheet and had never been credited to the Profit and Loss Account. The AO held that the assessee had not established that these amounts had been included as taxable income in any prior year, and accordingly concluded that the conditions of Section 36(1)(vii) were not satisfied.
CIT(A)'s Finding
The CIT(A) confirmed the disallowance, recording that the assessee had failed to demonstrate:
- That the debts were actually written off as irrecoverable in the books;
- That they had been taken into account while computing income of earlier years, as mandated under
Section 36(2); - That adequate recovery efforts had been undertaken and the debts had genuinely become irrecoverable.
Assessee's Submissions Before the Tribunal
Before the ITAT, the assessee's Authorized Representative, Ms. Amrin Pathan, placed the following key materials on record: