Substance Over Nomenclature: ITAT Mumbai Invalidates Section 263 Revision on Bad Debts Actually Written Off

The intersection of accounting terminology and tax deductibility often creates friction during assessment proceedings. A recurring dispute arises when financial statements utilize broad umbrella terms, such as "provisions," to describe entries that, upon closer inspection of the underlying ledgers, represent actual write-offs. In a significant judicial determination, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) recently adjudicated on this precise conflict in the case of Fiserv Merchant Solutions Private Limited Vs ACIT.

The Tribunal evaluated whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary jurisdiction under Section 263 of the Income Tax Act 1961. The PCIT had categorized a substantial deduction as an inadmissible provision simply based on the nomenclature used in the audited financial statements, disregarding the assessee's claim of an actual write-off. The ITAT's comprehensive ruling, delivered on 27/08/2026, reinforces the legal principle that the substantive nature of a transaction documented in the books of account supersedes the generic labels assigned in consolidated financial reports.

Background of the Assessee and Initial Assessment

The assessee, Fiserv Merchant Solutions Private Limited, operates as a resident corporate entity. Its primary business operations revolve around facilitating payment card transactions for various acquiring institutions and merchants, which includes the commercial distribution and sale of Point of Sale (POS) machines.

For the Assessment Year (AY) 2021-2022, the assessee submitted its return of income on 15-03-2022. In this filing, the assessee declared a total income amounting to ₹115,47,47,480. Subsequently, the income tax department's Computer-Assisted Scrutiny Selection (CASS) mechanism flagged the return for a complete scrutiny assessment.

The Scrutiny Process

During the course of the assessment, the Assessing Officer (AO) initiated a detailed verification process. The statutory procedure was followed meticulously, with the issuance of notices under Section 142(1) and Section 143(2) of the Income Tax Act 1961. These notices required the assessee to furnish various operational details, financial information, and documentary evidence supporting the claims made in the return of income.

The assessee complied with the requisitioned details and provided the necessary responses. Furthermore, the assessee exercised the right to a personal hearing, which the AO facilitated via video conferencing. After examining the submissions and the material placed on record, the AO concluded the assessment proceedings. The final assessment order was passed under Section 143(3) read with Section 144B of the Income Tax Act 1961 on 29 December 2023.

In this assessment order, the AO determined the total income of the assessee at ₹120,36,96,392. This final computation included an upward variation, specifically an addition of ₹4,89,48,912, which was attributed to the disallowance of excess depreciation claimed by the assessee.

The Genesis of the Dispute: Accounting Labels vs. Actual Write-offs

The core of the controversy emerged post-assessment when the PCIT reviewed the assessment records. The audited financial statements of the assessee reflected a specific debit entry amounting to ₹21,73,74,373, which was captioned as a "provision for bad and doubtful debts."