Fiserv Merchant Solutions Private Limited Vs ACIT (ITAT, Mumbai Bench)
Label Says “Provision,” Books Show Actual Write Off: Mumbai ITAT Quashes Section 263 Disallowance of ₹19.64 Crore Bad Debts
Summary:
The assessee, Fiserv Merchant Solutions Private Limited, was engaged in providing services relating to payment-card transactions for acquiring institutions & merchants, including sale of Point of Sale machines. It filed its return declaring total income of ₹115.47 crore.
The return was selected for complete scrutiny through CASS. During assessment proceedings, the AO issued notices u/s 142(1) & 143(2), called for information & granted personal hearings through video conferencing. The assessment was completed u/s 143(3) r.w.s. 144B on 29 December 2023, determining total income at ₹120.37 crore after making an addition of ₹4.89 crore towards excess depreciation.
The audited financial statements reflected ₹21,73,74,373 as provision for bad & doubtful debts. In the computation of income, the assessee added back ₹2,09,28,630, while claiming deduction for the balance ₹19,64,45,743 on the ground that it represented merchant receivables actually written off in the books.
The PCIT invoked section 263, holding that the entire amount of ₹21.73 crore was merely a provision & hence inadmissible. According to him, the AO failed to properly enquire into the claim. He therefore disallowed the balance ₹19.64 crore through the revision order. The assessee challenged the revision before the Tribunal.
Issue before the Tribunal
The principal issue was whether the assessment order was erroneous & prejudicial to the Revenue because the AO allowed deduction of ₹19.64 crore, despite the audited financial statements describing the entire amount as a “provision for bad & doubtful debts.”
The connected issue was whether the PCIT could assume lack of enquiry merely because the final assessment order did not contain a detailed discussion, even though the assessment record showed specific notices, replies, documents & personal hearings on the issue.
Assessee’s submissions
The assessee contended that the allegation of no enquiry was contrary to the assessment record. The AO had issued a show-cause notice on 16 December 2023 proposing disallowance of the entire ₹21.73 crore.
In response dated 19 December 2023, the assessee explained that ₹19,64,45,743 represented actual write-off of merchant receivables, while only ₹2,09,28,630 remained a provision. The latter amount had already been voluntarily disallowed in the computation.
The assessee furnished a detailed break-up, merchant-wise particulars, book entries & supporting material. Personal hearing was granted on 21 December 2023. A further notice was issued on 23 December, followed by another reply & video hearing.
The assessee argued that accounting nomenclature could not override the actual entries in the books. Though the financial statements collectively described the amount as a provision, the underlying records established actual write-off.
Regarding the auditor’s certificate sought by the PCIT, the assessee explained that the earlier auditor had been replaced. The former auditor was no longer available to certify the clarification, while the new auditor could not certify financial statements prepared by another professional. The assessee could not be compelled to perform an impossible act.
Revenue’s contentions
The Revenue supported the revision order. It submitted that the audited accounts expressly characterised ₹21.73 crore as a provision for doubtful debts. Since a mere provision is not allowable, the AO ought to have disallowed the entire amount.
According to the Revenue, the AO failed to apply his mind correctly despite the issue being selected for scrutiny. Allowance of an otherwise inadmissible deduction rendered the assessment order erroneous & prejudicial to the Revenue.
Tribunal’s findings & legal reasoning
The Tribunal found that allowability of bad debts was a specific scrutiny issue. The AO’s show-cause notice expressly proposed disallowance of the entire ₹21.73 crore, demonstrating that he was fully conscious of the controversy.
The assessee furnished a detailed reply, supporting evidence & merchant-wise break-up. Two personal hearings were also granted. After examining the material, the AO accepted the actual write-off of ₹19.64 crore while separately making an addition for excess depreciation.
The Tribunal observed that the AO had gone an “extra mile” in examining the issue. Therefore, the PCIT’s allegation of absence or inadequacy of enquiry had no factual foundation.
Merely because the assessment order did not discuss the issue in detail could not establish non-application of mind. Assessment records, notices, replies & hearing history clearly demonstrated conscious examination.
The Tribunal further held that the real nature of the transaction must prevail over nomenclature in the financial statements. If book entries & supporting evidence established an actual write-off, deduction could not be denied merely because the consolidated caption used the word “provision.”
The PCIT rejected the claim mainly because no auditor’s certificate was produced. However, he neither conducted an independent enquiry nor identified any defect in the merchant-wise evidence. Despite alleging inadequate enquiry, he directly disallowed the claim on merits instead of verifying the facts. This approach was held unacceptable.
Accordingly, the Tribunal quashed the order u/s 263 & restored the original assessment order.
Practical implications
The ruling confirms that substance prevails over accounting labels. A description as “provision” in financial statements is not conclusive if the underlying books demonstrate that specific debts were actually written off.
It also reiterates that section 263 cannot be invoked merely because the assessment order is silent on an issue. The complete assessment record must be examined to determine whether enquiry was conducted.
Taxpayers should preserve show-cause replies, merchant-wise write-off lists, ledger entries, board approvals & evidence reducing individual debtor balances. Where auditors change, inability to obtain retrospective certification should be properly documented.
The central principle is that a concluded enquiry cannot be branded as no enquiry merely because the PCIT prefers another conclusion or an accounting caption creates doubt.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI BENCH
Captioned appeal has been filed by the assessee assailing order dated 16-2-2026 passed under section 263 of the Income Tax Act, 1961 (in short, ‘the Act’) by learned Principal Commissioner of Income Tax (PCIT), Mumbai, for the Assessment Year 2021-22.
2. Grounds raised by the assessee are as under:
“1. On the facts and circumstances of the case, and in law, the learned Principal Commissioner of Income Tax -1, Mumbai (‘Pr. CIT’) has erred in holding that the order passed by the learned Assessing Officer (hereafter ‘AO’) is erroneous and prejudicial to the interest of the revenue, despite appropriate inquiries and verification regarding the claim of actual bad debts of the merchant receivables, were made in the course of assessment proceedings.
2. On the facts and circumstances of the case, and in law, the learned Pr. CIT has erred in treating the amount of INR 19,64,45,743 being the actual bad debts of the merchant receivables as provision of bad and doubtful debts, without considering the submission of the Appellant.
3. On the facts and circumstances of the case, and in law, when the initiation of revisionary proceedings under Section 263 of the Act is invalid, subsequent enquiries/assessment should also be invalid.
4. The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.”
3. Briefly stated, assessee is a resident corporate entity stated to be engaged in the business providing services in relation to payment card transactions for acquiring institutions and merchants. In other words, assessee sells Point of Sale (POS) machines. For the assessment year under dispute, assessee filed its return of income on 15-03-2022, declaring total income of Rs.1,15,47,47,480/-. The return of income filed by the assessee was selected for complete scrutiny through Computer-Assisted Scrutiny Selection (CASS). In course of assessment proceedings, the Assessing Officer issued notices under section 142(1) and under section 143(2) of the Act from time to time, seeking various information and details. In response to the notices issued, the assessee furnished its reply as called for. Further, on assessee’s request, personal hearing was granted through video conferencing. After considering submissions of the assessee and the materials available on record, the Assessing Officer ultimately completed the assessment under section 143(3) read with section 144B of the Act, vide order dated 29.12.2023, determining the total income at Rs.1,20,36,96,392/-, after making upward variation of Rs.4,89,48,912/-, on account of disallowance of excess depreciation.
4. After completion of assessment, in due course, learned PCIT, in exercise of powers conferred under section 263 of the Act, called for and examined the assessment records relating to the year under dispute. While so examining, he found that the assessee had claimed deduction towards provision for bad and doubtful debts amounting to Rs.21,73,74,373/-, whereas, in the computation of income, the assessee had disallowed and added back an amount of Rs.2,09,28,630/-, leaving aside the balance amount of Rs.19,64,45,743/-. According to learned PCIT, the entire provision for bad and doubtful debts should have been disallowed by the assessee. He observed, the Assessing Officer, without making proper enquiry or applying his mind, had completed the assessment by allowing the claim of bad and doubtful debts. This, according to learned PCIT, has not only made the assessment order erroneous but caused prejudice to the Department. Hence, he issued a show-cause notice to the assessee to explain why the assessment order should not be revised and the claims of bad debt should not be disallowed.
5. In response to the show-cause notice, the assessee furnished a detailed submission with audited financial statements and other documentary evidences to emphasize that there is neither any error in the assessment order nor any prejudice caused to the Department. It was submitted by the assessee that the balance amount of Rs.19,64,45,743/-, represents actual write-off of bad debts in the books of the assessee and not in the nature of any provision.
6. Learned PCIT, however, was not convinced with the submissions of the assessee. He observed that in the audited accounts, auditor has shown the entire amount of Rs.21,73,74,373/- as provision for doubtful debts. He observed, the assessee even was not able to furnish any certificate of the auditor certified by the management, to establish its claim that the balance amount of Rs.19,64,45,743/- actually is not in the nature of provision but represents bad debts written off. He observed, since the Assessing Officer failed to properly examine and appreciate the allowability of assessee’s claim, the assessment order is erroneous and prejudicial to the interests of Revenue. Accordingly, he revised the assessment order by holding that the entire amount of Rs.21,73,74,373/-, being in the nature of provision for bad and doubtful debts, is not allowable. Accordingly, the assessee, having disallowed an amount of Rs.2,09,28,630/-, he disallowed balance amount of Rs.19,64,45,743/-.
7. Before us, learned counsel appearing for the assessee submitted that the allegation of learned PCIT that the Assessing Officer has not made proper enquiry and failed to appreciate facts correctly is a bald allegation not borne out from the record. Drawing our attention to the documents placed in the paper book, he submitted, the Assessing Officer had issued a show-cause notice dated 16.12.2023 under section 143(3) of the Act proposing variation of Rs.21,73,74,373/-, representing the amount of provision for bad and doubtful debts debited to the profit and loss account. He submitted, in response to the show-cause notice, the assessee on 19.12.2023, furnished a detailed reply stating that out of amount of Rs.21,73,74,373/-, an amount of Rs.19,64,45,743/- was actually written off during the year and the balance amount of Rs.2,09,28,630/-, was added in the computation of income. He submitted, assessee had also furnished the detailed breakup of the amount actually written off. He submitted, after considering the reply of the assessee, the Assessing Officer issued a show-cause notice on 23-12-2023 on certain other issues, which was replied by the assessee. He submitted, after making thorough enquiry and on proper application of mind, the Assessing Officer ultimately passed the assessment order accepting the claim of the assessee. He submitted, the allegation regarding lack of enquiry or improper enquiry is totally incorrect. He submitted, merely because in the audited financial statements, the entire amount was reflected as provision for doubtful debts, actual entries in the books of account cannot be ignored and based on the caption in the financial statement, the amount should not be disallowed. He submitted, the allegation of learned PCIT that assessee could not obtain certificate of the Auditor, duly certified by the management is unacceptable, considering the fact that assessee had changed its auditor, who had prepared the audited accounts earlier. Hence, it was not possible on part of the assessee to obtain such certificate from the earlier auditor, whereas, the current auditor could not have certified financial statements not prepared by him. Thus, he submitted, he cannot be expected to perform an impossible act. In support of his contention, learned counsel relied upon a number of judicial precedents furnished by way of legal paper book.
8. Strongly supporting the observations of learned PCIT, learned Departmental Representative (DR) submitted, the Assessing Officer has failed to examine the basic fact whether the provision for bad and doubtful debts is allowable as deduction or not. He submitted, though, the issue was selected for scrutiny, however, the Assessing Officer failed to apply his mind correctly to all the facts. Therefore, the Assessing Officer having allowed an item of expenditure, otherwise not allowable, the assessment order deserves to be revised under section 263 of the Act. Thus, he submitted, there is no reason for interference.
9. We have considered rival submissions, perused the materials on record and applied our mind to the judicial precedents cited at the time of hearing. Undisputedly, the only issue on which learned PCIT exercised his powers under section 263 of the Act is in relation to deduction claimed towards bad and doubtful debts written off. It is a fact on record that assessee’s case was selected for complete scrutiny and one of the items selected for scrutiny was allowability of claim of provision for bad and doubtful debts amounting to Rs.21,73,74,373/-. In this context, it would be profitable to refer to the show-cause notice dated 6-12-2023 issued by the Assessing Officer proposing variation as under:
“2.1.1 An amount of Rs. 21,73,74,373/- has been debited to the Profit & Loss account as Provision for bad and doubtful debts. The provision for bad and doubtful debts is disallowable in computation of income under the provisions of Income Tax Act. However, in the computation of income for the current assessment year the assessee has not disallowed this provision. Therefore, this amount of Rs. 21,73,74,373/- debited as Provision for bad and doubtful debts is liable to be disallowed and added to the total income of the assessee. Also, penalty proceedings u/s 270A is liable to be initiated for under-reporting of income.”
10. As could be seen from the above, the Assessing Officer was conscious regarding assessee’s claim of bad debts written off and wanted to enquire about the allowability or otherwise of the claim. In reply to the show cause notice, the assessee on 19-12-2023 furnished its reply explaining in detail the reason for debiting the amount to the profit and loss account with supporting evidences. In the said submission, assesse had submitted that out of the provision for bad and doubtful debts amounting to Rs.21,73,74,373/-, the actual amount written off towards merchant receivables was to the tune of Rs.19,64,45,743/-. Whereas, bad and doubtful debts in the nature of provision was to the tune of Rs.29,28,2630. It was submitted by the assessee that the amount of Rs.2,09,28,630/-, being in the nature of provision, was disallowed by the assessee itself and added back in the computation of income. The assessee not only furnished its reply to the show-cause notice on 19-12-2023 but request for a personal hearing was granted to the assessee on 21-12-2023.
11. Thereafter on 23.12.2023, the Assessing Officer issued one more show cause notice raising further issues. In response, the assessee furnished its reply 24-12-2023 and yet again requested for a personal hearing through video conferencing. Accepting assessee’s request, the Assessing Officer granted such hearing on 25-12-2023. Thus, as could be seen from the chronology of events, not only the Assessing Officer, in course of scrutiny assessment, examined various issues, including the issue relating to claim of write-off of bad and doubtful debts, but even on assessee’s request, personal hearing was granted through video conferencing, providing an opportunity to the assessee to explain the issues raised in course of assessment proceedings.
12. In the body of the assessment order, the Assessing Officer has clearly observed that the submissions made by the assessee along with requisite documents and details, were perused and duly considered. Notably, the Assessing Officer while completing the assessment proposed variation of Rs.4,89,48,912/-, on account of excess depreciation claimed by the assessee. Therefore, these facts clearly reveal that the Assessing Officer has gone an extra miles not only for examining the issues arising in course of assessment proceedings, one of them being claim of bad and doubtful debts, but full opportunity was provided to the assessee even through video conferencing, to share views on the issues on which variations were proposed. That being the factual position emerging on record, the observation of learned PCIT that the Assessing Officer failed to conduct proper enquiry and appreciate the materials placed on record, in our view, is without any basis. On the contrary, after verifying the fact that the assessee had actually written off amount of Rs.19,64,45,743/- out of the total provision of bad and doubtful debts of Rs.21,73,74,373/-, the Assessing Officer allowed the claim. Merely going by the nomenclature that the amount of Rs.21,73,74,373/-, was referred to as provision for bad and doubtful debts in the audited financial statement, real facts cannot be ignored. If other documentary evidences furnished by the assessee, including the entries made in the books of account support assessee’s claim that the amount of Rs.19,64,45,743/- was actually written off and was not in the nature of provision, in our view, assessee’s claim cannot be rejected. Further, merely because in the assessment order there is no discussion by the Assessing Officer on the issue, cannot lead to the conclusion that the Assessing Officer has not enquired into or applied his mind to the issue.
13. On going through the observations of learned PCIT, it appears that he rejected assessee’s submissions merely because of assessee’s inability to furnish certificate from the auditor supporting the claim that the amount in dispute was actually written off. In this context, the explanation furnished by the assessee expressing its inability to do so is quite plausible. One more aspect which needs mention is, though learned PCIT has revised the assessment order alleging inadequate enquiry by the Assessing Officer, however without he himself undertaking any enquiry to ascertain the veracity of assessee’s claim or directing the Assessing Officer to undertake such enquiry has straightway proceeded to disallow the claim of the assessee on merits. This, in our view, is unacceptable. When there are sufficient materials on record to demonstrate that assessee had actually written off an amount of Rs. 19,64,45,743/- in its books of account, which is demonstrated by the assessee through list of merchants from whom amounts were due, without pointing out any defect or deficiency in the evidences furnished by the assessee, no disallowance of the amount claimed as deduction could have been made. The ratio laid down in the judicial precedents cited before us by learned counsel for the assessee support this view. Thus, on overall consideration of facts available on record, we hold that the impugned order passed under section 263 of the Act is unsustainable. Accordingly, we quash it by restoring the assessment order.
14. In the result, appeal is allowed.
Order Pronounced In Open Court On 27/08/2026.
