No Need to Prove Irrecoverability of Debts: ITAT Ahmedabad

Ishan Equipments Pvt Ltd Vs DCIT (ITAT Ahmedabad)

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Ahmedabad bench recently ruled in favor of Ishan Equipments Pvt Ltd in its dispute against the Deputy Commissioner of Income Tax (DCIT) regarding disallowances under Sections 37 and 36(1)(vii) of the Income Tax Act. The case centered on two primary disallowances: a penalty expense and a bad debt write-off, both of which were initially disallowed by the Assessing Officer (AO).

Case Background

Ishan Equipments Pvt Ltd, a company engaged in engineering and fabrication, had filed its income tax return for the assessment year 2018-19, declaring a total income of Rs. 1.51 crore. During the e-assessment process, certain expenses were scrutinized, leading the AO to disallow a penalty expense of Rs. 4,81,985 under Section 37 and a bad debt write-off of Rs. 24,50,304 under Section 36(1)(vii). These disallowances were upheld by the Commissioner of Income Tax (Appeals) at the National Faceless Appeal Centre (NFAC), prompting the assessee to escalate the matter to the ITAT.

Issues Presented in the Appeal

The appeal before the ITAT included two main grounds:

1. Disallowance of Penalty Expense: Ishan Equipments Pvt Ltd argued that the penalty amount of Rs. 4,81,985 had already been added back to the income in the original return filed, effectively causing the AO’s additional disallowance to result in double taxation. The company requested the deletion of the duplicate addition.
2. Disallowance of Bad Debts Write-Off: The company contended that Rs. 24,50,304, attributed to outstanding amounts from BGR Energy System Pvt Ltd and SIMON India Ltd, was appropriately written off as irrecoverable in its books. The company cited the Supreme Court judgment in TRF Ltd. vs. CIT, which clarified that post-1989 amendments, there is no requirement to prove the irrecoverability of a debt; it suffices if the debt is written off in the books of accounts.

Arguments and Evidence

During the hearing, the Authorized Representative (AR) for Ishan Equipments Pvt Ltd argued that the penalty expenditure had already been included in the company’s income computation at the time of filing. The AR provided a detailed breakdown to clarify that Rs. 4,81,985 was already disallowed, indicating that the AO’s further disallowance was a clerical duplication.

In addition, regarding the bad debts, the AR presented supporting documents, including ledger accounts and records of settlement discussions with debtors. The company emphasized that the debt had previously been accounted for as income, thereby meeting the provisions under Section 36(1)(vii).

Tribunal’s Observations

The ITAT reviewed the income computation statements and other documents submitted by the assessee. The Tribunal noted that the disallowed penalty amount was indeed part of the original income computation, making the AO’s additional disallowance duplicative and unsustainable. Consequently, the ITAT ordered the deletion of the Rs. 4,81,985 addition.

For the bad debt disallowance, the ITAT observed that the Supreme Court’s precedent in TRF Ltd. vs. CIT was applicable. The court ruled that for a bad debt to be allowable, it is sufficient if it is written off in the books of accounts, with no obligation to demonstrate irrecoverability. Upon reviewing the settlement records and ledger entries, the Tribunal concluded that Ishan Equipments Pvt Ltd had complied with the conditions of Section 36(1)(vii). The Tribunal, therefore, ordered the deletion of the Rs. 24,50,304 disallowance.

Decision

The ITAT ruled in favor of Ishan Equipments Pvt Ltd on both grounds. It found that the disallowances under Sections 37 and 36(1)(vii) were unjustified. The Tribunal set aside the Commissioner’s order and deleted the disallowances made by the AO. The appeal was pronounced on October 10, 2024, in an open court session at Ahmedabad.

Implications of the Ruling

The ITAT’s judgment reiterates the importance of accurate scrutiny during assessments to avoid duplicative disallowances. It underscores the need for clear record-keeping and adherence to legislative guidelines, particularly in cases where penalties or write-offs are involved. Additionally, this judgment reinforces the Supreme Court’s interpretation in TRF Ltd. vs. CIT, confirming that a bad debt’s allowance hinges on its being written off in the books rather than proving it as irrecoverable.

The decision provides a reference point for similar disputes where procedural or clerical errors lead to duplicate disallowances. It also serves as a reminder for companies to substantiate claims with thorough documentation, especially under scrutiny in e-assessment frameworks.

In summary, the ITAT Ahmedabad’s judgment in Ishan Equipments Pvt Ltd vs DCIT highlights procedural diligence in assessments and underscores taxpayers’ rights to avoid double disallowance.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal filed by the assessee is directed against the order dated 12.12.2023, passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (NFAC) [hereinafter referred to as “CIT(A)”], for the Assessment Year (A.Y.) 2018-19. The appeal arises from the assessment order framed under section 143(3) r.w.s. 144B of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] by the Assessing Officer [hereinafter referred to as “AO”].

Facts of the Case:

2. The assessee is engaged in the business of engineering and fabrication. The assessee filed its return of income for A.Y. 2018-19 on 25.10.2018, declaring a total income of Rs.1,51,43,170/-. The case was selected for complete scrutiny under the E-Assessment Scheme, 2019, with identified issues, such as, Verification of genuineness of expenses, and Verification of duty drawback received.

2.1. The assessment order was passed by the Assessing Officer (AO) on 19.04.2021, making some additions, including:

• Disallowance of penalty expenditure amounting to Rs.4,81,985/- under section 37.
• Disallowance of bad debts of Rs.24,50,304/- under section 36(1)(vii).

3. Aggrieved by the additions, the assessee preferred an appeal before the CIT(A), who partially allowed the appeal. Dissatisfied with the remaining additions, the assessee has filed this appeal before us with following grounds:

1. Disallowance of Penalty Expenditure of Rs.4,81,985/-

The Assessing Officer erred in disallowing penalty u/s 37 of Rs.4,81,985/-. This penalty of Rs.4,81,985/- was already disallowed and added in the total Income at the time of submitting original return of Income filed on 25.10.2018.

Hence it is requested to delete the addition made by the A. O. as it amounts to double addition.

2. Disallowance of Bad Debts W/Off Rs.24,50,304 /-

The Assessee has written off Rs.24,50,304/- a bad debts in the A. Y. 2018-19. This amount has been written off as bad debts and irrecoverable in the accounts of the assessee company.

The amount of the debt was taken into account while computing the income during the earlier years.

As all the terms and conditions and provisions of Section 36 of the Income Tax Act, 1961 are complied, it is allowable expenditure as bad debts.

Hence it is requested to delete the addition of Rs.24,50,304/- being bad debts written off, made by the A. O.

4. During the course of hearing before us, the Authorised Representative (AR) of the assessee stated that the penalty expenditure was already disallowed in the computation of income filed with the return. The disallowance was made under Section 43B instead of Section 37 due to a clerical error.

4.1. The AR provided a detailed break-up of the disallowed amounts in the ITR and confirmed that the penalty expenditure of Rs.4,81,985/- was part of the total disallowance of Rs.21,62,259/-. The AR also stated that following are the amounts included in the list totalling to Rs.4,81,985/-.

4.2. The AR requested the deletion of the double disallowance made by the AO on account of this clerical error.

4.3. Regarding Bad Debts Disallowance of Rs.24,50,304/-, the AR submitted that the bad debts of Rs.24,50,304/-, comprising amounts due from BGR Energy System Pvt. Ltd. (Rs.3,51,265/-) and SIMON India Ltd. (Rs.20,99,039/-), were written off in the books of accounts during F.Y. 2017-18 after settlement agreements were reached with both parties. The AR further stated that these amounts were offered to income by way of sale in the earlier years. The AR cited the Hon’ble Supreme Court’s judgement in TRF Ltd. vs. CIT (323 ITR 397), wherein it was held that it is sufficient if the bad debts are written off in the books, and there is no need to establish that the debt is irrecoverable. The AR argued that all the conditions under Section 36(1)(vii) of the Act were satisfied, and therefore the disallowance was unjustified.

5. The Departmental Representative (DR) relied on the orders of lower authorities.

6. We have carefully considered the submissions made by both the assessee and the Department, along with the orders of the lower We also perused the material available on records. Upon reviewing the computation of income and the ITR filed by the assessee, it is evident that the total disallowance of Rs.21,62,259/- included the said penalty expenditure. The error occurred due to a clerical mistake in selecting the section under which the disallowance was made. In light of this, we hold that the AO’s disallowance under Section 37 leads to a duplication, which is unsustainable. The addition of Rs.4,81,985/- is hereby deleted.

6.1. The assessee wrote off bad debts of Rs.24,50,304/-, which included Rs.3,51,265/- due from BGR Energy System Pvt. Ltd. and Rs.20,99,039/- from SIMON India Ltd.. The AO disallowed the claim, citing the absence of supporting documentation during the assessment proceedings. The assessee provided sufficient evidence in the form of ledger accounts and minutes of settlement meetings with the debtors, proving that the amounts were genuinely written off after settlement agreements. The Supreme Court’s ruling in TRF Ltd. vs. CIT clarifies that after 01.04.1989, there is no requirement to prove that the debt has become irrecoverable. It is enough that the debt has been written off in the books. Based on the submissions and the evidence provided, it is clear that the conditions under Section 36(1)(vii) of the Act were met, and the disallowance by the AO was unjustified. The disallowance of Rs.24,50,304/- is, therefore, deleted.

6.2. In view of the above findings, we allow the assessee’s appeal on both grounds. The disallowances made by the AO under sections 37 and 36(1)(vii) of the Act are deleted.

7. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the Open Court on 10^th October, 2024 at Ahmedabad.