The Hon’ble Hyderabad Income Tax Appellate Tribunal (“ITAT”) has recently delivered a significant ruling concerning the eligibility to claim bad debts that have been written off in the books without any need to provide proof of irrecoverability. The said decision was given in the case of Nuevosol Energy Private Limited Vs. Assistant Commissioner of Income Tax, Hyderabad dated 27 November 2024. The ITAT directed the Assessing Officer (‘AO’) to reverse the disallowance of the bad debt claim and set aside the Commission of Income Tax (‘CIT(A)’) order, providing much-needed clarity on the treatment of bad debts. The said ITAT ruling provides clarity on the application of the provisions governing bad debts, ensuring that businesses are not unduly burdened by additional documentation beyond the prescribed accounting treatment.
Facts of the case
- Nuevosol Energy Private Limited (‘Assessee’) is an Indian Company engaged in the business of manufacturing and installing solar module mounting structures, DC works and civil works.
- The Assessee had filed its return of income for AY 2018-19 on October 31, 2018, declaring a total loss of INR 433.16 Lakhs, which was later revised on the same day with the total loss being reduced to INR 392.59 Lakhs.
- During scrutiny, the AO observed that the Assessee had written off bad debts amounting to INR 350.33 Lakhs as irrecoverable.
- The AO directed the Assessee to provide names, address and PAN numbers of debtors from whom debts could not be recovered. While the Assessee provided ledger copies and details, the AO found no evidence proving the debts were irrecoverable or any attempts made to recover them.
- The AO disallowed INR 260.80 Lakhs of bad debt claims, citing non-compliance with conditions for claiming such deductions, and added the amount back to the total income.
- The Assessee appealed to the CIT(A), asserting that the only requirement for claiming bad debts is writing them off in the books of accounts and not proving irrecoverability.
- However, the CIT(A) upheld the AO’s disallowance, stating the Assessee failed to provide sufficient evidence to substantiate the claim, leading to the instant appeal before the ITAT.
Judgements and Circulars referred
- Supreme Court in the case of TRF Ltd. Vs. CIT 323 ITR 397
- Supreme Court in the case of Khyati Realtors Pvt. Ltd, civil appeal No.672/2020
- Mumbai ITAT in the case of Aditya Commodities Pvt. Ltd, ITA No.1971/Mum/2018
- Circular No.12/2016 dated 30.05.2016 (CBDT)
Assessee’s Contention
- The Assessee contended that the CIT(A) erred in upholding the disallowance of bad debts written off, emphasizing that under the Supreme Court’s decision in TRF Ltd (supra), the only requirement for claiming a deduction is to write off the debt as irrecoverable in the books, without needing to prove the debt’s actual irrecoverability. The Assessee argued that the CIT(A) failed to consider this and incorrectly sustained the additions made by the AO.
- The Assessee further distinguished the reliance on the Supreme Court’s judgment in Khyati Realtors Pvt. Ltd., noting that the issue in that case related to an alternative claim under section 37 of the Income-tax Act, 1961 (‘the Act’), not section 36(1)(vii) of the Act.
- The Assessee emphasized that the provisions of section 36(1)(vii) of the Act should apply here, and any doubtful debt provision excluded from it cannot claim a deduction under section 37 of the Act.
- Therefore, the Assessee requested the CIT(A)’s order be set aside, and the disallowance of bad debts be deleted.
AO’s Contention
- The AO argued that the Assessee failed to provide sufficient and satisfactory evidence proving that the debts had truly become irrecoverable.
- Additionally, the Assessee did not submit any supporting documentation to demonstrate attempts made to recover the outstanding debts.
- As a result of this lack of adequate evidence, the AO concluded that the claim for bad debts could not be allowed. Consequently, the AO added back the bad debts amounting to INR 260.80 Lakhs to the total income of Assessee.
Issues raised before the ITAT:
Whether the Assessee is eligible for a deduction on bad debts written off in the books without providing additional evidence of irrecoverability, and whether the disallowance of such claims by the AO and CIT(A) was justified?
Decision on issue raised
Whether the Assessee is eligible for a deduction on bad debts written off in the books without providing additional evidence of irrecoverability, and whether the disallowance of such claims by the AO and CIT(A) was justified?
- The ITAT considered the Assessee’s claim for deduction on bad debts written off in the books of accounts. It observed that the relevant provisions of the Act allow a deduction for bad debts if they are written off as irrecoverable in the books, and this was the key issue in the case.
- The ITAT noted that the Assessee had properly written off the bad debts in its books by debiting the profit & loss account and crediting the respective debtors’ accounts, which fulfilled the conditions for claiming a deduction.
- The ITAT further observed that while the AO disallowed the claim, it was solely based on the Assessee’s failure to provide evidence proving the irrecoverability of the debts, which, according to the law, was unnecessary.
- The ITAT also highlighted that the provisions for claiming deductions on bad debts were clear, and once the debts were written off, the Assessee had satisfied the statutory requirements.
- The ITAT emphasized that the CIT(A) had incorrectly sustained the disallowance, failing to consider the facts and legal principles appropriately.
- Therefore, on the basis of above observations, the Tribunal, set aside the CIT(A)’s order and directed the AO to allow the deduction for the bad debts written off.
Conclusion
In this case, the ITAT ruled in favour of the Assessee, affirming that once bad debts are written off as irrecoverable in the books of accounts, the statutory conditions for claiming a deduction are met. The ITAT reiterated that the sole requirement under the relevant provisions of the Act is the actual write-off in the books, and there is no legal obligation to provide additional evidence proving the irrecoverability of the debts. The ITAT emphasized that disallowing a deduction solely based on the failure to provide such evidence is unjustified. This ruling underscores the critical importance of properly documenting the write-off process and following the procedural requirements for claiming deductions on bad debts.
