Calcutta High Court Admits Appeal on Taxability of Written-Off Bad Debts Under Section 28(iv) of the Income Tax Act - 2025-01-17

Tracking Legal Developments.

Calcutta High Court Scrutinizes 'Double Benefit' Tax Claims in Major Revenue Appeal

In a significant move for tax jurisprudence, the Calcutta High Court has admitted an appeal filed by the Principal Commissioner of Income Tax-1, Kolkata , against Harmuny Entertainment Pvt. Ltd. The case centers on the complex interpretation of Section 28(iv) of the Income Tax Act, 1961 , specifically regarding the disallowance of substantial "bad debt" write-offs and their potential overlap with existing income assessments.

The Division Bench, comprising Chief Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyya, admitted the appeal to resolve questions of law that could have broader implications for how companies treat non-performing debts under current tax legislation.

The Core Dispute: Bad Debts and the Intent of the Law

The genesis of this legal battle lies in a disagreement over a disallowance amounting to Rs. 3,12,27,393. The Revenue contends that the Income Tax Appellate Tribunal (ITAT), Kolkata , erred by granting relief to the assessee, Harmuny Entertainment Pvt. Ltd. , when it set aside an order by the Commissioner of Income Tax (Appeals) .

The Revenue, represented by Mr. Tilak Mitra, argues that the ITAT incorrectly relied on the Supreme Court’s ruling in CIT vs. Sugauli Sugar Works (P) Ltd. . The Revenue posits that the facts of the present case are distinct, questioning whether an assessee should be permitted a "double benefit" when a creditor writes off a bad debt that has already provided tax benefits to another party, effectively creating an unintended fiscal advantage.

Framing the Legal Questions

The Court has identified three substantial questions of law to determine the validity of the ITAT’s decision:

1. Whether the Tribunal was justified in granting relief to the respondent regarding the Section 28(iv) disallowance.

2. Whether the reliance on Sugauli Sugar Works was misplaced, given the specific factual context of the bad debts in question.

3. Whether the Tribunal erred in overturning the disallowance related to repair and maintenance charges amounting to Rs. 9,99,856.

Key Observations

The proceedings highlight the critical tension between statutory interpretation and individual case specificities. Referring to the precedent of Sugauli Sugar Works , the Revenue noted in its submissions:

> "The Hon’ble Apex Court held that the cessation of the liability may occur either by reason of the operation of law... or a contract between the parties, or by discharge of the debt."

The challenge persists in applying this principle to situations where:

> "The sundry creditor has made written off the alleged Bad Debts and the same was already been allowed while computing the total income."

As the Revenue emphasized:

> "It is never the intent of the legislature to allow double benefit on the same amount, once in the hand of the payer and against in the hand of the payee."

Path Forward

The High Court has formally disposed of the stay application (GA 2 of 2024), ordering that it be retained with the records to serve as an informal paper book. The parties are now set to return to the Court in ten weeks for a substantive hearing.

This case is being closely watched by tax professionals, as a ruling here could redefine the limitations of Section 28(iv) and clarify the burden of proof required when claiming deductions on written-off debts that have already been accounted for in previous fiscal cycles.