Mere 'Writing Off' Sufficient for Bad Debt Deduction u/s 36(1)(vii); No Need to Prove Irrecoverability: Delhi ITAT - 2025-06-28

ITAT: Writing Off Debt in Books is Sufficient for Deduction; No Need to Prove Irrecoverability

New Delhi: The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has delivered a significant ruling, allowing a bad debt claim by reiterating that the sole condition for claiming a deduction under Section 36(1)(vii) of the Income-tax Act, 1961, is the act of writing off the debt as irrecoverable in the books of account. The Tribunal, comprising Judicial Member Shri Vikas Awasthy and Accountant Member Shri S.Rifaur Rahman, held that an assessee is not required to furnish additional proof that the debt has, in fact, become irrecoverable.

The bench also remitted the issue of unexplained cash credits under Section 68 back to the Assessing Officer (AO) for fresh verification, finding that the tax authorities had not fully appreciated the documents on record.

Case Overview

The appeal was filed by Ambey Laboratories Limited against the order of the Commissioner of Income-tax (Appeals) for the Assessment Year 2017-18. The case involved two primary disputes:

Unexplained Cash Credits (Section 68): An addition of ₹2.17 crore made by the AO on account of unsecured loans, which the AO deemed non-genuine.

Disallowance of Bad Debts (Section 36(1)(vii)): A disallowance of ₹1.91 crore claimed by the assessee as a bad debt arising from an export transaction.

The AO had contended that the unsecured loans were from parties with meager incomes or losses, and funds were routed into their accounts just before being lent to the assessee. The bad debt claim was disallowed because the assessee allegedly failed to provide evidence of its efforts to recover the amount. The CIT(A) largely upheld the AO's order, providing only partial relief on the loan issue.

Arguments of the Parties

Ambey Laboratories Limited (The Appellant):

On Unsecured Loans: The assessee argued it had discharged its primary onus under Section 68 by providing the identity, creditworthiness, and genuineness of the lenders through documents like loan confirmations and bank statements. It contended that the burden then shifted to the Revenue to disprove the evidence, which was not done. It was also argued that for AY 2017-18, the assessee was not required to prove the "source of the source" of funds for its lenders.

On Bad Debts: The appellant asserted that it had written off a debt of ₹1.91 crore related to an export sale to a Thai company, M/s. S&C Formulator Co. Ltd., due to quality disputes. Citing the Supreme Court's landmark judgment in TRF Ltd. v. CIT , the assessee maintained that the only prerequisite for claiming a bad debt deduction post-April 1, 1989, is to write it off in the books of account.

The Revenue (The Respondent):

The Departmental Representative simply relied on the findings of the AO and the CIT(A), maintaining that the assessee had failed to prove the genuineness of the loans and the irrecoverability of the debt.

Tribunal's Analysis and Ruling

The ITAT analyzed both issues separately and delivered a split verdict.

Unsecured Loans Remitted for Re-evaluation

On the issue of unsecured loans, the Tribunal observed that the lower authorities had "not appreciated the relevant facts available on record" and had only "partly verified the documents." The ITAT directed the AO to conduct a fresh examination, stating:

"...we are inclined to remit this issue back to the file of AO to verify the document in line of the documents available on record... we direct the AO to verify the information available on record as per law after giving proper opportunity of being heard to the assessee."

The bench instructed the AO to specifically consider the assessee's arguments that creditworthiness depends on the ability to arrange funds, not just earning capacity, and that the "source of source" principle may not apply to the assessment year in question.

Bad Debt Deduction Allowed, Citing Supreme Court Precedent

The Tribunal found merit in the assessee's claim regarding the bad debt. It noted that the assessee had recorded the export sales in its Profit & Loss account in previous years and had now written off the unrecovered amount. The Tribunal unequivocally followed the legal principle established by the apex court.

In a pivotal excerpt, the judgment states:

"However, we observed that Hon’ble Supreme Court in the case of TRF Limited (supra) had settled this issue that writing off of debt in the books of account is the only condition for claiming deduction of bad debts u/s 36(1)(vii) of the Act and it is not necessary for the assessee to establish that the debt become irrecoverable for allowance of deduction."

Final Decision and Implications

The ITAT allowed the assessee's appeal concerning the bad debt claim of ₹1.91 crore, directing the AO to delete the disallowance. The matter of the ₹2.17 crore addition for unsecured loans was remanded to the AO for re-adjudication. Consequently, the appeal was "partly allowed for statistical purposes."

This judgment reinforces a crucial principle for businesses: for tax purposes, the commercial decision to write off a debt is paramount. Once a debt arising from business activities is written off in the accounts, the deduction under Section 36(1)(vii) should be allowed without imposing the additional, often difficult, burden on the assessee to prove that every avenue of recovery has been exhausted.