EDGE STEELS PVT LTD ,MUMBAI vs. ITO WARD 12(2)2, MUMBAI

PER ANIKESH BANERJEE, J.M:

The instant appeal of the assessee is filed against the order of the National
Faceless Appeal Centre (NFAC), Delhi [for brevity, ‘Ld. CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2012-13, date of order 16.12.2024. The impugned order was emanated from the order of the Learned Faceless Assessment Centre, Delhi (in short, ‘the A.O.’) passed under section 143(3) read with section 254 read with section 144B of the Act, dated
24/09/2021. 2. The assessee has taken the following grounds of appeal:-
“GROUNDS OF APPEAL
The under mentioned Grounds of Appeal are without prejudice to one another:
1. FIRST GROUND OF APPEAL: - Order Bad In Law And On Facts
1.1. The order passed by the Learned Commissioner of Income Tax (Appeals)
(hereinafter referred to as (CIT(A)) u/s 250 of the Income-tax Act, 1961 (the Act) is bad in law and on facts.
2. SECOND GROUNDS OF APPEAL: ERRONEOUS CONFIRMATION OF DISALLOWANCE U/S 36 Of the Act
2.1. The learned (CIT(A)) has erred in confirming the order of Assessing Officer (AO), by confirming the addition of Rs. 43,61,237/- without considering the facts.
2.2. The learned CIT(A) has erred in upholding the disallowance of bad debt arising due to non-payment of amount by the debtor, holding the same to be in the provision for bad debt not allowable under section 36 of the Income-tax Act, 1961
without appreciating the details submitted by the Appellant
2.3. The learned CIT(A) has failed to appreciate the fact that the receivable has arisen on account of sale of goods which was offered to tax during the Financial
Year (FY) 2008-09 and has overlooked circular no. 12/2016 dated 30-5-2016 issued by the Central Board of Direct Taxes (CBDT).
4. The learned CIT(A) failed to verify whether the debt has actually been written off as per the directions given by the Income-tax Appellate Tribunal vide its order dated 20 September 2019 or not and instead went on to verify the proceedings under section 138 of the Negotiable Instruments Act, 1881 before the Metropolitan
Magistrate Court, Bandra, Mumbai.
2.5. The learned CIT(A) failed to observe the ledger account provided during the proceedings which clearly show that the Appellant had actually written off the amount by debiting the profit and loss account and crediting the party account.
However, while doing so, instead of using the term bad debt, it had used the word
Provision for doubtful debt.
2.6. The learned CIT(A) failed to appreciate the fact that the Magistrate Court order has held that the debtor is guilty and the Managing Director is convicted under the provisions of CrPC and ordered them to pay a compensation of Rs. 11.80 lakhs.
2.7. The learned CIT(A) failed to appreciate the fact that there was an out of court settlement between the debtor and the Appellant for an amount of 50% of the total receivable after the Magistrate Court's order which was received at a later stage by the Appellant.
3. SECOND GROUNDS OF APPEAL:
3.1. The Appellant craves to leave to add, amend and/or alter all or any of the above Grounds of Appeal before or at any time of hearing of this Appeal.”
3. The brief facts of the case are that the appeal was earlier heard, and order was passed on 20/09/2019 bearing ITA No.3332/Mum/2018. The Hon’ble Bench has set aside the matter before the Ld.AO for further adjudication on the issue of bad debt related to 50% of the outstanding, i.e. Rs.43,61,1237/- out of the total outstanding of Rs.87,22,474/- of M/s Tag Engineers Private Limited (TEPL). The Ld.AO passed an assessment order U/s 143(3) r.w.s. 254 of the Act but upheld the alleged addition by an order dated 24/09/2021 on the ground that the said company had claimed deduction under section 36(1)(vii) of the Act amount to Rs.43,61,237/- which was disallowed and added back with the total income of the assesse. The Ld. AR argued narrated the facts and filed paper book containing pages 1 to 115 which is placed in record.
4. The assessee is a company incorporated in India and is engaged in the business of trading in Alloy steel bars and rods since July 1995. The assessee filed its return of income declaring a total income of Rs. 50,22,980/-. The return was revised by declaring a total income of Rs. 661,740/-. The reason for revision was that in the original return, the assessee had not claimed bad debts of Rs.
43,61,237/- but in revised return the bad debt is claimed U/s 36(1)(vii) of the Act.
5. The assessee claimed that the amount to Rs. 87,22,474/- was receivable from party. M/s Tag Engineers Private Limited (hereinafter referred to as 'debtor') since
April 2006. The debtors initiated the payment but it is found that the issued cheques were dishonoured by the banker. Thereafter, the assessee and the debtor entered into a Memorandum of Understanding (MOU) dated 24/06/2009 for the payment of the outstanding amount of Rs. 87,22,474/- and issued various cheques drawn on the Shamrao Vithal Co-op Bank Limited in discharge of its liability as below and the debtor further agreed to pay interest for the delay in payment.
Sl.
No.
Cheque No.
Date
Amount
1. 425044
25 July 2009
500,000
2. 425045
25 August 2009
500,000
3. 425046
25 September 2009
500,000
4. 425047
25 October 2009
500,000
5. 425048
25 November 2009
500,000
6. 425049
25 December 2009
500,000
7. 425050
25 January 2010
500,000
8. 425051
25 February 2010
900,000
9. 425052
25 March 2010
900,000
10. 425053
25 April 2010
900,000
11. 425054
25 May, 2010
900,000
12. 425055
25 June 2010
900,000
13. 425056
25 July 2010
722,474
14. 425057
25 July 2010
487,242
Total
8,722,474
6. The assessee presented the cheques on the aforesaid dates for encashment.
However, all the cheques presented till March 2010 were returned unpaid by the bank with the remark 'refer to the drawer' indicating insufficient funds. Thereafter, the assessee filed a complaint against the debtor under section 138 of the Negotiable Instruments Act, 1881 before the Metropolitan Magistrate Court,
Bandra, Mumbai on 10/12/2010 after following the legal process under the said
Act.
7. The Metropolitan Magistrate Court, Bandra, Mumbai, passed an order on 28/12/2012. A copy of the order is enclosed in APB Page 88-109. In the order, the Court held the debtor to be guilty and one of its directors were sentenced to simple imprisonment for 3 months. In addition to the above sentencing, the accused was also directed to pay Rs. 11.80 lakhs within 3 months and in case of default, the directors would continue their simple imprisonment for another 4 months.
8. During the proceedings under Negotiable Instruments Act, 1881, the debtor requested the assessee to reduce the amount considering the financial situation of the debtor. Once the order was passed, the assessee out of sympathy agreed to settle the amount at 50% of the total amount receivable and wrote off the balance
50% of the total outstanding i.e. Rs. 4,361,237/- in the FY 2011-12. A copy of the ledger is enclosed in APB page 41. 9. The 50% of Rs. 87,22,474/- was received during the FY 2015-16. Out of the said 50 percentage, Rs. 23,71,500/- was received from the Metropolitan Magistrate
Court, Bandra, Mumbai and the balance from the debtor. It is important to note that the Magistrate will release the payment, only after closure of the case whether by way of mutual settlement or by passing of an order. In the case of the Appellant, as it was mutual settlement, the amount was released without passing of any order.
A copy of the ledger for recovery is enclosed as in APB page 42. However, while writing off the amount, instead of debiting write-off account, it inadvertently debited provision for doubtful debts account.
10. The Ld. AO passed an order u/s 143(3) of the Act, disallowing the amount written off. The contention of the Ld. AO is that the term used is provision for doubtful trade receivable and the same needs to be added back while computing the income of the assessee. The assessing officer has further contended that a debt will turn bad either wholly or it will not 11. Aggrieved by the order, the assessee filed an appeal before the Ld. CIT(A), and the CIT(A) dismissed the case stating that the assessee did not write-off the amount and it had merely made a provision for doubtful trade receivable. Being aggrieved assessee filed an appeal before ITAT.
12. The ITAT-Mumbai bench “E” passed the order dated 20/09/2019 bearing ITA
No. 3332/Mum/2019 and had taken the considered view that there is substantial force in the claim of the assessee that though the bad debt was written off as irrecoverable in the accounts of the assessee, however, inadvertently the wordings
'provision for bad debt were wrongly used and restored the file back to the assessing officer for verifying whether the amount is actually written off or not as mandated u/s 36(1)(vii) of the Act.
13. The Ld. AO, as per the direction from ITAT, passed the order U/s 143(3) r.w.s.
254 dated 23/03/2015. The Ld. AR stated that the ITAT, in its order had directed debtor or not. Instead of verifying the same, the Ld. AO went ahead in verifying the proceedings under the Negotiable Instruments Act, 1881. He further stated that the Ld. AO in the order, has mentioned that 'no order has been passed by the Honorable Court with regard to 50% of the amount to be paid to the appellant out of the total receivable from the debtor. It is not understandable that before the judge M/s. Tag Engineers Pvt. Ltd. agreed to pay 50% of the total amount and in this regard, no order/direction has been issued by the Court. It appears to be a concocted story'.
14. The Ld. AR argued that the observation of the Ld. AO is of no relevance to the case as the settlement between a debtor and a creditor is purely a business decision based on the facts. In the case of the assessee, the agreement to settle
50% of the debt has happened after the order of the Metropolitan Magistrate Court was passed. The amount of 50% was received in the FY 2015-16 and part of the amount was received through the Court and the balance was received from the debtor. In the case of the assessee, during the proceedings under Negotiable
Instruments Act, 1881, the assessee assumed that the debtor would not pay the amount and accordingly decided to write-off 50% of the total outstanding i.e. Rs.
43,61,237/- in the FY 2011-12 and the matter would be reviewed and decided as per the outcome of the proceedings. The addition was confirmed. The assessee being aggrieved filed an appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the impugned assessment order. Being dissatisfied with the impugned appellate order the assessee filed an appeal before us.
15. The Ld.DR argued and stands in favour of the orders of revenue authorities.
16. We have heard the rival submissions and perused the material available on record. The core issue in the present appeal relates to the disallowance of the assessee's claim of bad debts amounting to Rs.43,61,237/- under section 36(1)(vii) of the Act, which was upheld by the revenue authorities on the ground that the assessee had merely made a provision for doubtful debts and had not actually written off the debt in the books of account. It is an undisputed fact that the debt of rs.87,22,474/- arose out of sales made to M/s Tag Engineers Pvt. Ltd. (TEPL), and the amount remained unpaid despite the issuance of post-dated cheques. These cheques were dishonoured, and legal action under section 138 of the Negotiable
Instruments Act, 1881 was initiated. Subsequently, the Metropolitan Magistrate
Court, Bandra, Mumbai passed an order dated 28/12/2012 convicting the debtor and ordering compensation of Rs.11.80 lakhs. Pursuant to this, the assessee entered into a settlement with the debtor for 50% of the total outstanding amount, and accordingly, wrote off the remaining 50%, i.e., Rs.43,61,237/-, in its books during FY 2011–12. The only basis for disallowance by the Ld. AO and confirmation by the Ld. CIT(A) was that the assessee used the term "provision for doubtful debts"
instead of "bad debts written off." However, this issue was already considered by the Coordinate Bench of this Tribunal in assessee’s own case in ITA No.
3332/Mum/2018 vide order dated 20/09/2019, wherein the matter was remanded to the Ld. AO with a specific direction to verify whether the assessee had actually written off the said amount in the books of account. Upon perusal of the ledger entries submitted before us and placed in the assessee’s paper book, we find that the assessee had indeed debited the profit and loss account and credited the debtor's account in its books, thereby effectively writing off the said amount, albeit under the caption “provision for doubtful debts.” In substance, the requirement of section 36(1)(vii) read with Explanation 1 thereto stands satisfied, as there is no condition prescribed in law regarding the nomenclature used for write-off, as long as the write-off is real and identifiable in the books. Further, the assessee's claim is also supported by CBDT Circular No. 12/2016 dated 30.05.2016, which clarifies that if a bad debt is actually written off in the books of account, the claim shall be allowed, even if recovery efforts are ongoing or partially successful at a later stage.
We also find that the observations of the AO regarding the absence of a formal court order for the settlement or the suspicion of a “concocted story” are baseless, as partial payments were, in fact, received—some through the court and others directly from the debtor—as evidenced by ledger entries. The revenuee has brought no material on record to controvert this factual matrix. In view of the above findings, we hold that the assessee has satisfied the statutory requirements under section 36(1)(vii) of the Act and the claim of bad debt is allowable. The orders of the revenue authorities disallowing the said claim are therefore not sustainable in law.
Accordingly, the appeal of the assessee is allowed and the disallowance of Rs.43,61,237/- is directed to be deleted.
17. In the result, the appeal of the assesse bearing ITA No.635/Mum/2025 is allowed.
Order pronounced in the open court on 16th day of July, 2025. (SMT. RENU JAUHRI)
JUDICIAL MEMBER
Mumbai, िदनांक/Dated: 16/07/2025
Pavanan
Copy of the Order forwarded to:

BY ORDER,
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(Asstt.