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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
The appeal filed by the assessee is directed against the order dated 02.04.2025 of the Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi [“CIT(A)/NFAC”] pertaining to Assessment Year (“AY”) 2015-16.
The assessee has raised the following grounds of appeal:- “On facts and in law:
1. The Ld. CIT(A) has erred in upholding the assessment of total income at Rs.1,27,98,380/- as against the returned income of Rs.14,44,400/- thereby confirming the addition of Rs.1,13,53,979/- made by the Assessing Officer (AO) as alleged suppressed receipts.
2. The Ld. CIT(A) erred in law and on facts in confirming the addition of Rs.1,13,53,979/- solely on the basis that the TDS credit of Rs.2,27,080/- was claimed by the appellant in Form 26AS, without appreciating the fact that the said amount was duly reversed in the books on 31.03.2015 due to non-receipt from the party (M/s Vanshika Sugar and Power Industries Ltd).
3. The Ld. CIT(A) failed to appreciate that the appellant follows the mercantile system of accounting and that mere booking of income followed by reversal due to non-recovery does not amount to suppression of receipts, especially in the absence of actual receipt of income.
4. The Ld. CIT(A) erred in holding that the appellant could not substantiate the reversal of entries despite the fact that the appellant's books of account reflected the raised invoices and subsequent reversal as per accounting principles due to non-recovery, which is a valid business decision.
5. The Ld. CIT(A) erred in ignoring the settled legal principle that income that has not accrued or is not likely to be realized cannot be taxed, particularly when it is written off as irrecoverable in the books.
6. The Ld. CIT(A) erred in law by placing reliance solely on Form 26AS for making the addition without verifying the actual accrual or realization of income.
7. The AO made addition on the basis of information obtained u/s 133(6) of the Act from the party (M/s Vanshika Sugar and Power Industries Ltd) that payment is received by the appellant which is factually incorrect. Appellant has submitted detailed reply alongwith enclosures to the said Show Cause of AO which is reproduced at para 2.4 of the Assessment Order. However, the Ld. AO had not appreciated the submission and made the addition which is further upheld by Ld. CIT(A).
8. The AO while making addition has erred in not appreciating the fact that evidence which he has relied upon are the bills raised in the accounting year 2013-14 and therefore cannot be taxed in the current year.
The additions were made solely based on the AO's observations without appreciating the facts of the case, the true nature of the transactions, and the surrounding circumstances.
10. The appellant craves leave to add, amend, modify, delete, or alter any of the grounds of appeal at the time of hearing, as may be deemed fit in the interest of justice.”
Briefly stated the facts are that the assessee is a private limited company and engaged in the business of erection and commission of various types of plants required by sugar, power, steel and cement industries. For AY 2015-16, the assessee filed its return of income on 13.05.2016 declaring total income at Rs.14,44,000/-. The case was selected for limited scrutiny under CASS with reason „Receipts u/s 194C and 194J of the Income Tax Act, 1961 (the “Act”) (as per 26AS) are more than the receipts shown in ITR 4/5/6 (Service receipts as per 26AS) and total revenue from operations in P&L Account. Accordingly, notice(s) u/s 143(2) and 142(1) of the Act were issued and served upon the assessee in response to which, the assessee submitted various details as called for from time to time.
3.1 During the assessment proceedings, the Ld. Assessing Officer (“AO”) noticed that receipts amounting to Rs.1,13,53,979/- u/s 194C reflected in Form No. 26AS and ITS Data are not offered by the assessee company in the Profit and Loss Account and therefore he called for the information from Vanishka Sugar and Power Industries Ltd. u/s 133(6) vide his letter dated 15.11.2017. Accordingly, the Ld. AO asked the assessee to show cause as to why Rs.1,13,53,979/- should not be added to the total income. The assessee submitted its detailed reply to the said show cause which is reproduced at para 2.4 of the assessment order. However, the Ld. AO did not find the reply of the assessee acceptable and proceeded to make an addition of Rs.1,13,53,979/- as suppressed receipts on the ground that the assessee had claimed the TDS but not offered the income in respect of the said TDS, vide his order dated 28.12.2017 passed u/s 143(3) of the Act.
Aggrieved, the assessee filed an appeal before the Ld. CIT(A)/NFAC who disallowed the appeal of the assessee on the ground that the contention of the assessee remained unjustified and unsubstantiated as the assessee failed to submit any documentary evidence to verify its claim. The relevant findings and observations of the Ld. CIT(A)/NFAC is as under: “2.5 On perusal of the assessee's reply, the same is not acceptable. As per Form No.26AS assessee is in receipts of Rs.2,99,85,500/- with tax credit of Rs.5,99,710/-from two parties. While in the Return of Income filed by the assessee he had declared only total receipts of Rs.1,86,31,521/-of one party and claimed credit of TDS of Rs.5,99,710/- made by both parties. He has not offered receipts of Rs.1,13,53,979/- from M/s. Vanshika Sugar and Power Industries Ltd. The assessee is following mercantile system of accounting. In the mercantile system of accounting, once the bill is raised the amount of bill raised has to be offered for taxation. In cash system of accounting, the receipts are offered for taxation on receipt of the same. This is not the case so. Further, the assessee is claiming the tax deducted at source of Rs. 2,27,080/- in respect of contractual receipts from M/s. Vanshika Sugar and Power Industries Ltd in its return of income filed for the year under consideration. Since the assessee has taken tax credit of Rs.2,27,080/- in respect of payment from Vanshika Sugar and Power Industries Ltd. of Rs.1,13,53,979/- and not offered the receipts in the Return of Income, an addition of Rs.1,13,53,979/- is made to the total income of assessee. Since the assessee has concealed the particulars of income penalty u/s.271(1)(c) is Initiated for concealing the particulars of income. During the course of appeal proceedings, the appellant filed the submission and same has been examined carefully. It is claimed by the appellant that the amount of Rs. 1,13,53,979/- has reflected in form 26AS against M/s Vanshika Sugar and Power Industries Ltd and duly recorded in the books of accounts on 31.03.2015 and also taken benefit of tax credit of Rs. 2,27,080/-. Further, the said entry was reversed on 31.03.2015 due to non-recovery of the same as the amount was not received in the current year and neither in the subsequent year. In respect of the same, the Assessing officer examined the books of accounts during the course of assessment proceedings and found that the appellant company is following mercantile system of accounting wherein all the transaction are recognized and recorded as and when they take place and all the income and expenses are accounted for in the books of accounts in the same year of occurrence. It is evident from 26AS that the appellant company had claimed TDS of Rs. 2,27,080/- and had not disclosed the receipts of Rs. 1,13,53,979/-against M/s Vanshika Sugar and Power Industries Ltd for the said year. Since, the appellant company had taken benefit of tax credit of Rs. 2,27,080/- as it was appearing in form 26AS for the said year. In view of above facts and considering the explanation of the appellant, it is clear that the appellant has failed to justify the transactions based on which addition was made to its income during the assessment proceedings. During the appeal proceedings, no documentary evidences have been submitted by the appellant to verify the claim in-spite of multiple opportunities being provided by this office as stated above in para-6. As evidenced from the Assessment Order, it is evident that the appellant has taken benefit of tax credit of Rs. 2,27,080/- in respect of payment from Vanshika Sugar and Power Industries Ltd of Rs. 1,13,53,979/- and not offered the receipts in the return of income for the said year. The contention of the appellant remained unjustified and unsubstantiated. Hence, the ground is noted as disallowed.”
Dissatisfied, the assessee is in appeal before the Tribunal and all the grounds of appeal relate thereto.
The Ld. AR, at the outset, submitted that the impugned issue is covered by the decision of the Hon‟ble Supreme Court in the case of TRF Ltd. Vs. CIT, 323 ITR 397 (SC) and the Co-ordinate Bench of the Pune Tribunal in the case of Trident Services Pvt. Ltd., & 1380/PUN/2009 (Pune-Trib.) and in the case of Xebec Communication Pvt. Ltd. Vs. JCIT, (Pune-Trib.) as well as Jurisdictional Bombay High Court in the case of Star Chemicals Pvt. Ltd., 11 DTR 311 (Bom.) and in the case of DIT Vs. Oman International Bank, 313 ITR 128 (Bom.).
The Ld. DR relied on the order of the Ld. AO and Ld. CIT(A)/NFAC.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A)/NFAC, paper book filed by the Ld. AR on behalf of the assessee as well as various judicial precedents relied upon by the Ld. AR. We find that the Ld. AO made the addition of Rs.1,13,53,979/- on account of suppressed receipts on the ground that the assessee had claimed the TDS and therefore bound to disclose the receipts of Rs.1,13,53,979/- but had not offered the income in respect of the said TDS claimed. The Ld. Counsel for the assessee has contended that both the Ld. AO/CIT(A)/NFAC have failed to consider the submission of the assessee.
9. Perusal of the record shows that before the Ld. CIT(A), the assessee submitted the reconciliation of sales as per books of account of the assessee which is as under : Total Sales Rs.2,99,85,202/-; Sales written off due to bad debt Rs.1,13,53,979/- and Net Sales disclosed in Profit and Loss A/c. Rs.1,86,31,523/- and contended that merely because the amount of Rs. 1,13,53,979/- appears in Form 26AS as received from one party named Vanshikha Sugar & Power Industries Ltd. does not mean that the assessee is in receipt of the said amount. In support of its claim, during the course of assessment proceedings, the assessee furnished all the relevant documents like the copy of bank statements and ledger extract of the parties as proof to ensure that the amount was not received during the year under consideration nor in the subsequent years. The assessee had taken benefit of tax credit of Rs.2,27,080/- as it was appearing in Form 26AS and just because the assessee had claimed the benefit of TDS it does not mean that the assessee has suppressed receipts in respect of amount appearing in Form 26AS. We find force in this contention of the assessee. The Ld. AO was in fact in error in observing that the payment of Rs.1,13,53,979/- has been received by the assessee from Vanshikha Sugar & Power Industries but no such payment was received which can be evidenced from the ledger account extract of the assessee in the books of Vanshikha Sugar & Power Industries that does not reflect any payment being made to the assessee (pages 82-83 of the paper book refers). On the contrary, the assessee had recorded the sales and written off the same by debiting the amount to the sales account instead of bad debts account, since the chances of recovery of the said amount were very remote.
It is also the contention of the assessee that the assessee is following mercantile system of accounting wherein all the transactions are recognized and recorded as and when they take place and all the income and expenses are accounted for in the books of account in the same year of occurrence. The amount of Rs. 1,13,53,979/- appearing in Form 26AS as received/receivable from Vanshikha Sugar & Power Industries Ltd. was offered to tax by duly recording the same in the books of account on 31.03.2015 and the same is evidenced by the ledger extract of the party Vanshikha Sugar & Power Industries Ltd. as per books of account of the assessee which is available on record. The entry was reversed immediately on 31.03.2015 due to non-recovery of the same as the amount was neither received in the current year nor in the subsequent years and have been written off in the books of account as irrecoverable by debiting to the sales account instead of debiting to bad debt account, the corresponding income has been subject to tax in the year under consideration. The amount was offered to tax and the entry was reversed as on 31.03.2015. As per the provision of section 36(1)(vii) of the Act where any amount has been shown as income by the assessee in preceding year or in the year under consideration, but which has been written off by the assessee, then the same is to be allowed as deduction out of business income of the assessee under section 36(1)(vii) of the Act. The assessee had not debited any amount to bad debt account, on the other hand, the amount which was due from debtors were reduced from sales during the year under consideration. However, necessary entries were passed in the books. Though the entries were passed in a different manner by not debiting the amount to be written off to bad debt but by debiting sales account and crediting parties account, the intention was to write off the amount which was irrecoverable. Thus, the addition of Rs.1,13,53,979/- should be deleted.
It is further submitted by the Ld. AR that it is not necessary for the assessee to establish that the debt has become irrecoverable. It is enough if the debt is written off as irrecoverable in the accounts of the assessee that bills raised are accounted for in the books of accounts and were written off due to non-recovery of the same and therefore the conclusion drawn by the Ld. AO that the receipts were not disclosed in the current year is incorrect. However, both the Ld. AO and the Ld. CIT(A)/NFAC adjudicated the impugned issues against the assessee without considering the decisions (supra) relied upon by the assessee.
We find some force in the above contentions of the ld. AR. We find that the impugned issue is no more res-integra and covered in favour of the assessee by the decision of the Co-ordinate Bench of the Pune Tribunal in the case of Xebec Communication Pvt. Ltd. (supra), wherein the Tribunal relying on the decision of the Apex Court in the case of TRF Ltd. (supra), allowed the claim of the assessee under the similar set of facts to that of the present assessee by observing as under : “9. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 36(1)(vii) of the Act. The requirement of said section is that any amount which has been shown as income by the assessee in preceding year
or in the year under consideration, but which has been written off as bad debt by the assessee, then the same is to be allowed as deduction out of business income of assessee under section 36(1)(vii) of the Act. The assessee had not debited any amount to the bad debts account, on the other hand, the said receipts which were due from customers were reduced from the gross receipts of the year under consideration. However, necessary entries were made to the parties account and the amount was squared off from the said account. The assessee has placed on record the copy of account of the said party Country Club in the books of account of the assessee and we have perused the same. The amounts which were due from the said parties have been squared off from the parties account and on the other hand, the same are debited to the receipts. Though the entries have been passed in different manner and no amount has been debited to the bad debts account but the intention of the assessee can be clear from the aforesaid entries as recognized that the amounts which were due against business receipts is known to be receipts and hence, debited to the receipts account and simultaneously to the parties account in this regard, where the amount has been squared off and finding support from the ratio laid down by the Hon'ble Supreme Court in T.R.F. Ltd. Vs. CIT (supra), we hold that the assessee is entitled to claim the aforesaid deduction under section 36(1)(vi) of the Act. Accordingly, we hold so and direct the Assessing Officer to delete the addition of 59.81,991/-. The ground of appeal raised by the assessee is thus allowed.”
The claim of the assessee also finds support from the decision of the Hon‟ble Jurisdictional Bombay High Court in the case of Oman International Bank (supra) wherein the Hon‟ble Court held as under :
“12. Our attention was invited to the judgment of the Madras High Court in South India Surgical Co. Ltd. vs. Assistant Commissioner of Income-tax. (2006) 287 ITR 62 (Mad.). In case the amount was payable by a Government Department (Hospital). The Tribunal there had taken the view that the debt could not be claimed as bad on the mere ground that the hospital and the Departments might make payments as and when funds an provided. The Madras High Court after considering the various judgments was pleased to observe that it is no sufficient for the assessee to say that he has become pessimistic about the prospect of recovery of debt in question. The assessee must honestly feel convinced that the financial position of the debtor was so precarious and shaky that it would be impossible to collect any money from him. The question is really one of fact depending upon the various facts and diverse circumstances bearing on the debtor's pecuniary position, his commitments and obligations. Further that the judgment of the assessee in regard of the debt as a bad debt must be a honest judgment and not a convenient judgment. Reference was also made to the judgment of the Delhi High Court Commissioner of Income-tax vs. Global Capital Ltd., (2008) 306 ITR 332 (Delhi). The Delhi High Court has taken the view that post the amendment the assessee is not required to establish that the concerned debt has actually become bad in the relevant year for the purpose of claiming deduction under this Section and the only requirement for claiming deduction is that the assessee has to write off the relevant debt in his book treating it as bad. This Court in an unreported judgment in The Commissioner of Income Tax vs. M/s. Star Chemicals (Bombay) P. Ltd., Income Tax Appeal Lodging No.1915 of 2007 dated 27th February, 2008 had also taken a view that post amendment on a reading of the Section and the Circular, what was required was to write off the debt as a bad debt based on the assessee's commercial wisdom and that will satisfy the purpose of the Section.
“13. Considering the above discussion, in our opinion to treat the debt as bad debt has to be commercial or business decision of the assessee based on the relevant material in possession of the assessee. Once the assessee records the debt as bad debt in his books of account that would prima facie establish that it is a bad debt unless the A.O. for good reasons holds otherwise. The writing in the accounts no doubt, has to be bonafide. Once that be the case the Assessee is not called upon to discharge any further burden. In our opinion, therefore, we are in agreement with the view taken by the majority constituting the Bench of the learned Tribunal.
The question as framed will have to be answered by holding that after the amendment it is neither obligatory nor is the burden on the assessee to prove that the debt written off by him is indeed a bad debt as long as it is bonafide and based on commercial wisdom or expediency. Appeal disposed of accordingly.”
14. In light of the above factual and legal matrix of the case and in the absence of the any contrary material/juridical precedent brought on record by the Revenue to enable us to take a different view, respectfully following the decision(s) (supra), we set aside the impugned order of the Ld. CIT(A)/NFAC and direct the Ld. AO to delete the addition of Rs.1,13,53,979/-. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 29th October, 2025.