AJITSINH TAKHATSINH BARAIYA,AHMEDABAD vs. THE ITO, WARD-3(2)(1), AHMEDABAD

The brief facts of the case are that the assessee is an individual engaged in the business of manpower supply exclusively to M/s Harsha Engineers Limited. The assessee filed his return of income declaring business income of ₹7,17,682/-. During assessment proceedings, the Assessing Officer observed that the assessee claimed a sum of ₹27,92,370/- as expenditure under the head “Contribution to PF,” supposedly on account of deductions made by the service recipient (M/s. Harsha Engineers Ltd.) towards Provident Fund, ESIC, Professional Tax, canteen expenses, bus fare, and deficiency in services. The assessee submitted that the total amount invoiced for services rendered was ₹1,31,80,617/-, and therefore, the closing balance receivable as of 31.03.2018 should have been ₹41,33,823/-. However, according to the confirmation from M/s Harsha Engineers Ltd., the closing balance was only ₹13,41,452/-. The difference of ₹27,92,370/-, according to the assessee, had been deducted by the client and was hence irrecoverable. The assessee submitted before the Assessing Officer that since Harsha Engineers Ltd. had written off the same amount in their books and issued a ledger confirmation, the amount was irrecoverable and qualified as bad debt. However, upon examination of case records, the Assessing Officer noted several discrepancies. Firstly, the amount of ₹27,92,370/- was initially claimed under PF and ESIC contributions, but the assessee had not actually deposited any such amounts. The claim was therefore found to be bogus. The Assessing Officer was of the view that it was only upon detection by the Department Ajitsinh Takhatsinh Baraiya vs. ITO Asst. Year –2018-19 - 3– that the assessee shifted his position and re-characterized the same as bad debt. The Assessing Officer observed that the assessee had neither included this amount in his turnover nor shown it as receivable at any point, thereby failing to establish it as a proper debt. The AO relied on the decision of CIT v. Coates of India Ltd. (1998) 232 ITR 324 (Cal HC), which held that a "bad debt" implies a “worthless” debt and mere unilateral write-off or an entry in the debtor's books does not qualify as a bad debt in the hands of the creditor. Furthermore, the AO held that the assessee had not established that the debtor (Harsha Engineers Ltd.) was in a financially precarious position or that any genuine recovery efforts were made by the assessee to recover this amount. It was also noted that the submission about the irrecoverable debt emerged only after scrutiny began and appeared to be an afterthought to cover the false claim under the head of PF and ESIC. In view of these findings, the AO held that the assessee’s claim was incorrect, it was not supported by facts, and the deduction of ₹27,92,370/- was thus disallowed by the Assessing Officer. Accordingly, an addition of ₹27,92,370/- was made to the total income of the assessee.

In appeal, CIT(Appeals) dismissed the appeal of the assessee with the following observations:

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. On going through the rival contentions of both the parties before us we note that the primary contention of the assessee is that the client M/s Harsha Engineers Ltd. had deducted the amount under various heads-such as PF, ESIC, canteen expenses, bus fare, and deficiency in services from the gross billings amounting to ₹1,70,00,165 (including GST), and that the net receipts of only ₹1,27,16,61/- were received by the assessee, leaving a discrepancy of ₹27,92,370/- between the closing balances as per assessee and client books. The Counsel for the assessee submitted that the amount was never recovered, the same had been effectively written off by the client M/s Harsha Engineers Ltd. and thus, under prevailing jurisprudence including TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) and CIT v. Samara India (P) Ltd. (2013) 216 Taxman 93, the write-off in the assessee’s books is sufficient to claim it as bad debt. Further, the Counsel for the assessee placed reliance on Circular No. 14 (XL-35) of 1955 and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) to contend that the absence of an entry in books cannot, by itself, deprive the assessee of a lawful deduction. The assessee also produced Ajitsinh Takhatsinh Baraiya vs. ITO Asst. Year –2018-19 - 5– reconciliations and ledger summaries in support of the fact that the deductions were indeed made by the client M/.s Harsha Engineering and was duly accounted as unrecoverable.

Upon perusal of the detailed written submissions and documentary evidences such as ledgers, reconciliation statements, 26AS data, and profit and loss accounts (specifically those at pages 66 to 97 of the paper book), it is noted that the assessee has sought to justify the discrepancy in receipts and deductions made by client with some degree of clarity. The total deductions of ₹32,42,464/- comprise not only the sum of ₹27,92,370/- in dispute but also miscellaneous adjustments and capital charges, which are supported by correspondences and accounting treatment by the client of the assessee M/s Harsha Engineers Ltd. We observe that it is also a matter of record that the client, Harsha Engineers Ltd., has acknowledged the difference through ledger confirmations and treated the corresponding amount as a write- off in it’s book of accounts. Although the assessee’s initial classification of the expense under PF and ESIC was erroneous and misleading, the subsequent correction and reclassification of the claim under the head of “bad debt” or “irrecoverable deductions” needs to be viewed in light of substance over form as illustrated by the assessee. Further, judicial precedents such as TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) have clarified that post-April 1, 1989, it is not necessary to demonstrate that a debt has become bad in a commercial sense—it is sufficient if it is written off as irrecoverable in the books. While we note that the assessee altered his narrative during the course of assessment proceedings, the fact remains that the claim has not been found to be devoid of underlying commercial transaction. It is also relevant to note Ajitsinh Takhatsinh Baraiya vs. ITO Asst. Year –2018-19 - 6– that the client of the assessee M/s Harsha Engineers Ltd. an independent party, has not disputed the deductions made by them against the invoice raised on them by the assessee. The Assessing Officer has not undertaken any independent inquiry under Section 133(6) of the Act to disprove the client’s accounting treatment or the reconciliation submitted by the assessee. Accordingly, given the totality of facts, documentary evidence filed, and legal position enunciated by binding precedents, we are of the considered view that the disallowance of ₹27,92,370/- made by the Assessing Officer and sustained by the CIT(A) is liable to be deleted, subject to verification of actual write-off in the assessee’s books as per accounting norms and also the fact that this amount had earlier been offered to tax as incurred in any of the previous assessment years. Upon such verification, the AO shall allow the deduction in accordance with law.

In the result, appeal of the assessee is allowed for statistical purposes. This Order pronounced in Open Court on 13/08/2025 Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 13/08/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,