MODI HOME PRODUCTS LIMITED,MUMBAI vs. INCOME TAX OFFICER, MUMBAI

2. Briefly stated, the assessee filed its return of income for the Briefly stated, the assessee filed its return of income for the Briefly stated, the assessee filed its return of income for the year under consideration on 29.11.2014 declaring nil income. The year under consideration on 29.11.2014 declaring year under consideration on 29.11.2014 declaring return was selected for scrutiny and statutory notices under the return was selected for scrutiny and statutory notices under the return was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (hereinafter “the Act”) were duly issued and tax Act, 1961 (hereinafter “the Act”) were duly issued and tax Act, 1961 (hereinafter “the Act”) were duly issued and complied with. The assessment was completed under section 143(3) complied with. The assessment was completed under section 143(3) complied with. The assessment was completed under section 143(3) of the Act on 26.12.2016, wherein the Assessing Officer made of the Act on 26.12.2016, wherein the Assessing of the Act on 26.12.2016, wherein the Assessing various various addition/disallowances addition/disallowances , , inter-alia, , the the following following disallowances: (i) bad debt written off amounting to ₹6,17,138/-, disallowances: (i) bad debt written off amounting to disallowances: (i) bad debt written off amounting to and (ii) ad-hoc disallowance of various expenses aggregating to hoc disallowance of various expenses aggregating to hoc disallowance of various expenses aggregating to ₹14,24,482/-. On appeal, the learned Commissioner of On appeal, the learned Commissioner of Income Income-tax (Appeals) granted partial relief but sustained the disallowance of the bad debt granted partial relief but sustained the disallowance of the bad debt granted partial relief but sustained the disallowance of the bad debt written off as well as the ad written off as well as the ad-hoc disallowance of expenses. hoc disallowance of expenses. Aggrieved, the assessee is in appeal before the the assessee is in appeal before the Income Income-tax Appellate Tribunal by way of raising grounds ribunal by way of raising grounds as reproduced above above:

4.1 Ground No. 1 of the appeal of the Ground No. 1 of the appeal of the assessee being assessee being is general in nature and the same is dismissed as nature and the same is dismissed as infructuous.

4.2 In ground No. 2 the assessee is aggrieved against the In ground No. 2 the assessee is aggrieved against the In ground No. 2 the assessee is aggrieved against the confirming of disallowances of Rs. 61,17,138/ confirming of disallowances of Rs. 61,17,138/- on account of the on account of the bad debt written off. off. The assessee’s claim pertains t The assessee’s claim pertains to an amount stated to be a security deposit allegedly paid in March 1994 to the stated to be a security deposit allegedly paid in March 1994 to the stated to be a security deposit allegedly paid in March 1994 to the Customs Department through M/s Balaji Shivram, Clearing Agents, Customs Department through M/s Balaji Shivram, Clearing Agents, Customs Department through M/s Balaji Shivram, Clearing Agents, Mumbai, for import of moulds, which was stated to have not been Mumbai, for import of moulds, which was stated to have not been Mumbai, for import of moulds, which was stated to have not been refunded. The assessee wrote off the said amount refunded. The assessee wrote off the said amount and claimed it as and claimed it as bad debt. The Assessing Officer disallowed the claim on the ground The Assessing Officer disallowed the claim on the ground The Assessing Officer disallowed the claim on the ground that the assessee failed to establish that the amount constituted a that the assessee failed to establish that the amount constituted a that the assessee failed to establish that the amount constituted a “debt” which had been taken into account in computing taxable “debt” which had been taken into account in computing taxable “debt” which had been taken into account in computing taxable income in any year, as mandated by secti income in any year, as mandated by section 36(1)(vii) read with on 36(1)(vii) read with section 36(2) of the Act. section 36(2) of the Act.

4.3 Before Ld. CIT(A) the assessee argued that the under provision Before Ld. CIT(A) the assessee argued that the under provision Before Ld. CIT(A) the assessee argued that the under provision u/s 36(1)(vii) effective after 01.04.1989, it was sufficient to the write u/s 36(1)(vii) effective after 01.04.1989, it was sufficient to the write u/s 36(1)(vii) effective after 01.04.1989, it was sufficient to the write off of debt as unrecovered in the books of account following the off of debt as unrecovered in the books of account following the off of debt as unrecovered in the books of account following the decision of Hon’ble Supreme Court in TRF ltd. 937 SC. The learned decision of Hon’ble Supreme Court in TRF ltd. 937 SC. decision of Hon’ble Supreme Court in TRF ltd. 937 SC. Commissioner of Income Commissioner of Income-tax (Appeals), after calling for a remand tax (Appeals), after calling for a remand report, concurred with the Assessing Officer, noting that the report, concurred with the Assessing Officer, noting that the report, concurred with the Assessing Officer, noting that the Modi Home Products Limited assessee failed to produce any assessee failed to produce any documentary evidence, documentary evidence, such as acknowledgements or recei acknowledgements or receipts from the Customs Department, pts from the Customs Department, establishing either the nature of the payment as a recoverable debt establishing either the nature of the payment as a recoverable debt establishing either the nature of the payment as a recoverable debt or its inclusion in taxable income in any year. or its inclusion in taxable income in any year.

4.4 Before us ld. counsel for the assessee referred to the paper Before us ld. counsel for the assessee referred to the paper Before us ld. counsel for the assessee referred to the paper book pages 26 to 29. The paper book page 26 shows that the 29. The paper book page 26 shows that the 29. The paper book page 26 shows that the assessee has paid Rs. 37,705 assessee has paid Rs. 37,705/- to Babaji Shivram Clearing Agents to Babaji Shivram Clearing Agents being consignment of 300 Aqua master being consignment of 300 Aqua master. The paper book page 27 The paper book page 27 also reflected the same entry also reflected the same entry of Rs. 37,705 claiming to of Rs. 37,705 claiming to be amount paid to custom authorities. The paper book page 28 also reflected custom authorities. The paper book page 28 also reflected custom authorities. The paper book page 28 also reflected the similar entry of Rs. 5,79,433/ entry of Rs. 5,79,433/- claiming to be amount of custom amount of custom authorities and paper book page No. 29 show amount with custom authorities and paper book page No. 29 show amount with custom authorities and paper book page No. 29 show amount with custom authorities as written written off .

4.5 Under the provisions provisions of section 36(1)(vii) for claiming of bad of section 36(1)(vii) for claiming of bad debt written off as deduction as deduction, firstly, the amount of debt should the amount of debt should have been taken as part of income as part of income either in the current year or in either in the current year or in the earlier years. The ledger extracts in the paper book indicating The ledger extracts in the paper book indicating The ledger extracts in the paper book indicating payments purportedly made to clearing agents and Customs portedly made to clearing agents and Customs portedly made to clearing agents and Customs authorities by themselves, neither establish the payment as a authorities by themselves, neither establish the payment as a authorities by themselves, neither establish the payment as a security deposit with the Customs Department nor demonstrate security deposit with the Customs Department nor demonstrate security deposit with the Customs Department nor demonstrate that the amount represented a debt arising in the course of that the amount represented a debt arising in the course of that the amount represented a debt arising in the course of business which had been offe business which had been offered to tax in any earlier year. red to tax in any earlier year.

Modi Home Products Limited The assessee has squarely fail The assessee has squarely failed to explain that actually the that actually the assessee had paid said said amount as a security deposit with the a security deposit with the custom authorities as as no evidence in support thereof including no evidence in support thereof including any receipt issued by custom auth receipt issued by custom authorities has been filed. Further, u . Further, unless said amount was taken into account for income of the current or said amount was taken into account for income of the current said amount was taken into account for income of the current earlier years, same cannot be allowed as deduction as bad debt deduction as bad debt written off u/s 36(1)(vii) of the Act. u/s 36(1)(vii) of the Act.

4.7 Section 36(1)(vii) of the Act permits Section 36(1)(vii) of the Act permits deduction of bad debts deduction of bad debts written off as irrecoverable in the accounts of the assessee for the written off as irrecoverable in the accounts of the assessee for the written off as irrecoverable in the accounts of the assessee for the previous year. However, section 36(2) expressly conditions such previous year. However, section 36(2) expressly conditions such previous year. However, section 36(2) expressly conditions such deduction on the requirement that the debt must have been taken deduction on the requirement that the debt must have been taken deduction on the requirement that the debt must have been taken into account in computing the income into account in computing the income of the assessee of that of the assessee of that previous year or of an earlier previous year, or must represent previous year or of an earlier previous year, or must represent previous year or of an earlier previous year, or must represent money lent in the ordinary course of business of money-lending. money lent in the ordinary course of business of money money lent in the ordinary course of business of money 4.8 The Hon’ble Supreme Court in The Hon’ble Supreme Court in TRF Ltd. v. CIT [(2010) 323 ITR 397 (SC)] clarified that post 01.04.19 397 (SC)] clarified that post 01.04.1989, it is sufficient if the bad 89, it is sufficient if the bad debt is written off as irrecoverable in the accounts; however, this debt is written off as irrecoverable in the accounts; however, this debt is written off as irrecoverable in the accounts; however, this principle operates subject to the fulfilment of the conditions of principle operates subject to the fulfilment of the conditions of principle operates subject to the fulfilment of the conditions of section 36(2). Thus, the requirement that the debt should have been section 36(2). Thus, the requirement that the debt should have been section 36(2). Thus, the requirement that the debt should have been taken into account in taken into account in computing taxable income remains computing taxable income remains mandatory.

4.9 In the present case, the assessee has failed to establish that In the present case, the assessee has failed to establish that In the present case, the assessee has failed to establish that the alleged security deposit constituted a “debt” within the meaning the alleged security deposit constituted a “debt” within the meaning the alleged security deposit constituted a “debt” within the meaning

Modi Home Products Limited of section 36(1)(vii), or that it was ever considered as income in any of section 36(1)(vii), or that it was ever considered as income in any of section 36(1)(vii), or that it was ever considered as income in any year. In the absence of such foundational facts, the claim cannot be In the absence of such foundational facts, the claim cannot be In the absence of such foundational facts, the claim cannot be sustained as a bad debt. While, in a given case, a non-recoverable sustained as a bad debt. While, in a given case, a non sustained as a bad debt. While, in a given case, a non deposit may be eligible for consideration as a business loss under deposit may be eligible for consideration as a business loss under deposit may be eligible for consideration as a business loss under section 28, such a claim would also require proof that the section 28, such a claim would also require proof that the section 28, such a claim would also require proof that the expenditure or loss was incurred wholly and exclusively for the expenditure or loss was incurred wholly and exclusively for the expenditure or loss was incurred wholly and exclusively for the purposes of business business proof which is conspicuously absent here. proof which is conspicuously absent here.

4.10 Accordingly, we find no infirmity in the concurrent findings of Accordingly, we find no infirmity in the concurrent findings of Accordingly, we find no infirmity in the concurrent findings of the authorities below on this issue. The disallowance of ₹6,17,138/- the authorities below on this issue. The disallowance of the authorities below on this issue. The disallowance of is sustained.

4.11 The ground No. 2 of the appeal of the assessee is accordingly The ground No. 2 of the appeal of the assessee is accordingly The ground No. 2 of the appeal of the assessee is accordingly dismissed.

Modi Home Products Limited The learned Commissioner of Income The learned Commissioner of Income-tax (Appeals), while tax (Appeals), while acknowledging the settled principle that ad acknowledging the settled principle that ad-hoc disallowances are hoc disallowances are impermissible—as laid down by the Hon’ble Supreme Court in as laid down by the Hon’ble Supreme Court in as laid down by the Hon’ble Supreme Court in CIT v. Walchand & Co. Pvt. Ltd. v. Walchand & Co. Pvt. Ltd. [(1967) 65 ITR 381 (SC)] 7) 65 ITR 381 (SC)]—nevertheless upheld the disallowance on the ground that the assessee had not upheld the disallowance on the ground that the assessee had not upheld the disallowance on the ground that the assessee had not fully substantiated the claims. fully substantiated the claims.

5.2 We are unable to concur with the approach of the learned We are unable to concur with the approach of the learned We are unable to concur with the approach of the learned Commissioner of Income Commissioner of Income-tax (Appeals) on this issue. The Assessin tax (Appeals) on this issue. The Assessing Officer has not pointed out any specific defect, discrepancy, or non- Officer has not pointed out any specific defect, discrepancy, or non Officer has not pointed out any specific defect, discrepancy, or non genuineness in the vouchers or bills produced by the assessee. The genuineness in the vouchers or bills produced by the assessee. The genuineness in the vouchers or bills produced by the assessee. The disallowance has been made purely on an estimated and ad-hoc disallowance has been made purely on an estimated and ad disallowance has been made purely on an estimated and ad basis. It is well settled that where books of account are not rejected basis. It is well settled that where books of account are basis. It is well settled that where books of account are and no specific instance of inflation or non and no specific instance of inflation or non-business expenditure is business expenditure is identified, ad-hoc disallowances cannot be sustained. Suspicion, hoc disallowances cannot be sustained. Suspicion, hoc disallowances cannot be sustained. Suspicion, however strong, cannot substitute proof. however strong, cannot substitute proof.

5.3 In the absence of any concrete finding of defect or falsity in In the absence of any concrete finding of defect or falsity in In the absence of any concrete finding of defect or falsity in the supporting evidence, the impugned disallowance is unsustainable. supporting evidence, the impugned disallowance is unsustainable. supporting evidence, the impugned disallowance is unsustainable. We, therefore, set aside the findings of the learned Commissioner of We, therefore, set aside the findings of the learned Commissioner of We, therefore, set aside the findings of the learned Commissioner of Income-tax (Appeals) on this issue and direct deletion of the ad tax (Appeals) on this issue and direct deletion of the ad tax (Appeals) on this issue and direct deletion of the ad-hoc disallowance of ₹14,24,482/ 14,24,482/-.

5.4 The ground No. The ground No. 3 of the appeal of the assessee is accordingly 3 of the appeal of the assessee is accordingly allowed.

Order pronounced in the open Court on nounced in the open Court on 19/0 /01/2026.