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Facts
The appellant, M/s. M. M. Healthcare Ltd., advanced Rs. 7.30 crores to JMD Oil Pvt. Ltd. for a joint venture manufacturing unit. The project did not materialize, and JMD Oil Pvt. Ltd. went into liquidation, leading the appellant to write off the amount as bad debts. The CPC disallowed this claim during processing.
Held
The Tribunal held that the advance of Rs. 7.30 crores was a capital advance and not a debt in the ordinary course of business, thus not allowable as bad debt under Section 36(1)(vii) of the Income Tax Act. However, the disallowance by the CPC under Section 143(1) was found to be beyond its jurisdiction.
Key Issues
Whether the advance given for a joint venture project, which did not materialize, can be claimed as a bad debt. Whether the CPC has the power to disallow such a claim under Section 143(1) processing.
Sections Cited
143(1), 36(1)(vii), 36(2)
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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
Assessment Year: 2022-23 M/s. M. M. Healthcare Ltd., Vs. Dy. Commissioner of Income Pushpanjali, East Delhi, Tax, Circle-16(1), Anand Vihar, New Delhi New Delhi PAN: AAACM1799D (Appellant) (Respondent) Assessee by Sh. Ruchesh Sinha, Adv. Ms. Monalisa Maity, Adv. Department by Ms. Ankush Kalra, Sr. DR Date of hearing 03.12.2025 Date of pronouncement 17.12.2025 ORDER
PER SATBEER SINGH GODARA, JM
This Revenue’s appeal C.O. No.238/Del/2025 for assessment year 2022-23, arises against the Commissioner of Income Tax (Appeals)/Addl./JCIT(A)-1, Ahmedabad’s DIN and order no. ITBA/APL/S/250/2024-25/1074913096(1), dated 24.03.2025 involving proceedings under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties. Case files perused.
2. The Revenue’s sole substantive grievance raised in the instant appeal seeks to reverse the Addl./JCIT(A)’s lower appellate discussion quashing the CPC’s section 143(1) processing dated 07.08.2023 itself reading as under: “7. Decision: Appellant has raised 4 grounds of appeal. 7.1. Ground No. 1: This ground no. 1 is relates to disallowance of bad debts of Rs.73238717/-. The Appellant is engaged in the business of medical/health care services and has been regularly filing its income tax return. The fact of the transaction is that Appellant and JMD Oil Pvt. Ltd. (having registered Office at 5/25 Ramesh Nagar, New Delhi - 110015) jointly decided in July 2015 to start the manufacturing of generic medicines in a joint venture manufacturing unit, which will be set up at Gandhi Dham (Kutch), Gujarat. It was decided that both the joint venture partners will be investing around Rs. 10 crores each in this joint venture project. The idea behind this manufacturing activity was that there is vast difference in the cost of generic medicines and branded medicines, being produced, manufactured & marketed by Multinationals and other local big pharmaceutical companies. Because of the substantial price difference, the generic medicines can be marketed with lesser efforts at a good margin. It was likelihood at that times that Ministry of Health, Government of India may direct practicing doctors to write the name of compound of the medicine, being prescribed by them in the patients' prescription. In this view of the matter, this amount of Rs. 7.30 crores were transferred from the regular bank account of the Appellant to the bank account of JMD Oil Pvt Ltd. by way of banking
2 | P a g e channels i.e. eight RTGS transactions and one account payee cheque. The details of transactions are as under:
However, the said company i.e. JMD Oil Pvt. Ltd went into liquidation and hence, the Appellant was constrained to write-off the said amount as bad debts as the same became irrecoverable. While processing the Income Tax Return of the Appellant a disallowance of the said amount was proposed to be made by the AO CPC. To the same/the appellant disagreed. However, while processing the Income Tax Return of the appellant, the AO CPC disallowed a sum of Rs.73000000/- pertaining to the aforesaid company. In addition to this, the AO CPC has also disallowed other bad debt amounting to Rs.238703/- claimed by the appellant. These bad debts are relating to non-receipt of amounts from the debtors/ patients. 7.1.1. During the appellate proceedings, it is noticed that an amount of Rs.73000000/- pertains to advance given to JMD oil mill for setting up a manufacturing unit for production of generic medicine in joint venture. The appellant has furnished detailed and elaborate submission and claimed that the bad debts of Rs.73000000/- are allowable particularly in view of decision in case of T.R.F. Ltd. v. CIT [2010] 90 Taxman 391/323 ITR 397/230 CTR 14. As the project was not materialized, the amount became bad debts. This amount is written off in the books of accounts. It is seen that this amount advanced is in nature of capital advance. The bad debts are allowed as an expenditure u/s 36(1)(vii) of IT Act, which is subject to provisions of sub section 2 of section 36 of IT Act. Therefore, it is almost clear that the amount claimed as bad debt was not taken into account in computing the income of the appellant in the earlier years. Attention of appellant was invited to the judgment of Hon’ble Supreme Court in case of Pr. Commissioner Of Income Tax 6 Vs Khyati Realtors Pvt. Ltd. on 25 August, 2022, 328 CTR SC 249 and appellant’s comments were invited in view of above judgment for allowability of bad debts claim pertaining to JMD Oil Mills. The relevant part of notice issued to the appellant is as under: “1. It is seen that the AO CPC has disallowed claim of bad debts amounting to Rs.73023871/-. In the earlier submission you have 3 | P a g e relied on facts of the case, decisions and judgments in favour of claim of bad debts and power of AO CPC to disallow the claim of bad debts u/s 143(1) of IT Act. Your submission is gone through and noted.
It is seen that bad debts of Rs.73023871/- have been written off in the books of accounts and this amount is claimed as expenses. Out of these amount, an amount of Rs.73000000/- pertains to advance given to JMD oil mill for setting up a manufacturing unit for production of generic medicine in joint venture. As the project was not materialized and the amount becomes bad debts same was written off. It is seen that this amount advanced is in nature of capital advance. The bad debts are allowed as an expenditure u/s 36(1)(vii) of IT Act, which is subject to provisions of sub section 2 of section 36 of IT Act. The provisions of section 36(2) are as under: “[ no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the assessee;] [ Substituted by Act 4 of 1988, Section 11, for Clause (i) (w.e.f. 1.4.1989).]” Now it is almost clear that the amount claimed as bad debt was not taken into account in computing the income of the appellant in the earlier years. Your attention is invited to the judgment of Hon’ble Supreme Court in case of Pr. Commissioner Of Income Tax 6 vs Khyati Realtors Pvt. Ltd. on 25 August, 2022, 328 CTR SC 249. Important points of judgment is as under: Business expenditure—Bad debt—Advance given for acquiring immovable property—If the assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would be entitled to a corresponding deduction under cl. (vii) of sub-s. (1) of s. 36 subject to the fulfilment of the conditions set forth in sub-s. (2) of s. 36— However, merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non-compliance with the conditions in s. 36(1)(vii), 36(2) and Explanation to s. 36(1)(vii) would not entitle the assessee to claim a deduction—In the instant case, assessee’s primary argument was that the amount of Rs. 10 crores was given to BD Ltd. for the purpose of purchasing a constructed premises which was written off after the project did not make any progress and the amount became irrecoverable —As noted by the CIT(A), there is no material to substantiate the submission, in respect of payment of the amount, the time by which the constructed unit was to be given to it, the area agreed to be purchased, etc.—Equally, in support of its other argument that the amount was given as a loan, the assessee nowhere 4 | P a g e established the duration of the advance, the terms and conditions applicable to it, interest payable, etc.—Accounts of the assessee nowhere showed that the advance was made by it to BD Ltd. in the ordinary course of business—Further, there is nothing on record to suggest that the requirement of the law that the bad debt was written off as irrecoverable in the assessee’s accounts for the relevant year has been satisfied—Moreover, since the amount given by the assessee was in the nature of capital expenditure, it could not have been written off—Therefore, the assessee’s claim for deduction of bad debt is not allowable. Held : For the purposes of computing income chargeable to tax, besides specific deductions, ‘other deductions’ enumerated in different clauses of s. 36 can be allowed by the AO. Each of the deductions must relate to the business carried out by the assessee. If the assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would be entitled to a corresponding deduction under cl. (vii) of sub-s. (1) of s. 36 subject to the fulfilment of the conditions set forth in sub-s. (2) of s.
Merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as noncompliance with the conditions in s. 36(1)(vii), 36(2), and Explanation to s. 36(1)(vii) would not entitle the assessee to claim a deduction. It is evident from the rulings of this Court, that : (i) the amount of any bad debt or part thereof has to be written off as irrecoverable in the accounts of the assessee for the previous year; (ii) such bad debt or part of it written off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; (iii) no deduction is allowable unless the debt or part of it ‘has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year’, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (iv) the assessee is obliged to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) as well as s. 36(2).—Catholic Syrian Bank Ltd. vs. CIT (2012) 248 CTR (SC) 1 : (2012) 68 DTR (SC) 1 : (2012) 3 SCC 784 and Southern Technologies Ltd. vs. Jt. CIT (2010) 228 CTR (SC) 440 : (2010) 34 DTR (SC) 11 : (2010) 2 SCR 380 followed; T.R.F. Ltd. vs. CIT (2010) 230 CTR (SC) 14 : (2010) 35 DTR (SC) 156 : (2010) 13 SCC 532 distinguished. Your comments are solicited on allow ability on bad debts on Rs. 73000000/- in view of above judgment of Hon’ble Supreme Court, in which earlier judgment in case of TRF is distinguished”. 5 | P a g e The reply filed in response to the said notice, was duly considered. Appellant has claimed that the judgment of Hon’ble Supreme Court in case of Pr. Commissioner of Income Tax 6 Vs Khyati Realtors Pvt. Ltd. is not applicable to the facts of the case of the appellant. It is claimed that the appellant has classified this amount of advance given to JMD under current assets in the audited financial accounts of the appellant. It is also claim that it is not capital expenditure. It is also mentioned that the payment made to JMD constitutes revenue expenditure and advance is paid in ordinary course of business. It is mentioned that, the advance was paid to JMD oil was for purchasing raw materials and packing material required for manufacturing of medicines. It is also mentioned that, entries in the books of accounts are conclusive in respect of context in which they are made. It is also claimed that the amount was advanced 9 bank transactions hence same is not advanced for purchase of capital asset. Appellant has also claimed that the reliance on decision of Khyati Realtors Pvt. Ltd. is also misplaced. It is claimed that M/s Khyati Realtors Pvt. Ltd has given amount of Rs.100000000/- for purchase of constructed premises and Hon’ble Supreme Court has observed that there is nothing on record to suggest that bad debts was written off as a recoverable in the assessee’s account. In contrary the appellant has given advance in ordinary course of business and not for capital asset and same has been duly written off in the books of accounts. It is also mentioned that decision of Khyati Realtors Pvt. Ltd is actually supports the case of present appellant. The submission of the appellant is duly considered. It is seen that the appellant and JMD have decided to contribute Rs.100000000/- each for start up of new business. The business of manufacturing of generic medicine did not started at all. No manufacturing license required for production of medicines was available. The amount of Rs.64000000/ was given in fortnight from 13.07.2015 to 29.07.2015. No payment is made so frequently in round figures for purchase of raw material. Advances were given even when no material was received. Therefore, there is no force in claim that the amount was advanced for purchase of raw and packing material. It is seen that Khyati Realtors Pvt. Ltd. was engaged in TDR and other real estate business and gave advances for purchase of premises to be constructed. Similarly, the appellant also engaged in the business of medical related profession and given advance for setting up a plant for manufacturing medicine. Therefore, there is similarity in both cases. Therefore, it is seen that the advance given by the appellant is not given in the ordinary course of business. Similarly, on verification of balance sheet, it is seen that the amount advanced to JMD is shown under the head other loan and advances. 6 | P a g e The details of advances shown by the appellant in the balance sheet are as under:
As such, this amount of Rs.73000000/- represents capital advance. It is seen that bad debts are allowable u/s 36(1)(vii) of IT Act which is subject to provisions of sub section 2 of section 36 of IT Act. To qualify any amount for bad debts conditions mentioned in sub section 2 of section 36 requires to be fulfilled. These primary conditions are as under: i. Bad debts should be taken into account in computing the income of the assessee in a previous year. ii. Such debts should be written off in the books of account as irrevocable. In short, the account of debtors requires to be credited. iii. Money advanced represents money lent in the ordinary course of the business. It is seen that in this case, the 1st condition and 3rd condition are not fulfilled by the appellant. The amount advanced being capital advance is not been taken into account in computing the income of any previous year. In short this is not debt but capital advance. As the conditions prescribed by sub section 2 of section 36 and amount was not advanced in ordinary course of business the amount of Rs.73000000/- is not allowable. The balance amount of Rs.238703/- is receivable from the patients was considered in the income offered in earlier years. Therefore, this amount is allowable as expenditure. Therefore, ground no. 1 is partly allowed. However in this case ground 7 | P a g e no. 2 and 3 which relates to power of AO CPC to disallow such amount u/s 143(1)(a) is decided in favour of appellant, the AO is directed to reduce income of appellant by Rs.73238717/-. 7.2. Ground No. 2 & 3: These ground no. 2 & 3 relate to power of AO to disallow the claim of bad debts u/s 143(1) of IT Act. The appellant has mentioned that the AO CPC has exceeded its jurisdiction while making an assessment under, thereby making huge addition, under the garb of processing the ITR u/s 143(1) of the Income Tax Act, 1961. Therefore, during the appellate proceedings the appellant has furnished detailed explanation and claimed that the disallowance made by AO CPC is not permissible during the proceedings u/s 143(1) of IT Act. It is also claimed that the disallowance made by the AO CPC is beyond the purview of powers conferred to him/her by section 143(1)of IT Act. The AO CPC is empowered to make addition or disallowance only in following conditions: Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:— (a) the total income or loss shall be computed after making the following adjustments, namely:— (i) any arithmetical error in the return; (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; (iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139; (iv) disallowance of expenditure [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return; (v) disallowance of deduction claimed under [section 10AA or under any of the provisions of Chapter VI-A under the heading "C.— Deductions in respect of certain incomes", if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return: The disallowances made by AO CPC do not fall in any of these 6 permissible categories. Therefore, it is very much clear that AO CPC has over stepped the jurisdiction while making the disallowance. The disallowance of Rs.73238703/- made do not fall under purview of section 143(1)(a) of IT Act. Though the amount of Rs.73000000/- is claimed as bad debts is not allowable the same is not disallowable 8 | P a g e u/s 143(1) of IT Act by any stretch of imagination. Therefore, the disallowance of Rs.73000000/- is deleted even though ground no. 1 was partly allowed and amount of Rs.73000000/- was not treated as allowable while discussing ground no 1. AO may take the action as per law if he finds necessary to bring the amount of Rs.73000000/- for taxation. Ground no. 2 & 3 is allowed. AO is directed to delete the entire addition of Rs.73238703/-. 7.3. Ground No.4: This ground is general hence not adjudicated. 7.4. The appeal of the appellant is partly allowed.” This is what leaves the Revenue aggrieved.
We have given out thoughtful consideration to the Revenue’s and the assessee’s respective vehement submissions in support and against the CPC’s action disallowing the bad debts claim in question.
Learned departmental representative vehemently argues that the assessee’s bad debts claim very well comes under section 143(1)(a)(ii) being in the nature of “an incorrect claim, if such incorrect claim is apparent from any information in the return”. She accordingly submits that the CPC herein had rightly treated the same as capital in nature and not allowable u/s 36(1)(vii) of the Act.
We find no merit in the Revenue’s foregoing vehement submissions. This is for the precise reason that going by the principles of stricter interpretation of a taxing statute as per
9 | P a g e Commissioner Vs. Dilip Kumar (2018) 9 SSC 1 (SC), what all is discernible from a perusal of section 143(1)(a)(ii) is that any such claim raised by the assessee ought to be “incorrect as per information in the return” which is not the case before us. And that the assessee’s return or relevant books of account uploaded therewith nowhere indicated even that the impugned bad debts of Rs.7.30 crores represented a capital expenditure so as to be disallowed under section 36(1)(vii) of the Act. The assessee has further quoted various recent judicial precedents i.e. CIT Vs. GVK Industries Ltd. [2023] 147 (Telangana), Khatau Junkar Ltd. Vs. K.S. Pathania [1992] 61 Taxman 157 (Bombay), Shree Vardhman Stanakvasi Jain Shravak Trust Vs. ITO [2025] 173 taxmann.com 165 (Ahmedabad – Trib.), Qualcomm Asia Pacific Pvt. Ltd. Vs. CIT(A), [2025] 173 taxmann.com 839 (Mumbai – Trib.), ACIT Vs. Mahesh Mohanbhai Patel (HUF) [2025] 174 taxmann.com 843 (Ahmedabad – Trib.) that the CPC’s section 143(1)(a) processing could not exceed the specific instances enumerated thereunder to conclude that the learned Addl./JCIT(A) has rightly quashed the same under challenge, in very terms.