Businesses pursuing legal action to recover unpaid dues do not have to wait until those proceedings conclude before claiming a tax deduction for bad debts, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has clarified in a major ruling. In an order pronounced on June 30, 2026, the Tribunal ruled in favour of Ahmedabad-based commodity trading firm Hemant Brothers, allowing it to claim a deduction of Rs 2.69 crore linked to losses arising from the National Spot Exchange Ltd. (NSEL) payment crisis.
The Bench held that once a debt has been written off in the books of account and the statutory requirements of the Income-tax Act are fulfilled, the deduction cannot be denied merely because recovery efforts are still in progress.
The dispute relates to the assessment year 2014-15, when Hemant Brothers claimed a deduction of Rs 2.69 crore under Section 36(1)(vii) of the Income-tax Act after writing off outstanding receivables connected to commodity trades executed on NSEL. The company recorded the write-off by charging the amount to its profit and loss account.
Although the firm’s original assessment was completed in December 2016, the matter was reopened through revision proceedings under Section 263. Following the review, the Assessing Officer (AO) issued a fresh assessment order in December 2019 rejecting the deduction. The Commissioner of Income Tax (Appeals) later upheld that decision, leading the company to challenge the order before the ITAT.
Why The Tax Department Rejected The Deduction
The tax authorities argued that the claim was premature because legal proceedings to recover the NSEL-related dues had not concluded. The Assessing Officer also questioned whether the commodity transactions involved genuine delivery of goods and maintained that the debt could not be considered irrecoverable while recovery actions remained pending.
However, the Tribunal found that the taxpayer had submitted sufficient documentary evidence, including contract notes, broker confirmations, delivery reports and ledger account confirmations, to establish the authenticity of the transactions. It also observed that the Revenue had failed to produce evidence casting doubt on those records.
The ITAT concluded that pending recovery proceedings alone cannot be used as a basis to deny a bad debt deduction where the statutory conditions have already been met.
Tribunal Also Allows Alternative Business Loss Claim
Apart from granting relief under Section 36(1)(vii), the Tribunal accepted the company’s alternative argument that the loss qualified as a deductible business loss under Section 28 of the Income-tax Act.
While examining earlier Tribunal decisions arising from the NSEL payment crisis, the Bench noted there was no allegation that Hemant Brothers had any involvement in the underlying scam. Since the loss occurred during the ordinary course of business, it held that the amount was also eligible for deduction as a business loss.
The Tribunal relied on the Supreme Court’s decision in TRF Ltd. v. CIT along with CBDT Circular No. 12/2016. These authorities clarify that after the 1989 amendment to the Income-tax Act, taxpayers are not required to establish that a debt has become permanently irrecoverable. A deduction can be claimed once the debt has been written off in the books of account and the conditions prescribed under Section 36(2) are satisfied.
Why The Decision Matters For Businesses
The ruling reinforces an important principle for taxpayers dealing with commercial defaults and prolonged litigation. Businesses are not obligated to wait until recovery proceedings or court cases conclude before claiming a bad debt deduction, provided the debt is genuine, has been written off in the books and satisfies the relevant provisions of the Income-tax Act.
The Tribunal also pointed out that if any portion of a bad debt written off is subsequently recovered, the amount can be brought to tax in the year in which the recovery takes place. The decision is expected to provide greater certainty for businesses seeking legitimate tax relief while simultaneously pursuing recovery of outstanding dues.
