A business can claim a deduction for a bad debt even if efforts to recover the money are still underway, the Ahmedabad Bench of the Appellate Tribunal (ITAT) has ruled.
In an order pronounced on June 30, 2026, the Tribunal allowed Ahmedabad-based commodity trading firm Hemant Brothers to claim a deduction of ₹2.69 crore arising from the National Spot Exchange Ltd. (NSEL) payment crisis. It held that once a debt has been written off in the books of account and the conditions prescribed under the Income-tax Act are fulfilled, the deduction cannot be denied merely because recovery proceedings are pending.
What was the dispute?
For the assessment year (AY) 2014-15, Hemant Brothers claimed a deduction of ₹2.69 crore under Section 36(1)(vii) of the Income-tax Act after writing off dues arising from commodity transactions on NSEL. The amount was written off by debiting the profit and loss account.
The firm’s original assessment was completed in December 2016. However, following revision proceedings under Section 263, the Assessing Officer (AO) passed a fresh assessment order in December 2019 disallowing the deduction. The Commissioner of Income Tax (Appeals) also upheld the disallowance, prompting the taxpayer to approach the ITAT.
Why did the tax department reject the claim?
The AO questioned whether the commodity transactions involved actual delivery and held that the bad debt claim was premature because recovery proceedings relating to the NSEL default were still pending. According to the department, the debt could not be treated as irrecoverable until those proceedings concluded. The appellate authority agreed with this view.
What did the ITAT rule?
The Tribunal disagreed with the department’s reasoning.
It observed that the taxpayer had produced contract notes, broker confirmations, delivery reports and ledger account confirmations to establish the genuineness of the transactions. The revenue had not produced any evidence to show these documents were unreliable.
More importantly, the ITAT held that the pendency of recovery proceedings cannot be the sole reason for denying a bad debt deduction. It noted that the Revenue had not disputed compliance with Section 36(1)(vii), and the debt had already been written off in the books by debiting the profit and loss account. Accordingly, the assessee was entitled to the deduction.
The Tribunal relied on the Supreme Court’s ruling in TRF Ltd. v. CIT and CBDT Circular No. 12/2016, which clarify that after the 1989 amendment to the Income-tax Act, are not required to prove that a debt has actually become irrecoverable. A deduction is available if the debt is written off in the books of account and the conditions under Section 36(2) are satisfied.
Alternative relief under Section 28
The ITAT also accepted the taxpayer’s alternative claim that the amount was deductible as a business loss under Section 28 of the Income-tax Act.
Relying on earlier Tribunal rulings involving losses arising from the NSEL crisis, the Bench noted that there was no allegation that Hemant Brothers was involved in the scam. It therefore held that the loss had arisen in the ordinary course of business and was allowable as a business loss as well.
What does the ruling mean?
The ruling reiterates that businesses are not required to wait for recovery proceedings to conclude before claiming a bad debt deduction. If a genuine business debt has been written off in the books of account and the conditions under Sections 36(1)(vii) and 36(2) are met, the deduction cannot be denied solely because legal proceedings are continuing.
The Tribunal also noted that if any amount written off as a bad debt is recovered in a later year, it can be taxed in the year of recovery under the provisions of the Income-tax Act.