The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that businesses can claim a bad debt deduction even when recovery proceedings are still pending. According to reports from Mint, the Tribunal allowed Ahmedabad-based commodity trading firm Hemant Brothers to claim a ₹2.69 crore deduction arising from the National Spot Exchange Ltd. (NSEL) payment crisis. The ruling was pronounced on June 30, 2026, establishing that once a debt has been written off in the books of account and conditions prescribed under the Income-tax Act are fulfilled, the deduction cannot be denied merely because recovery proceedings are pending. As per Financial Express, the Tribunal held that "once a debt is written off in the books and the statutory conditions are met, the deduction cannot be denied simply because recovery efforts are continuing."
For the assessment year 2014-15, Hemant Brothers claimed the ₹2.69 crore deduction under Section 36(1)(vii) of the Income-tax Act after writing off dues arising from commodity transactions on NSEL. The firm's original assessment was completed in December 2016, but following revision proceedings under Section 263, the Principal Commissioner of Income Tax revised the assessment on March 1, 2019, directing the Assessing Officer to complete a fresh assessment. The Assessing Officer passed a fresh assessment order on December 26, 2019, but disallowed the entire deduction of ₹2.69 crore. The Commissioner of Income Tax (Appeals) also dismissed the appeal on July 18, 2024, before the dispute finally reached the ITAT.
The Assessing Officer 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 Mint, the department argued that the debt could not be treated as irrecoverable until those proceedings concluded. The Commissioner (Appeals) agreed with this reasoning and upheld the disallowance, prompting the taxpayer to approach the ITAT. As per Financial Express, the department's position was that "until those proceedings concluded, the debt could not be treated as irrecoverable."
The Tribunal disagreed with the tax department's reasoning and observed that the taxpayer had produced contract notes, broker confirmations, delivery reports and ledger account confirmations to establish the genuineness of the transactions. According to Mint, the ITAT held that the pendency of recovery proceedings cannot be the sole reason for denying a bad debt 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, taxpayers are not required to prove that a debt has actually become irrecoverable. As per Financial Express, the ruling reinforces the settled legal position that "once a debt is written off as irrecoverable in the books of account, the taxpayer is not required to independently establish that the debt has in fact become irrecoverable." Legal expert Ashish Mehta from Khaitan & Co noted that the ruling does not create a new legal principle but reinforces one already settled by the Supreme Court.
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. According to Mint, 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. The Tribunal held that the loss had arisen in the ordinary course of business and was allowable as a business loss as well. As per Financial Express, the Tribunal explained that "a business loss under Section 28 operates differently. It does not require prior recognition of the amount as taxable income. The key requirement is that the loss should have arisen in the ordinary course of carrying on the business." Legal expert Ashish Mehta explained that unpaid sale proceeds generally fall within the scope of bad debts, whereas losses arising from trade advances, broker defaults, exchange failures or business transactions that ultimately fail are often claimed as business losses.
