Tribunal allows appeal, directs deletion of disallowed bad debts. Transactions deemed genuine.

The Tribunal allowed the appeal filed by the assessee and directed the AO to delete the disallowance of Rs. 30,66,21,626/- in respect of bad debts. The Tribunal found the transactions with Reliance entities to be genuine, as the revenue from these transactions was accepted by the Revenue authorities. It disagreed with the CIT(A)'s conclusion that the transactions were sham and emphasized that writing off debts as irrecoverable in the accounts is sufficient for claiming bad debts under Section 36(1)(vii) of the Income Tax Act.

---

---

Issues Involved:
1. Disallowance of Rs. 30,66,21,626/- in respect of bad debts.
2. Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 30,66,21,626/- in respect of bad debts:
The assessee, engaged in the business of operations, management, and maintenance of telecommunication networks, had debited Rs. 38,34,42,562/- as bad debts, which included Rs. 22,21,54,111/- on account of settlement of claims and Rs. 17,00,00,000/- not acknowledged by Reliance entities as debts. Despite efforts, the assessee could not realize the said bills from Reliance Communication Ltd. and Reliance Telecom Ltd., leading to a settlement agreement where Rs. 38,34,42,562/- was agreed not to be paid. The AO concluded that these bad debts were sham transactions influenced by the assessee's shareholders and added the amount to the income of the assessee. The CIT(A) upheld the disallowance but corrected the figure to Rs. 30,66,21,626/- and allowed relief of Rs. 7,68,20,936/-.

2. Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act:
The CIT(A) and AO believed that the bad debts were a method to reduce tax liability, influenced by the relationship between the assessee and Reliance entities. The CIT(A) cited the Supreme Court judgment in the case of Sovereign Securities Pvt. Ltd., which dealt with the issue of bad debts claimed to avoid tax liability. The assessee argued that the debts were genuine, supported by the fact that services were rendered, and the revenue from these transactions was accepted by the Revenue authorities. The assessee cited the Supreme Court decision in T.R.F. Ltd. vs. CIT, which held that once debts are written off as irrecoverable, it suffices for deduction under Section 36(1)(vii).

Tribunal's Decision:
The Tribunal observed that the assessee's transactions with Reliance entities were genuine, as the revenue from these transactions was accepted by the Revenue authorities. The Tribunal disagreed with the CIT(A)'s finding that the transactions were sham, noting that the revenue from these services was offered to tax and accepted by the Revenue. The Tribunal emphasized the Supreme Court's ruling in T.R.F. Ltd. vs. CIT, which states that writing off debts as irrecoverable in the accounts is sufficient for claiming bad debts under Section 36(1)(vii). The Tribunal found the Revenue's reliance on the case of Sovereign Securities Pvt. Ltd. inapplicable, as the conditions of Section 36(1)(vii) r.w.s. 36(2) were satisfied in the present case. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.

Conclusion:
The appeal filed by the assessee was allowed, and the Tribunal directed the AO to delete the disallowance of Rs. 30,66,21,626/-. The Tribunal's decision was pronounced in the open court on 17th December 2019.

---