Revenue Tribunal Findings/Rulings

Income Tax

Magellan Hub Ltd v/s DIRECTOR GENERAL-MRA- ARC/IT/259-25

Facts:

The Appellant appealed against the MRA’s determination disallowing two claims made in its income tax returns. It claimed entitlement to the SME income tax exemption under Item 11 of the Second Schedule to the Income Tax Act, contending that the four-year exemption commenced from the date it started business in 2018, notwithstanding that its SME registration certificate was issued only on 7 September 2021. It also claimed a deduction of Rs 65,198.43 as a bad debt under section 60 of the Income Tax Act in respect of an unpaid debt owed by a French client, arguing that recovery proceedings would have been commercially uneconomical. The MRA rejected both claims, maintaining that registration as a Small Enterprise was a prerequisite to the exemption and that the Appellant had failed to produce sufficient evidence demonstrating that the debt had genuinely become irrecoverable.

Issue:

Whether the Appellant qualified for the SME exemption before obtaining its registration certificate, and whether it had discharged the burden under section 60 of the Income Tax Act of proving that the disputed debt had become a deductible bad debt.

Held:

The Tribunal dismissed the appeal. It held that registration as a Small Enterprise is a condition precedent to the statutory exemption. Although the exemption extends for four successive income years from the year the company starts its activities, that period begins only once the enterprise has been duly registered. The legislation, when read as a whole, contains no ambiguity capable of supporting a retrospective exemption. The Tribunal further held that the Appellant had failed to satisfy the evidential requirements of section 60. A debt does not become deductible merely because the taxpayer considers recovery to be uneconomical. The taxpayer bears the burden of proving, through objective evidence, that the debt has become genuinely irrecoverable. In the absence of recovery attempts, legal advice, quotations, correspondence, or evidence of the debtor’s inability to pay, the Appellant failed to establish that the debt had become bad. The MRA was therefore justified in disallowing the deduction.