A recent audit report of Comptroller and Auditor General (CAG) has flagged serious compliance gaps in bad debt claims by lenders, revealing that banks and non-banking financial companies (NBFCs) secured large tax deductions without disclosing borrowers’ PAN details across multiple assessment years.
As per the findings of CAG, examined cases relate largely to Assessment Years (AYs) 2014-15 to 2019-20 for NBFCs and AYs 2010-11 to 2019-20 for banks across regions. The review of records of the Income Tax Department (ITD) by CAG showed that in 127 cases, comprising 28 banks and 99 NBFCs, bad debts of Rs 1,37,320 crore were claimed in income tax returns. CAG in its finding noted, “From the assessment records made available to Audit, it was observed in the sampled bank cases checked in Audit that neither the PAN details of the borrowers nor any evidence to substantiate the verification made by the AO were available on the record to verify the correctness of these claims”.
CAG further said, audit observed in 172 cases of banks and 456 cases of NBFCs, as provided in their income tax return (ITR-6) filed that out of total bad debts of Rs 1,37,320.93 crore claimed by 28 cases of Banks and 99 cases of NBFCs, bad debts of Rs 64,696 crore was written off in respect of loans given to persons whose PAN details were not disclosed by the assessees in their returns of income. Despite this, the Income Tax Department allowed deductions worth Rs 40,178 crore during assessments, raising concerns over inadequate verification.
Region-wise data indicates that such cases were spread across Ahmedabad, Bengaluru, Delhi, Guwahati, Hyderabad, Jaipur, Kolkata, Mumbai and Chennai. The assessment years varied by region, for instance, Bengaluru cases spanned AYs 2014-15 to 2019-20, Mumbai cases covered AYs 2016-17 to 2019-20 for NBFCs and AYs 2017-18 to 2019-20 for private banks, while Kolkata cases included earlier years such as AYs 2010-11 to 2012-13 along with AY 2018-19. The highest amount of deduction allowed was in Chennai region, which was of Rs 15,738 for assessment years 2014-15 and 2016-17 to 2019-20.
Illustrative cases further highlight the issue. In Guwahati, for AY 2018-19, an NBFC claimed and was allowed Rs 25.36 crore in bad debts without providing PAN details of borrowers. CAG said in its report that response of the ministry was awaited till November 2025 in this case. However, the Deputy Commissioner concerned in his reply to CAG sated that Assessing officer was not required to cross-verify if the debt had indeed become bad and if it had been written off by the assessee from its books of accounts and so it is allowable as a deduction. CAG termed the reply untenable as it was incumbent upon the assessee to provide all required information in the ITR for the correctness of disclosure for verification and allowance of claims during the assessment.
In another case in Mumbai for AY 2018-19, a bad debt claim of Rs 115.61 crore was allowed against a borrower PAN that was found to be non-existent. The matter was reported to the DCIT 14(1)(2) Mumbai in March 2022. Finance Ministry accepted the audit observation and stated that remedial action has been initiated.
Under Section 139A of the Income Tax Act and Rule 114B, PAN disclosure is mandatory for specified financial transactions, including bank accounts linked to loans. The audit observed that despite these provisions, assessing officers did not verify borrower-level data or maintain adequate documentation, making it difficult to validate claims or assess tax implications in the hands of borrowers.
CAG has advised the Central Board of Direct Taxes (CBDT) to strengthen verification mechanisms and consider disallowing bad debt deductions above a specified threshold where PAN details are missing. It has also been suggested that borrower information be integrated into departmental systems to improve scrutiny during assessments.
CAG recommended that the CBDT issue stricter instructions to ensure verification of borrower details above a threshold and integrate such data into systems for effective scrutiny and to safeguard tax revenues.
