CAG Flags Rs 40,178 Crore Tax Relief at Risk Over Missing PAN, Fake Entries

CAG Flags Compliance Gaps in Bad Debt Claims by Lenders

A recent audit report by the Comptroller and Auditor General (CAG) has revealed serious compliance gaps in bad debt claims by lenders, including banks and non-banking financial companies (NBFCs). The report found that these entities secured large tax deductions without disclosing borrowers' Permanent Account Number (PAN) details across multiple assessment years.

The CAG's examination of cases relating to Assessment Years (AYs) 2014-15 to 2019-20 for NBFCs and AYs 2010-11 to 2019-20 for banks across various regions revealed a total of 127 cases, comprising 28 banks and 99 NBFCs, where bad debts of Rs 1,37,320 crore were claimed in income tax returns. The CAG noted that in these cases, neither the PAN details of the borrowers nor any evidence to substantiate the verification made by the Assessing Officer (AO) were available on record to verify the correctness of these claims.

The CAG further found that in 172 cases of banks and 456 cases of NBFCs, bad debts of Rs 1,37,320.93 crore were claimed by 28 cases of banks and 99 cases of NBFCs, with bad debts of Rs 64,696 crore 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.

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Region-wise Data

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, with Bengaluru cases spanning AYs 2014-15 to 2019-20, Mumbai cases covering 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 Rs 15,738 for assessment years 2014-15 and 2016-17 to 2019-20.

Illustrative Cases

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. The CAG said in its report that a response from the ministry was awaited till November 2025 in this case. However, the Deputy Commissioner concerned replied that the 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. The 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.

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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. The Finance Ministry accepted the audit observation and stated that remedial action has been initiated.

Recommendations

The 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.

Key Figures

• Rs 1,37,320 crore: Total bad debts claimed by 28 banks and 99 NBFCs
• Rs 64,696 crore: Bad debts written off in respect of loans given to persons whose PAN details were not disclosed
• Rs 40,178 crore: Deductions allowed during assessments despite non-disclosure of PAN details