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Facts
The assessee, a non-banking finance company, declared its total income. The Assessing Officer (AO) observed that major expenses included a net loss on sale of private equity and non-recoverable interest. The assessee claimed this interest was written off due to reasons including waivers related to Covid-19.
Held
The Tribunal held that for claiming deduction of bad debts under Section 36(1)(vii) read with Section 36(2) of the Act, it is sufficient if the debt is written off as irrecoverable in the books of accounts and the conditions of Section 36(2) are met, without needing to prove the specific reason for irrecoverability.
Key Issues
Whether the deduction for non-recoverable interest expense is admissible under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, when the assessee has written it off in its books of accounts.
Sections Cited
250, 143(1), 36(2), 36(1), 145, 155, 36(1)(vii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 05.12.2024, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2008-09.
In this case, the Assessee being a non banking finance company had declared its total income at Rs.28,18,570/- by filing its return of income on dated 28.03.2021, which was processed u/s 143(1). Subsequently, the case of the Assessee was selected for complete scrutiny and various details were called for from the Assessee by issuing various statutory notices. In response to which, the Assessee filed its submissions. On consideration of the same and from the profit & loss account, it was observed by the Assessing Officer (AO) that the Assessee has shown loss of Rs.1,20,71,667/- after debiting various expenses on account of finance cost of Rs.26,94,011/-, depreciation of Rs. 22,956/- and other expenses of Rs.3,06,20,352/-. On perusal of details of the other expenses as per schedule 16 of the schedule 2, the audit balance sheet and profit & loss account, it was seen by the AO that major expenses were on account of net loss on sale of private equity of Rs.1,41,07,681/- and interest of Rs.1,50,11,871/- not recoverable.
On being asked, the Assessee has submitted that interest not recoverable, was on account of amount not recoverable from the parties as per “annexure-3” and the said interest income is offered for tax in earlier years. Copy of annexure-3 is enclosed herewith.
3.1. On perusing the said “annexure-3” it was noticed by the AO that major part of the interest not recoverable was due to “the party paid principle for waiver of interest either fully or partly due to Covid-19”, however, the Assessee failed to provide any supporting documentary evidence/s on account of “interest not recoverable” which has been taken into account while computing the income of the Assessee of the previous year. The Assessee has also failed to substantiate that the aforesaid amount of interest, has already been written off as irrecoverable in the account of previous year. The AO on the aforesaid reasoning ultimately disallowed the amount of Rs.1,50,11,871/- on account of “interest not recoverable” as per the provision of section 36(2) of the Act and consequently added back the same to the business income of the Assessee.
The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner and provided the details of 31 parties in respect of which the interest irrecoverable was written off during the year under consideration. The Ld. Commissioner on perusing the details, had seen that the principle amount was advanced by the Assessee in F.Y. 2013-14 to F.Y. 2018-19 to various parties, as detailed below:
Sr. Amount Amount of Date on Interest not Income Reasons No loan loan which recoverable Offered in why the advanced advanced advanced financial interest is year not recoverable 1 Anita 25,00,000 FY 2017- 19,110 FY 2017- Partly paid Somani 18 18 principle
The Ld. Commissioner, though considered the aforesaid aspects such as details of advances given and interest irrecoverable as detailed above and the reason for interest irrecoverable, however, at last justified the decision of the AO in disallowing the interest irrecoverable of Rs.1,50,11,871/- u/s 36(2) of the Act by observing and holding as under:
“It is seen that the major reason for writing off of the interest as irrecoverable is the principal amount was partly or fully paid or agreed to pay principal amount, subject to waiver of interest. In some of the cases the client was non-cooperative to pay either principle amount or interest. In some of the cases the interest amount was under dispute. During the appellate proceedings the appellant has provided the copy of the ledger account of these parties. However, the appellant has no provided the copy of return of income of respective years, in which the interest receivable/ received was offered for taxation. Further the appellant has not brought on record any evidences from a single party that they agreed to pay full or part amount of principal amount, subject to waiver of interest. With respect to disputed amount of interest the appellant has not provided any document to show the nature of dispute and the status of the dispute. With respect to some of the parties stated to be non-cooperative, the appellant has not provided any documentary evidence to show that any correspondence with them was made to recover the interest and also the principal amount. Thus, the interest income being offered for taxation in earlier year and the same has been written off in the year has remained no substantiated. The condition laid down in section 36(2) of the Act is not specified. Therefore, the AO was justified to disallow interest irrecoverable of Rs.1,50,11,871/- u/s. 36(2) of the Act.
Accordingly ground no. 1 of the appeal is dismissed.”
The Assessee, being aggrieved, has challenged the decision of the Ld. Commissioner in affirming the addition made by the AO and contradicted the findings of the authorities below.
We have heard the parties and perused the material available on record. For better understanding, let us peruse the relevant provisions of section 36(1) & 36(2) of the Act, as applicable to the instant case.
“Section 36(1) 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession; …………………………………………………………………………………… …………………………………………………………………………………… …………………………………………………………………………………… …………………………………………………………………………………… …………………………………………………………………………………… …………………………………………………………………………………… ……………………………………………………………………………………
(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause: Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause. Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this sub- section and clause (v)of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;
(viia) in respect of any provision for bad and doubtful debts made by— …………………………………………………………………………………… …………………………………………………………………………………… …………………………………………………………………………………… ……………………………………………………………………………………
“Section 36(2) (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply— (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year), but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the Assessing Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub- section (6) of section 155 shall apply;
(v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.”
As per mandate of the provisions of section 36(2) of the Act for claiming any deduction for a bad debt or part thereof, no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the Assessee of the previous year, in which the amount of such debt or part thereof is written off or of an earlier previous year. Admittedly, in the instant case, the Assessee has taken into account the irrecoverable interest amounts on the reasons mentioned above, in the previous years. We further observe that both the authorities below have specifically raised the issue that the Assessee has failed to provide any supporting document or necessary evidence qua “interest not recoverable”. Admittedly, the CBDT, in order to avoid the litigations on the issue of liability of bad debts that are written off as irrecoverable in the accounts of the Assessees and in the cases involving failure on the part of the Assessees to establish that the debt irrecoverable, has issued a Circular no.12/2016 dated 30.05.2016 by following the directions of the Hon’ble Apex Court in the case of TRF Ltd. (CA No.5292 to 5294 of 2003) vide judgment dated 09.02.2010 wherein it was laid down “that after 01.04.1989, for allowing the deduction for the amount of any bad debt or part thereof u/s 36(1)(vii) of the Act, it is not necessary for Assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of the Assessee”, directed as under:
“4. In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.”
From the CBDT circular, it is clear that for claiming deduction of bad debts u/s 36(1)(vii) r.w.s. 36(2) of the Act, the Assessee is only supposed to make the debt or part thereof as admissible u/s 36(1)(vii) of the Act, as written off as irrecoverable in its books of accounts for the previous year on fulfilling the conditions stipulated in sub section 2 of sub section 36(2) of the Act but not to establish the reason of irrecoverable of debt. Admittedly, in the Assessee’s case, the conditions as prescribed in the provisions of section 36(2) of the Act are fulfilled and the Assessee by producing the relevant documents has been able to establish the written off of the bad debt on account of interest, as irrecoverable in its books of accounts for the previous year, hence no addition as made by the AO and affirmed by the Ld. Commissioner, is sustainable. Hence, on the aforesaid analyzations, we are inclined to delete the same, thus the same is deleted.
In the result, the appeal filed by the Assessee stands allowed.
Order pronounced in the open court on 28.04.2025.