AHA HOLDINGS PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 6(1)(1), MUMBAI

PER B.R. BASKARAN, A.M :

The assessee has filed this appeal challenging the order dated
20-02-2024 passed by the Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2016-17. The solitary issue urged in this appeal is related to the rejection of bad debts claimed by the assessee. There is a delay of 137 days in filing the appeal before the Tribunal. The assessee has filed an affidavit, explaining the delay. Having regard to the submissions made in the affidavit, we done the delay.
2. The facts relating to the case are stated in brief. The assessee herein is a private limited company classified as Non Banking Financial Company

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(NBFC). It is engaged in the business of money lending and making investments in shares and securities. A survey action u/s 133A of the Act was conducted in the hands of the assessee on 22-09-2016. 3. The assessee is a holding company of M/s Chandra Net Pvt Ltd
(CNPL), wherein it held 80% of its paid up capital. The assessee had given loan of Rs.37.07 crores to the above said company. The assessee had also given loan of Rs.10.76 crores to another company named M/s
Manekchand Pannachand Trading Investment Company P Ltd (MPTI).
During the year under consideration, the assessee wrote off outstanding loans of above said companies aggregating to Rs.47.83 crores as bad debts u/s 36(1)(vii) of the Act.
4. The AO took the view the write off of loans as bad debts is a colourable device/sham transaction adopted by the assessee to create loss with the purpose of setting off the same against the Long term capital gains earned by it. The reasoning given by the AO may be summarized as under:-
(a)
Shri Shripal Morakhia is a major shareholder of assessee company. His son in law, Shri Abhishek Javeri was found to be one of the directors of both the above said borrower companies.
(b)
During the course of survey operation, two assignment agreements dated 12-02-2015 were found. Under the first agreement, the outstanding loan of CNPL was assigned to M/s
MPTI for a sum of Rs.10,000/-. Under the second agreement, the outstanding loan of M/s MPTI was assigned to M/s Strix
Wireless Systems P Ltd for a sum of Rs.1000/-. Hence, as per

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the above said assignment agreements, the bad debts have arisen on 12-02-2015 relating to AY 2015-16. (c)
It was noticed that the assessee has sold shares of YOBOHO
New Media P Ltd on 01-04-2015. However, the agreement for sale was found entered on 10-03-2015. Since the sale process was completed on 01-04-2015, the capital gains have arisen in AY 2016-17. (d)
Hence, in order to set off the bad debts, the assessee has wrote off the debts in the year relevant to AY 2016-17 in the books, even though the bad debts have arisen in the year relevant to AY 2015-16 as per the assignment agreements.
(e)
The financials of M/s CNPL would show that it has started making profits and hence there is no reason to write off the outstanding amount as bad debts.
Accordingly, the AO disallowed bad debts claim of the assessee. The Ld
CIT(A) also confirmed the same.
5. We heard the parties and perused the record. We notice that the bad debts has been claimed as deduction u/s 36(1)(vii) of the Act. The provisions of sec.36(1)(vii) reads as under:-
“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—
……
(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:”

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It can be noticed that the provisions of sec.36(1)(vii) is subject to the provisions of sec.36(2) of the Act. The conditions provided in sec. 36(2) of the Act reads as under:-
“(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;”

There is no dispute that the assessee has written off the outstanding balance of these companies as bad debts in the books of accounts. Hence

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there is no dispute that the conditions prescribed in sec.36(1)(vii) read with sec. 36(2) have been fulfilled by the assessee. The Hon’ble Supreme Court has held in the case of TRF ltd vs. CIT (2010)(323 ITR 397)(SC) that, when the assessee has fulfilled the conditions prescribed in both these sections have been fulfilled, then the deduction of bad debts have to be allowed.
7. It is pertinent to note that, under pre-amended provisions of sec.36(1)(vii) of the Act, the assessee was required to prove that the debt has become bad. After the amendment, it was sufficient if the debt is written off in the books as bad, subject to fulfillment of conditions of sec.36(2) of the Act. This position of law has been explained by Hon’ble
Supreme Court in the above said case. Hence the claim of bad debts should have been allowed by the AO.
8. However, we notice that the AO has taken different stand, i.e., the AO has expressed the view that the writing off of debts due from the above said two companies was a colourable device/sham transaction adopted by the assessee to lower its tax. The reasoning given by the AO was discussed by us in an earlier paragraph. We shall examine the correctness of reasoning.
8.1. The first reason cited by the assessee is that the son-in-law of the main director of the assessee company is one of the common directors in both the borrower companies referred above. We notice that the assessee has explained that the above said son-in-law is not a share holder in both the borrower companies. Hence, it cannot be said that the son-in-law had any interest in the borrower companies. Hence, in our view, this reason cannot be a ground to suspect the claim of the assessee.
8.2. M/s CNPL is a subsidiary company of the assessee company and hence the debt was written off to suit the convenience of the assessee.
However, we noticed earlier that the loan was given to M/s CNPL by the assessee company in the ordinary course of its money lending business.

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The assessee has also received interest from the above said company in the years relevant to AY 2015-16 and 2016-17, which were duly offered to tax. Hence, it may not be proper for the AO to suspect the bad debts claimed by the assessee merely for the reason that the borrower company happened to be the subsidiary of the assessee company. In this regard, the assessee has taken support of the decision rendered by Hon’ble
Madras High Court in the case of CIT vs. V Ramakrishna & Sons Ltd (Tax case (Appeal) No. 490 of 2004). In the above said case, the Hon’ble Madras
High Court has held that the bad debts have to be allowed on the basis of facts available in each case. In our view, the facts would indicate that the interest received from the above said company has been subjected to tax.
There is no material to show that the money was not lent to the above said company in the ordinary course of business. Hence, the claim cannot be rejected merely on the reason that the borrower company happened to be subsidiary company. In our view, this fact that the borrower company is a subsidiary company is a good ground to probe the matter further.
However, we notice that the AO did not carry out any investigation to prove that the bad debt claim was bogus. We notice that the AO has examined the financials of M/s CNPL and expressed the view that the said company has started making profits and hence there was no necessity for the assessee to write it off as bad. The above said observation would show that the AO is assuming the role of the owner of the company to question the business wi om, which is not permitted under the law.
8.3. The next reason cited by the AO is related to assignment agreements found during the course of survey operations. According to AO, the assessee has assigned both the loans, vide Assignment Agreements dated
12-02-2015. According to the AO, the bad debts have arisen in the financial year 2014-15 relevant to AY 2015-16. However, the assessee has explained that both the assignment agreements were not acted upon at all.

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The assessee further explained that the companies, in whose favour these loans were assigned were already declared as “Non Performing Assets”, but the assessee had entered into Assignment Agreements without realizing the same. Subsequently, the auditors and legal advisers advised the assessee not to go ahead with both the Assignment agreements.
Accordingly, it was stated that the Assignment agreements were not acted upon. It was further submitted that the assessee had received a sum of Rs.1,000/- and Rs.10,000/- against the Assignment agreements and both these amounts were adjusted against the outstanding balance of the concerned assignees. It is pertinent to note that the director has also given very same explanations in the statement taken from him.
8.4. However, the AO has rejected the above said explanations on the ground that the assessee earned long term capital gains on 01-04-2015, i.e., in the succeeding financial year 2015-16 relevant to AY 2016-17 and the purpose of postponing writing off of bad debts is to enable setting off of the same against the long term capital gains. In this regard, the AO has also referred to an opinion given by a legal consultant, wherein he has expressed the view that the transfer of shares has taken place on 1.4.2015
and hence the capital gains will be taxable in AY 2016-17. It so happened that the agreement for sale of shares was entered in March, 2015, but the actual transfer took place on 1.4.2015. Hence, the assessee obtained a legal opinion. We notice that the AO has linked the Assignment agreements with the legal opinion given by the legal consultant and accordingly took the view that the writing off of bad debts was purposely shifted to AY 2016-17 in order to set off the same against the capital gains.
However, we notice that the AO has rejected explanations given by the assessee without examining it at all, i.e., the AO could have conducted enquiry with the Assignees in order to find out the veracity of the explanations given by the assessee, which is not justified. Accordingly, we

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are of the view that the AO has come to such a conclusion only on presumptions and surmises.
8.5. In our view, the above said observations of the AO are not required to be considered, since the claim of bad debts is allowed u/s 36(1)(vii) of the Act, wherein the requirement is that the debt should be written off as bad in the books of accounts and further the conditions prescribed in sec.36(2) should be fulfilled, i.e., there was no necessity for the assessee to establish that the debt has really become bad. This legal position has been explained by Hon’ble Bombay High Court in the case of Director of Income tax (International Taxation) vs. Oman International Bank SAOG
(2009)(184 Taxman 314), wherein it was held as under:-
“A comparison between the provisions of section 36(1)(vii), as it stood before and after its amendment with effect from 1-4-1989, would show that prior to the amendment the assessee was required to establish that the debt in question has become bad in the previous year. Subsequent to the amendment to the language of section, it is sufficient if the bad debt or part thereof is written off as irrecoverable in the accounts of the assessee based on commercial expediency. If one applies the rule of interpretation as spelt out in Hyden’s case, it would lead to an irresistible conclusion that the legislature by the amendment has sought to exclude the burden on the assessee to prove that the debt is bad debt and leaves it to the commercial wi om of the assessee to treat the debt as bad debt once it is written off as irrecoverable in the accounts of the assessee.”

The CBDT has also issued a Circular No.551 dated 23-1-1990 explaining the above said legal position.
8.6. We noticed earlier that the assessee is a NBFC and it is governed by RBI guidelines on Prudential norms. As per the said prudential norms, both the loan accounts have been classified as NPA by the assessee. Even if it is assumed that the view of the AO that the assessee has wantonly shifted the writing off of bad debts to AY 2016-17, yet the deduction u/s 36(1)(vii) of the Act, the bad debts is allowable as deduction in the year in 9
which it was written off. It would be difficult for anyone to ascertain the year when the debt has really bad and in any case, it may not be relevant for the purposes of sec.36(1)(vii) of the Act. Hence, various observations made by the AO regarding unacted assignment agreements, shifting of writing off of bad debts etc. are not relevant for allowing deduction u/s 36(1)(vii) of the Act.
9. In view of the foregoing discussions, we are of the view that the various reasoning given by the AO in support of his view that the writing off bad debts was a colourable device or sham transaction are based upon sound reasoning, but based upon on surmises and conjectures. Further, the AO has arrived at such a conclusion without conducting enquiry of any type or bringing any material on record to support his view. We noticed that the various reasoning given by the AO will not be relevant for allowing deduction u/s 36(1)(vii) of the Act. We have also seen that the assessee is eligible to claim deduction of bad debts u/s 36(1)(vii) of the Act and also fulfilled the conditions prescribed u/s 36(2) of the Act.
10. Accordingly, we hold that the bad debts claimed by the assessee cannot be rejected. Accordingly, we set aside the order passed by the Ld
CIT(A) on this issue and direct the AO to delete the disallowance of bad debts claimed by the assessee.
11. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 13-03-2025 [ANIKESH BANERJEE]

[B.R. BASKARAN]
JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 13-03-2025

TNMM

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Copy to :
1)
The Appellant
2)
The Respondent
3)
The CIT concerned
4)
The D.R, ITAT, Mumbai
5)
Guard file

By Order

Dy./Asst.