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Facts
The assessee, a non-banking finance company, advanced a loan of Rs. 10 Crore to Shri Ramalinga Raju in FY 2008-09. Due to non-recovery, a suit was filed, and the Bombay High Court decreed that Rs. 5 Crores would be recovered. The assessee claimed this Rs. 5 Crores as a business loss or bad debt.
Held
The Tribunal held that the non-recovery of a principal loan amount advanced as part of business activity should be allowed as a bad debt or business loss, distinguishing it from cases of loan waiver. The AO's reliance on the Mahindra & Mahindra judgment was found not applicable as it dealt with waiver, not non-recovery.
Key Issues
Whether the non-recovery of a principal loan amount advanced by an NBFC in the course of its business can be claimed as a business loss or bad debt.
Sections Cited
143(3), 28(i), 36(1)(vii), 36(2), 29
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 18/12/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s. 143(3) for the A.Y.2017-18. 2. The assessee is aggrieved by addition / disallowance of Rs.5 Crore which was claimed as loss / bad debt on account of non- recovery of principal component of loan advanced by the assessee.
The brief facts are that the assessee is a non-banking finance company registered with the RBI. As a part of its lending business assessee has given loan of Rs.10 Crore to one Shri Ramalinga Raju in F.Y. 2008-09. Since assessee could not recover the said loan it had filed suit before Hon’ble Bombay High Court for the recovery of the said loan. The Hon’ble High Court vide order dated 04/04/2016 in terms of consent terms order and decreed that Shri Ramalinga Raju shall pay a sum of Rs.5 Crores against outstanding amount of Rs.10 Crores. Thus, assessee claimed that sum of Rs.5 Crores as a business loss. It has been stated that in the F.Y. 2008-09, assessee had written off the said loan in the profit and loss account, however, the same was not claimed in the computation of income because assessee had filed suit for recovery. The Hon’ble High Court had decreed that assessee will receive only Rs.5 Crores, therefore, Rs. 5 Crores was cliamed either as bad debt or as business loss. The ld. AO has disallowed the claim relying upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Mahindra and Mahindra Ltd., reported in 93 taxmann.com 32(SC) and deduced that when principal amount of loss waived cannot be taxed as business income, then non-recovery of principal amount of loan cannot be claimed as business loss. The ld. CIT (A) too has confirmed the addition holding as under:- “6.5 The appellant claims that the non-recovery of Rs. 5,00,00,000/- given as a loan to Mr. Ramalinga Raju represents a business loss under Section 28(i) or a bad debt under Section 36(1)(vii). However, the AO disallowed the claim, treating the loan DSP Adiko Holdings Pvt. Ltd., as a capital transaction with no revenue impact. The AO relied on the Hon'ble Supreme Court's decision in CIT vs. Mahindra & Mahindra Ltd. (2018) 93 taxmann.com 32 (SC), where it was held that waiver of a principal loan does not constitute taxable income under Section 28(iv) or Section 41(1). The appellant argued that the Mahindra & Mahindra decision is not applicable, as it pertains to waiver of loans, not to non-recovery. 6.6 The facts of the case reveal that the appellant wrote off the loan amount in FY 2008-09 but did not claim it as a deduction in that year. The claim was made in the current year on the basis of a settlement decree by the Hon'ble Bombay High Court. However, the relevant details of the loan transaction-such as its purpose, terms, and impact on revenue-have not been satisfactorily demonstrated by the appellant. The appellant has also not shown that the loan was directly related to its core business operations as an NBFC 6.7 The reliance placed by the appellant on CIT vs. Shreyas S Morakhia (2012) 342 ITR 285 (Bom) and PCIT vs. Hybrid Financial Services Ltd. (2020) 426 ITR 358 (Bom) is distinguishable, as these cases involved bad debts arising from revenue transactions, such as brokerage or trading operations, which directly impacted the Profit and Loss Account. In contrast, the loss in the present case pertains to the principal amount of the loan, which is a capital transaction and does not impact revenue. 6.8 Following the principles laid down by the Hon'ble Supreme Court in Mahindra & Mahindra Ltd., it is clear that non-recovery of a loan principal does not constitute a business loss or bad debt. The appellant has not been able to establish how this loss qualifies under Section 28(i) or Section 36(1) (vii). Therefore, the disallowance of Rs. 5,00,00,000/- is upheld.”
After hearing both the parties and on perusal of the facts and material on record it is not in dispute that assessee is registered at NBFC and in the course of business activity it has advanced loan of Rs.10 Crores to Shri Ramalinga Raju in the DSP Adiko Holdings Pvt. Ltd., F.Y.2008-09. While computing taxable income for the F.Y. 2009- 10, assessee though has written off the loan, however, he has not claimed any deduction as the matter was subjudice before the Court for the recovery of the loan. Finally, when the Hon’ble Bombay High Court has decreed that only Rs.5 Crores was to be recovered from Shri Ramalinga Raju, accordingly, assessee had claimed business loss of Rs. 5 Crore in this year as the consent term and the decree of order was passed in this year. Once loan has been given during the course of business and if part thereof has admittedly become irrecoverable, the same has to be allowed as bad debt u/s.36(2) or as business loss while computing the income under the head ‘profits and gains’ from business u/s.29. We are unable to understand the logic and the reference made by the ld. AO upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Mahindra and Mahindra Ltd., (supra) where the issue was of waiver of loan and whether the amount can be held to be taxable in the hands of the recipient. Here in this case assessee has given loan and not received any loan which has been waived of. The ld. CIT (A) has held that assessee has not demonstrated the relevant details of loan transaction and its purpose and terms. All these observations has no relevance once the factum of the matter that assessee had given loan in the earlier year as part of its business activity and assessee could only recover half of the loan as per the decree of the Hon’ble Bombay High Court, then the balance half of Rs.5 Crores has to be allowed as bad debt or business loss. Accordingly, the claim of the assessee is allowed in the grounds.
In the result, appeal of the assessee is allowed.
Order pronounced on 28th February, 2025.