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Facts
The assessee, Bandhan Financial Services Ltd., an NBFC, faced a disallowance of Rs. 9,70,45,226/- for 'Social Welfare Expenses' by the Assessing Officer (AO) for AY 2014-15. These expenses pertained to disbursing insurance claims to borrowers' nominees, under a group master policy, when original claims were rejected or pending with LIC. The CIT(A) allowed the assessee's appeal against this disallowance, leading the Revenue to appeal to the ITAT.
Held
The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s order. The Tribunal concurred that the expenditure was commercially expedient and allowable under Section 37(1) of the Income Tax Act, citing the assessee's need to honor agreements for goodwill despite LIC claim issues. The ITAT also emphasized consistency, noting similar deductions were allowed in previous assessment years under the same facts.
Key Issues
Whether 'Social Welfare Expenses' incurred by an NBFC for disbursing insurance claims to nominees, when original claims are rejected or pending, constitute allowable business expenditure under Section 37(1) and if cash payments attract disallowance under Section 40A(3), considering the principle of consistency from prior assessment years.
Sections Cited
250, 139, 143(2), 142(1), 143(3), 40A(3), 37(1), 153D, 153A
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Income Tax Appellate Tribunal, “A” BENCH KOLKATA
Before: Shri Rajesh Kumar & Shri Pradip Kumar Choubey
Assessment Year: 2014-15 DCIT, Circle-1(1), Kolkata..……………… ……………...……….……….……Appellant vs. Bandhan Financial Services Ltd....………………………….......……...…..…..Respondent DN 32 Salt Lake, Salt Lake City, Sech Bhawan, S.O Salt Lake, Kol-700091. [PAN: AABCG0611R] Appearances by: Shri Manas Mondal, Addl. CIT-DR, appeared on behalf of the appellant. Shri Biswanath Paul, FCA, appeared on behalf of the Respondent. Date of concluding the hearing : October 15, 2025 Date of pronouncing the order : November 11, 2025 ORDER
Per Pradip Kumar Choubey, Judicial Member:
This appeal filed by the revenue is directed against the order dated 11.06.2024 of the Commissioner of Income Tax (Appeals)-27, Kolkata [‘CIT(A)’] passed under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2014–15.
The appeal has been filed by the revenue with a delay of 56 days. The revenue has filed a petition for condonation of the delay. After considering the reasons cited in the petition for condonation of delay, we find that the reasons are valid and consequently, the delay in filing the appeal is hereby condoned and we proceed to dispose of the appeal on merits.
Brief facts of the case are that the assessee had filed its original return of income u/s 139 of the Act on 27.11.2014 declaring a total income at Rs.422,02,20,590/-. Later on, the case was selected for Bandhan Financial Services Ltd scrutiny and all the statutory notices u/s 143(2) & 142(1) of the Act were issued and served on the assessee. In response to the same, the assessee had filed its submission and the same was perused by the Assessing Officer. The Assessing Officer passed the assessment order u/s 143(3) of the Act determining total income of the assessee at Rs.431,72,65,820/- making a disallowance of Rs.9,70,45,226/- on account of 'Social Welfare Expenses'.
Aggrieved by the said order, the assessee filed an appeal before the CIT(A) wherein the appeal of the assessee has been allowed.
Being dissatisfied, the revenue is in appeal before us challenging the very impugned order by raising the following grounds of appeal:
“1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing 'Social Welfare Expenses' of Rs. 9,70,45,226/- towards disbursement of insurance claim to the borrowers without considering that the relevant claims of the borrowers were rejected by the insurance company, i.e., LIC due to mismatches in KYC documents submitted on behalf of the borrowers by the assessee company at the time of disbursement of loan and at the time of raising insurance claim.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing 'Social Welfare Expenses' of Rs. 9,70,45,226/- towards disbursement of insurance claim to the borrowers without considering that the mode of payment in cash was not eligible for deduction u/s. 40A(3) of the Income Tax Act, 1961.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing 'Social Welfare Expenses' of Rs. 9,70,45,226/- towards disbursement of insurance claim to the borrowers without considering the correctness of the actual disbursement.
4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing 'Social Welfare Expenses' of Rs. 9,70,45,226/- without appreciating that insurance claim cannot be disbursed by any other authority apart from the Insurance company, who is engaged in such business.
5. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing 'Social Welfare Expenses' of Rs. 9,70,45,226/- without considering that the expenditure allowed towards payment of premium under Group Insurance scheme and the disbursement of Bandhan Financial Services Ltd insurance claim by the premium paying agency may lead to double deduction in the hand of the assessee.
6. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing of Rs. 9,70,45,226/- as business expenditure, which was rejected by the LIC as the relevant insurance claims of the deceased found unverifiable by the insurance company.
7. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in considering 'Social Welfare Expenses' of Rs. 9,70,45,226/- as business expenditure u/s 37(1) of the Act without considering that the disbursement of insurance claim is not related to the business of the assessee.
8. That the appellant craves leave to add and/or alter, amend, modify or rescind the grounds hereinabove before or at the time of hearing of this appeal.”
The ld. DR in the course of argument has submitted that in fact the assessee could not furnish any evidence or document to prove that the claim was made before LIC regarding payment of Rs 9,71,01,000/-, nor the assessee able to establish the cases of 8999 persons were genuine. The ld. DR further submits that said social welfare expenses have been given in cash which is contrary to the provisions of section 40A(3) of the Act as all business expenses are to be paid by cheque only. The ld. DR further submits that payment of such huge sum in cash to the nominee of the deceased creates severe doubts about the genuineness of the payment made. The further submission of the D.R is that Assessing Officer has stated in his order that the assessee could not furnish evidences to substantiate that LIC rejected the borrowers claim. The company has accepted KYC from the borrowers and the same was also sent to LICI as the insurance was to be covered by LICI, both are professional organisation and both of them have checked the credentials. It has further been submitted that the assessee could not convincingly prove before AO that theses 8999 persons were defaulter and died and the claim is to be delivered to the nominees.
Contrary to that, the ld. AR supports the impugned order thereby submitting that the Assessing Officer without taking cognizance of the 3 Bandhan Financial Services Ltd assessee’s submission made the addition in routine manner. The ld. AR submits that the umbrella policy taken by the financer for all borrowers taken together and there were no individual policy documents for each borrower and copy of master policy was filed and required documents were submitted to the LIC. The ld. AR further submits that the assessee company followed the KYC rules at the time of disbursement of loan and the borrowers were required to submit their KYC documents which were cross-verified with its original documents before sanctioning the loans. He stated that the names as per KYC had been taken in records of the company for submitting to the insurance company. The ld. AR further submitted that the loans was required for business expediency and the Assessing Officer allowed the disallowance of expenses in earlier years. The assessee during the course of assessment proceedings had inter alia submitted the LIC master policy document before the Assessing Officer, along with its explanation for allowing such expenditure as business expenses. The ld. AR also submitted that the assessee duly explained the modus operandi to verify the genuineness of the claim before paying the loan amount to the nominee/family of the deceased borrower and the process includes as the branch head and the respective Regional Manager of the assessee went to the spot physically to verify the genuineness of the fact of death of the respective borrower and the assessee also used to talk statement from the respective gram panchayat and the branch head discussed with the group members regarding the death of the borrower. He further submits that in previous year i.e. 2011-12 & 2012-13, the Assessing Officer had allowed the deduction under the same head and accordingly there is no illegality in the impugned order.
Upon hearing submission of the counsels of the respective parties and on perusal of the material available on record, we find that the present dispute relates to the denial of the claim of expenditure of the 4 Bandhan Financial Services Ltd assessee under the head social welfare charges for the assessment year 2014-15. It is not in dispute that the assessee is a Non-Banking Financial Company (NBFC), which is registered with the Reserve Bank of India (RBI) and it was engaged in micro financing activities such as providing financial assistance to poor women organized into small groups in rural and urban areas in India. We find that in order to safeguard against bad loans, the assessee purposefully obtains a 'Group Master Policy' from 'Life Insurance Corporation of India' (LIC), which covers the life of the borrowers and his/her spouse and as per the said policy, on death of the borrower, the spouse/nominee may make a claim to LIC towards total amount of loan sanctioned to the borrower and when such claim is approved and paid by the LIC, the loan outstanding at the time of borrower's death is appropriated by the assessee towards the full and final settlement of such outstanding loan and thereafter, the balance amount is paid to the family/ nominee of the deceased borrower. We note that the assessee had produced assessment records for the assessment years 2011-12 and 2012-13, wherein the Assessing Officer had allowed the deduction under the same heading for earlier period, the details of the same are as under:
Assessment year Amount of claim Assessed under Date of assessment i.r.o social welfare section order expenses 2013-14 INR 0.87 crores 143(3)/153D 30.03.2015 2012-13 INR 5.79 crores 143(3)/153D/153A 30.03.2015 2011-12 INR 4.24 crores 143(3)/153D/153A 30.03.2015 8.1 It is pertinent to mention here that the said mismatch occurs between the application of the borrower and the final documents submitted by the nominee/spouse upon death of the borrower, in order to claim insurance of the loan amount and even though there is not an individual insurance policy, there is individual loan application between 5 Bandhan Financial Services Ltd the borrower and the appellant, in which such error has occurred. We find that the Assessing Officer had passed an observation based on incorrect understanding of facts. We further find that claims which are to be rejected or accepted, is fully depends on LIC and in case where proper documents were not submitted by the nominee/spouse of the deceased borrower, such an application was either rejected or kept pending for a long period of time which in other words, the assessee has to bear the cost of such rejection of claims, as the loan or part of such amount, remains unpaid and unreconciled and eventually, the loan amount which remains unpaid by the LIC and the deceased borrower or his nominee, which was written-off, and was ultimately claimed as expense under the head "Social Welfare Charges". We also find that the Assessing Officer had treated the deduction claimed by the assessee as an apprehension of an expense rather than a real expense, which is incorrect. We find that the ld. CIT(A) in his order has elaborately discussed the entire issue and allowed the claim of the assessee after considering various judicial pronouncements, the relevant part of the order of the ld. CIT(A) is essential to reproduce as under:
“5.2.12 Hence, in light of the aforementioned jurisprudence, it appears that various courts have consistently, allowed deduction towards expenses or written off loan/bad debts, where it was commercial expedite. In the present case also, the appellant had written off such amount, as the said amounts were irrevocable, and the insurance claims were not settled. As a result, as a measure of goodwill and in order to save itself from disrepute, the appellant had honoured the agreement with the family of deceased borrowers, in order to settle such outstanding payments. The facts and circumstances, clearly establish that it was commercially expediate for the appellant to incur such expenses, and as a result, such an amount ought to have been allowed as deduction under Section 37(1) of the Act. 5.2.13, Another point which is apt to mention at this stage is that in the earlier years, the Assessing Officer had allowed such deduction, on the very same facts and circumstances. The said assessments for the AYs 2011-12 and 2012-13 completed u/s 143(3) on 31.05.2015, have not been challenged or disputed. In such circumstances a consistent view of allowing such deduction is a logical aspect. Reliance is placed on the judgement of Hon'ble Supreme Court in the case of 'Radhasoami Satsang v. CIT, [193 ITR 321]', where it was observed that "certain fundamental aspect of business of an assessee permeates though different assessment years. Where the revenue has allowed a position to be 6 Bandhan Financial Services Ltd sustained for multiple years, it would not be at all appropriate to allow the position to be changed in a subsequent year." 5.2.14. Reliance is again placed in the case of 'Parashuram Pottery Works Ltd. v. Income Tax Officer [1977] 106 ITR 1 (SC)', where, the Hon'ble Supreme Court had held the following: "It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it." 5.2.15. In light of the above, it appears that the AO had not followed the principal of consistency position with regard to claim of deduction under the head "Social Welfare Charges. The AO had failed to adduce any reason or evidence which would support such a contrary stance. In such circumstances, even on this ground, the contention of the appellant is accepted. Therefore, the addition of Rs.9,70,45,226/- made by the AO against the aforesaid disallowance of 'Social Welfare Expenses' is not acceptable and liable to be deleted. Consequently, this ground raised by the assessee is allowed.” 8.2 Going over the above discussion and considering the facts of the case, we find that the ld. CIT(A) has elaborately discussed everything and thereafter, passed the impugned order in favour of the assessee considering the various judicial precedents. We, therefore, do not find any infirmity in the order of the ld. CIT(A) and the same is upheld. Accordingly, the appeal of the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Kolkata, the 11th November, 2025.