Instronics Limited Vs ITO (ITAT Delhi)
In the recent case of Instronics Limited Vs Income Tax Officer (ITO), the Income Tax Appellate Tribunal (ITAT) Delhi addressed a critical issue concerning the treatment of a bad debt claim. Instronics Limited, an NBFC, had claimed a deduction for a loan amounting to ₹53,11,956 that was deemed irrecoverable. The dispute centered around whether this amount could be considered a bad debt under Section 36(1)(vii) of the Income Tax Act, 1961.
Background
Instronics Limited had extended a loan to UM Power Limited, a sister concern, which later became unrecoverable. The company wrote off this loan as bad debt and sought to claim a deduction. The assessing officer (AO) scrutinized the transaction and raised concerns about its validity, noting that both the lender and borrower shared common directorship. The AO suspected that the transaction was merely a fund transfer between related entities and therefore, the bad debt claim was not legitimate.
Proceedings and Findings
Assessment Officer’s Observations
The AO’s examination revealed that the loan was granted under conditions that seemed questionable given the common director between the entities. The AO concluded that the primary intent was to shift funds rather than to genuinely engage in a business transaction. The supporting documents provided by Instronics Limited were deemed insufficient, as they did not convincingly demonstrate that the loan was granted in the ordinary course of business or that appropriate due diligence was undertaken.
