DSP Adiko Holdings Pvt. Ltd. Vs DCIT (ITAT Mumbai)
The appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai, involved DSP Adiko Holdings Pvt. Ltd. (the assessee), a Non-Banking Finance Company (NBFC), contesting the disallowance of a claim for bad debt or business loss. The claim stemmed from the non-recovery of a portion of a loan advanced to Shri Ramalinga Raju.
Issue and Background
In the Financial Year , the NBFC advanced a loan of to Ramalinga Raju as part of its lending business. The loan became irrecoverable, leading the assessee to file a suit in the Bombay High Court. In , the High Court passed a consent decree stating that Ramalinga Raju would pay only against the outstanding. Consequently, the assessee claimed the remaining as a business loss or bad debt in the Assessment Year .
The Assessing Officer (AO) and the National Faceless Appeal Centre (NFAC)/CIT(A) disallowed the claim, arguing that the loan principal was a capital transaction with no impact on revenue, and its non-recovery did not qualify as a business loss or bad debt.
Judicial Precedents and Disputed Applicability
The tax authorities relied on the Supreme Court’s decision in CIT vs. Mahindra and Mahindra Ltd. to reject the claim. In that case, the Supreme Court held that the waiver of a loan principal does not constitute taxable income in the hands of the recipient under Section or Section of the Income Tax Act. The authorities illogically extrapolated this to conclude that the non-recovery of a principal amount by the lender (the NBFC) could not be claimed as a loss.
The CIT(A) further noted that the assessee failed to satisfactorily demonstrate the loan’s terms or its direct relation to its core NBFC business, distinguishing the assessee’s reliance on precedents like CIT vs. Shreyas S Morakhia and PCIT vs. Hybrid Financial Services Ltd., which involved bad debts arising from revenue transactions like brokerage.
ITAT’s Holding and Rationale
The ITAT, Mumbai, allowed the appeal, ruling in favor of the NBFC. The Tribunal found the reliance placed by the lower authorities on the Mahindra and Mahindra Ltd. judgment to be flawed and illogical.
The ITAT reasoned that:
1. The assessee is a registered NBFC, and the loan was advanced in the course of its business activity. This key fact established the transaction’s revenue nature.
2. The Mahindra and Mahindra Ltd. case dealt with the taxability of a loan waiver in the hands of the recipient, which is a fundamentally different issue from the claim of an irrecoverable debt by a lender/NBFC.
3. Once a loan has been advanced during the course of business and is proven to have become irrecoverable (as evidenced by the Bombay High Court decree limiting recovery to half the principal), the balance amount must be allowed as a bad debt under Section or a business loss under Section of the Act.
Consequently, the ITAT set aside the disallowance, ruling that the claimed by DSP Adiko Holdings Pvt. Ltd. was an admissible deduction.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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.
3. 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 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.”
4. 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 F.Y.2008-09. While computing taxable income for the F.Y. 200910, 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.
5. In the result, appeal of the assessee is allowed.
Order pronounced on 28th February, 2025.
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