ITAT Delhi Allows Bad Debt Deduction as Valid Book Write-Off Is Sufficient

Instronics Limited Vs ITO (ITAT Delhi)

In this case, the assessee, a registered Non-Banking Financial Company (NBFC), filed its return declaring nil income for Assessment Year 2016-17. During scrutiny assessment, the Assessing Officer (AO) noticed that the assessee had claimed a deduction of ₹53,11,956 as bad debts in its Profit and Loss Account. The claim related to loans advanced to UM Power Ltd. and the interest accrued thereon over several financial years. According to the assessee, ₹46 lakh had been lent in the ordinary course of its money-lending business during FY 2012-13. Interest income on the loan had been recognized and offered to tax in subsequent years. After partial repayment of ₹6 lakh, the outstanding loan and accrued interest aggregated to ₹53,11,956, which was written off as irrecoverable during FY 2015-16.

The assessee contended that it fulfilled the conditions prescribed under Sections 36(1)(vii) and 36(2) of the Income-tax Act. It also relied upon CBDT Circular No. 12/2016 and submitted that the debt had been validly written off in its books of account. Being an NBFC, lending money formed part of its regular business activities.

The AO disallowed the claim. The primary reason was that a common director, Varsha Karan Singh, was associated with both the assessee company and the borrower company. The AO observed that documents relating to recovery efforts and the resolution approving the write-off were signed by the common director. On this basis, the AO concluded that the assessee had attempted to take undue advantage of the provisions relating to bad debts and held that the debt was not genuinely bad.

The Commissioner of Income Tax (Appeals) upheld the disallowance made by the AO.

Before the Income Tax Appellate Tribunal (ITAT), the assessee argued that all statutory conditions for claiming bad debt deduction had been satisfied. It also referred to the balance sheet of UM Power Ltd., which showed that the borrower had written off the unsecured loan in its own books.

The Tribunal examined the facts and noted that the assessee had placed on record documents showing the outstanding loan balance from earlier years. It further observed that CBDT Circular No. 551 dated 23 January 1990 clarified that, after the amendment effective from 1 April 1989, an assessee is not required to establish that a debt has actually become irrecoverable. A deduction is allowable in the year in which the debt is written off as irrecoverable in the books of account.

The Tribunal also referred to CBDT Circular No. 12/2016, which advised the Department not to pursue appeals on the ground that the taxpayer failed to prove irrecoverability, provided there was a valid write-off. Reliance was also placed on the decision of the Delhi High Court in CIT vs. Morgan Securities and Credits (P) Ltd., where it was held that once a debt is written off as irrecoverable in the accounts, deduction under Sections 36(1)(vii) and 36(2) is allowable.

Addressing the Revenue’s concern regarding the common director, the Tribunal held that both companies were separate and independent entities. The mere existence of a common director could not negate the fact that the unsecured loan had become irrecoverable. Since both the lender and borrower had written off the loan in their respective books and the write-off satisfied the requirements laid down in the CBDT circulars, the debt had to be treated as bad.

Accordingly, the Tribunal allowed the assessee’s appeal and directed that the bad debt deduction of ₹53,11,956 be allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals)-4, New Delhi [“Ld. CIT(A)”, for short] dated 24.06.2019 for the Assessment Year 2016-17.

2. Brief facts of the case are, assessee filed its return of income on 17.10.2016 declaring nil income. The case was selected for complete scrutiny through CASS. Notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. In response, assessee made a request for manual scrutiny and based on the approval, the assessment was conducted on manual mode. During assessment proceedings, the AO observed that the assessee has debited a sum of Rs.53,11,955/- in its Profit & Loss account as bad debts. When the assessee was asked to substantiate the same, in response assessee submitted as under :-

“The assessee company has given loans of Rs.46 lakhs to UM Power Ltd., UM House, Plot No-35P, Sector-44, Gurgaon Haryana 122002, PAN-AABCU2600C, during the FY 2012-13 and interest of Rs.2,86,737/- on the said loan was accrued since then on yearly basis on 31.03.2013. During the next FY 2013-14, an amount of Rs.6 lakhs was received back on 27.09.2013 from the said company and with interest due of Rs.6,39,412.51 on 31.03.2014, outstanding balance due in the account was Rs.49,26,149.51.

During the succeeding FY 2014-15, neither any fresh loan was given to the said company nor any repayment of the outstanding amount was received back from the said company and interest accrued on 31.03.2015 was Rs.3, 85, 8061-, thus total outstanding balance of loan given alongwith interest accrued thereon till that date was Rs.53,1l,955.51.

The assessee has also highlighted the provisions of circular no. 12/2016 dated 30.05.2016 issued by CBDT on the admissibility of claim of deduction of bad debts u/s 36(l)(vii) r.w. section 36(2) of the Income Tax Act, 1961.

On the aspect of fulfilling the conditions as stipulated in sub section 2 of section 36(2) of the Income Tax Act, 1961, the assessee in reply to query raised on 14.12.2018 submitted-

“As stated in the earlier submission dated 14.12.2018, and in continuation of it, the assessee company further submit that it has made a deduction of Rs.53,11,956/- u/s 36(1)(vii) of the Act, the amount which found by the management as not recoverable hence, written off in its books of accounts for the FY 2015-16.

Summary of the account of UM Power Ltd for the FY 2012-13, FY 2013­14 and FY 2014-15, amount of Rs.53,11,956/- is irrecoverable, is as under:

It is submitted that loans of Rs.46 lakhs to UM Power Ltd. PAN-AABCU2600C, made during the FY 2012-13 in the course of business i.e. money is lent in the ordinary course of money lending, as it is a registered NBFC vide certificate No. B-14.00055 dated 24.2.1998 and RBI registered certificate is enclosed and net interest of Rs.2,86,737/-, Rs.6,39,413/-, and Rs.3,85,806/- for the FY 2012-13, FY 2013-14 and FY 2014-15 respectively were debited to the account of UM Power Ltd. and interest income is already taken into income of the company for the respective assessment years.”

As is evident from above that the assessee company in its defense has stated all the legal position for which the company being NBFC is entitled for the claim of bad debts. One thing that the assessee company has failed to bring in its submissions is that Varsha Karan Singh happens to be the common director of both the companies viz M/s. Instronics Limited & MIs. UM Power Limited and it will be interesting to note that the assessee during the course of assessment proceedings has filed a copy of the documents through which it has been intended to inform this office regarding the efforts made by the assessee company to recover the bad debts. All the documents to this effect including the resolution of write off of the sum of Rs.53,11,955/- have been signed by none other than Varsha Karan Singh who happens to be the common director of both the companies.”

3. After considering the submissions of the assessee, the AO observed that the assessee in its defence has stated the legal position being NBFC is entitled for the claim of bad debts. Further he observed that Varsha Karan Singh is a common Director of both the companies and failed to file a copy of documents through which it has taken efforts to recover the bad debts. He also observed that the resolution of right of abovesaid sums was also signed by Varsha Karan Singh who happens to be the common Director. Therefore, he was of the view that the assessee in a way has intended to take the advantage of being NBFC and mis-utilised the provisions of section 36 (2) of the Act. Accordingly, he held that bad debts claimed by the assessee are not a bad debt and he disallowed the same.

4. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-4, New Delhi and filed detailed submissions. After considering the detailed submissions, ld. CIT (A) sustained the addition made by the AO.

5. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-

“1. That on the facts and circumstances of the case and the provision of law, the Ld CIT Appeals has failed to appreciate that the assessment order passed by the Ld AO u/s 143(3) is illegal, bad in law and wrong on facts. The addition sustained is unjust, unlawful and arbitrary and are made against the principles of natural justice.

2. That on the facts and circumstances of the case and the provisions of law, the Ld CIT Appeals has erred in sustaining the addition on account of disallowance of Bad Debts claimed of Rs.53,11,956/- ignoring the fact that the said amount is irrecoverable and eligible to claim as deduction u/s 36(1)(vii) of the I T Act.

3. That on the facts and circumstances of the case and the provisions of law, the Ld CIT Appeals has erred in not following the provisions of circular no.12/20 16 dated 30.05.2016 issued by CBDT on the admissibility of claim of deduction of bad debts u/s 36(1)(vii) r.w. section 36(2) of the IT Act, 1961 merely on suspicion and assumptions ignoring the legal fact that the appellant company is fulfilling the conditions as specified in the said circular.

4. That on the facts and circumstances of the case, the Ld CIT Appeals has erred in ignoring the fact that the appellant company is an NBFC company, registered with RBI and lending of loans is one of its primary business activities. The Ld CIT Appeals has ignored the fact that the appellant company (i.e. the lender company) and the borrower company- UM Power Ltd., are two separate distinct persons and independent of each other and distinctively assessed to Income Tax with their respective PAN’s.

5. That on the facts and circumstances of the case and the provisions of law, the Ld. CIT Appeal has erred in ignoring the explanations given, evidences and materials placed and available on records. The same has not been properly considered and judicially interpreted and the same do not justify the additions/disallowances sustained. The addition of Rs.53,11,956/- has been sustained with preset mind of the Ld. CIT( A) and his order is based on surmises, conjectures and suspicion.

6. That on the facts and circumstances of the case, the various observations and findings of the Ld. CIT Appeals in the impugned appellant order is irrelevant and vitiated in the law.”

6. At the time of hearing, ld. AR of the assessee brought to our notice relevant facts on record and heavily relied on the detailed submissions made before the ld. CIT(A) from pages 4 to 12 of the appellate order.

7. On the other hand, ld. DR of the Revenue brought to our notice page 4 of the assessment order and page 23 of the appellate order and relied on the findings of the lower authorities.

8. Considered the rival submissions and material placed on record. We observed that assessee has given loan to UM Power Pvt. Ltd. which is a sister concern of the assessee and has a common Director. We observed that the assessee has brought on record various documents and its outstanding from AY 2013-14 onwards. At the time of hearing, ld. AR also brought to our notice Balance Sheet of UM Power Limited dated 31.03.2016 and even they have written off the long term borrowings in the form of unsecured loan. Further we observed that Circular No.551 dated 23.01.1990 clarifies requirement for claiming bad debt deductions u/s 36(1)(viii) of the Act following the amendment, as per which w.e.f. 1.4.1989, it is no longer necessary for the assessee to establish that a debt has in fact become irrecoverable and the Circular specifies that the claim will be allowed in the year when it is written off as irrecoverable in the accounts of the assessee.

9. Further we observed that as per Circular No.12 of 2016, the Department was advised not to file appeals on the ground that the taxpayer failed to prove that the debt was irrecoverable, provided a valid write off is exists.

10. Therefore, it is enough to establish that a debt is to be treated as bad or recoverable and once it is written off in the books of the assessee concern. Further we observed that Hon’ble Delhi High Court in the case of CIT vs. Morgan Securities and Credits (P) Ltd. (2007) 162 taxmann 124 (Delhi) held as under :-

“A debt becoming bad or irrecoverable are but two sides of the same coin. The Commissioner (Appeals) had endorsed the reasoning of the Assessing Officer to the effect that the assessee had merely written off the debts at the end of the year so that its taxable income would get reduced. The Commissioner (Appeals) as well as the Assessing Officer were influenced by the fact that there had been no previous dealings between the assessee and ‘S’; no security was taken for the loan and the sequence of events from the advance of the loan to its writing off did not span across even one year. To the contrary, it appeared that those factors would be relevant if the stand of the department was that the transaction itself was sham or false. Once it was accepted that the transaction actually took place, those factors would, in fact, quell a doubt that the decision to write off the loan as a bad debt was a consequence of an honest judgment. Any prudent person, on learning that an unsecured loan had become perilously unrecoverable, would expeditiously initiate each and every legal remedy available to him, as had been manifested itself in the instant case. [Para 4}

A conjoint reading of section 36(2) and section 36{l)(vii) would make it clear that an assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dated 23.1.1990. [Para 5}

The circular leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The circular expressed the hope that such litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned. [Para 7}

Therefore, no substantial question of law would arise in the instant case”

11. We observed that the lower authorities have impressed upon the fact that a common Director is involved in both the companies. However, it is a fact on record that both the companies are independent and merely having common Director will not absolve the fact that the unsecured loan has become bad to recover since assessee as well as the sister concern, UM Power Ltd. has mutually written off in their books of account and as per the directions of the CBDT Circular No.551/1990 (supra), the same has to be treated as bad and doubtful. Both the entities are independent and can take their own resolutions. Accordingly, we are inclined to allow the grounds taken by the assessee.

12. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on this 9^TH day of April, 2026.