Loss on Loan Foreclosure deductible while Computing taxable Income

ACIT Vs Maruti Countrywide Auto Financial Services Pvt. Ltd (ITAT Delhi)

Maruti Countrywide Auto Financial Services Pvt. Ltd. Appeal: Loss On Foreclosure Of Loan Held To Be Deductible While Computing Its Income

In ACIT vs. Maruti Countrywide Auto Financial Services Pvt. Ltd. [ITA No. 3455 /Del/2014 A.Y.: 2010-11, decided on 14.01.2019], one of the ground raised was that in the fact and circumstances of the case & in law, the CIT(A) erred in deleting the disallowance of Rs. 95,80,354/- made by the A.O. on account of loss on foreclosure of loan accounts.

The brief facts of the case are that Maruti Country Wide Auto Financial Services Pvt. Ltd. being a non-banking Financial Co. (NBFC), inter alia, was engaged in business of providing financial assistance to the customers in acquiring wide range of consumers and auto products. In the assessment proceedings, the Assessing Officer observed that the assessee has claimed loss on foreclosure of loans of Rs.95,80,354/-. In this regard, the assessee submitted his reply as under:

“The assessee is a Non-Banking Financial Company (NBFC) engaged inter alia in the business of auto finance, lease and hire purchase. The assessee is providing financial assistance to customers in acquiring wide range of customer and auto products, during the regular course of business, it has to provide from time to time certain auto/consumer loans and assets on hire purchase/lease. In the case of consumer loan, the loan is hypothecated against the auto/two wheeler or the consumer durable as a security which, in the event of default of the customer may be repossessed or a foreclosure settlement reached with the borrower. Similarly, in the case of hire purchase, in the event of default on the part of the hirer in the payment of installments the assessee may repossesses the assets etc. As and when the hypothecated asset is repossessed under loan/hire purchase transaction, the same is included in the repossessed stock of the company under the current assets thereafter; the assessee takes a commercially prudent decision for selling those repossessed assets to the interested buyers. On sale, the excess/shortfall of the sale proceeds vis-a-vis the amount recovered from the hirer is booked as business profit/loss in the profit and loss account under the head ‘loss on sale of repossessed assets’. The unsold repossessed stock lying in the possession of the assessee as at the end of the year continue to form part of the current assets. The loss which has arisen consequent to the sale of repossessed assets represent’s realizable value/sale proceeds vis-a-vis the amount recoverable from the hirer constitute the loss incurred by the assessee as business loss. Similarly, where the loan is foreclosed the loss is quantified and charged, to the books. In the event of default by the customer, the assessee takes a commercially prudent decision and negotiates with the customers and the loans are foreclosed at he mutually agreeable value which is most of the cases is less than the principal amount of loans remaining unpaid. The settlement is reached with a view to minimize the losses on account of non-recovery from defaulting customers. Accordingly, loss on repossessed assets and foreclosure are on account of defaults due to non payments by the customers/borrowers and losses in the normal course of business.”

From the above submissions, the Assessing Officer observed that the assessee company is an NBFC which is authorized to lend for earning interest on advances as per Government Rules, RBI and statutory regulations. The foreclosure of loans is nothing but it is a discount offered to lonee on negotiation of pre-payment of principal amount when the loss of principal is expected if the loan is recovered over the contracted tenure. The loan is an asset on which the yield is by way of interest. The foreclosure loss is a loss equated to erosion of the loan asset. The claim of loss on foreclosure is, therefore, equivalent to write off of an asset which is capital in nature and not allowable under section. 37(1) since it is not a Revenue write off. He also observed that it is not a business loss which happens automatically and in regular course of business beyond the assessee’s control. It is a situation brought by the assessee itself to save future capital loss. He also observed that it is not a bad debt because it has not been accounted for as per the mandatory provisions of section 36(1)(vii) and 36(2). It was further observed that the loss on sale of repossessed assets occurs when there is difference between the unrecovered principle and the sale price of vehicles pertaining to those loans that have gone bad and these vehicles are sold after their repossession. Thus, these two heads cannot on any score be equated or mean to be at part. It was also observed that the case laws relied by the assessee are not applicable in the present case because the facts are different. Keeping in view the above, the Assessing Officer disallowed the amount of Rs.95,80,354/- and added into the income of the assessee.

After hearing both the sides and perusing the entire materials available on record and the case laws cited by both the parties, the learned Members of the ITAT Delhi observed that in ITA No. 5894/Del/2013 for the A.Y. 2009-10 in the case of assessee itself, the coordinate Bench of Tribunal has decided the issue in favour of the assessee as under:

08. We have carefully considered the rival contentions and also the various decisions relied up on by the assessee. Factum of the claim of the assessee is that assessee advances to loan to various customers against hypothecation of primary assets. Late or on imminent default in repayment of loan or on account of inadequate security available with the assessee, assessee negotiates the outstanding amount with the borrower for repayment. On negotiation it may happen the negotiated amount is most of the times less than the amount of outstanding due from the borrower. Such excess of outstanding over the negotiated amount is written off in the books of accounts of the assessee titled as “loss on foreclosure of loan assets.” Such amount is claimed as deduction under section 36(1)(vii) of the Income tax Act. Provision of section 36 (1) (vii) are as under :- 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (vii) subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year] : Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause : Explanation — For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee 2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee ;

09. Admittedly the assessee is a non banking fiancé company and engaged in the business of money lending and therefore the amount of debt represents the money lent in the ordinary course of business of money lending. Further according to section 36(1) (vii) of the act any bad debt or part of the bad debt if written off in the books of accounts as irrecoverable, same shall be allowed to the assessee as deduction. It is admittedly written off in the book of accounts of the assessee as “ loss on foreclosure of loan assets” . In view of this the assessee satisfies all the conditions of allowability of this sum as deduction under section 36(1) (vii) rws 36(2) of the Income Tax Act. As the sum is written off in the books of accounts by writing of the loan amount of the borrower on negotiation cannot be called a future or probable loss but ascertained and accrued loss in the business of financing. Though the cases relied up on by the assessee relates to the issues of loss on sale of repossessed vehicle, Honorable Delhi High court in case of CIT V CITI CORP Maruti Finance Limited in ITA No 1712 & 1714 /20109/11/2010 has held that even loss on repossessed vehicle sold is also allowable to the assessee under section 36(1) rws 36 (2) of the act. Honorable Delhi High court also held that such deduction was also covered in favour of the assessee by the decision of Honourable Calcutta High court in case of A W Figgies & Co Pvt Limited 254 ITR 63. Above decision of Honourable Delhi high court has been upheld by Hon Supreme court in CC 22330/2011 dated 13/1/2012. Further the claim of the assessee in writing off of the bad debt is on stronger footing on the cases relied up on by the assessee. In view of above facts, we confirm the order of CIT (A) in deleting the disallowance of Rs. 77,36,166/- made by the AO on account of loss of foreclosure of loan assets.

Respectfully following the above judgment, the learned Members of the ITAT, Delhi dismissed the above-mentioned ground of the Revenue.