Recently, the Income Tax Appellate Authority ( ITAT ) of Delhi disallowed a bad debt deduction claim upholding the CIT(A)’s decision stating the loan provided by the NBFC to its sister concern was for mere shift of funds and there was no purpose shown for taking loan.
The appellant/ assessee, Instronics Limited, is an Non-Bank Financial Institution ( NBFC ) who provided a loan to UM Power Limited, its sister entity, which later became irrecoverable. Consequently, the assessee wrote off Rs. 53,11,956/- (principal and interest) as a bad debt deduction under Section 36 (1)(vii) of the Income Tax Act 1961. The loan was given in the ordinary course of business, supported by various documents, including the company’s registration certificate, confirmation of loan, and a board resolution for write – off.
The Income Tax Assessing Officer (AO) rejected the bad debt claim, noting that the related party nature of the transaction and the lack of business commencement by UM Power Limited hinted at potential collusion and misuse of Section 36(1)(vii) of the income tax legislation. The loan was provided to its sister concern.
Aggrieved, the assessee appealed against this before the CIT(A), who also upheld and affirmed the AO’s decision. CIT(A) stressed that the assessee lacked both documented purpose for the loan as well as the due diligence required in transactions of such manner.
The CIT(A) also noted that the documents provided by the assessee were self-serving and it was an indicative of an intention to shift funds rather than a genuine business loss. Aggrieved by this, the assessee appealed against this decision before the tribunal.
The income tax tribunal, after examining the facts of the matter, found no merit in the appeal and agreed with the CIT(A)’s rationale. The bench of Mr Shamim Yahya and Mr Yogesh Kumar US gave emphasis on the importance of substance over form and fairness in related party transactions.
The tribunal upheld the CIT(A)’s decision denying the bad debt deduction, as the assessee failed to demonstrate genuine business purpose for the loan. The relationship between the lending and borrowing entities, who shared a common director, further cast doubt on the legitimacy of the claimed deduction
Accordingly, the appeal was dismissed.
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