ITAT allows ₹5 Cr Bad Debt Claim on Irrecoverable Loan to Ramalinga Raju [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai, has ruled in favour of DSP Adiko Holdings Pvt. Ltd. by allowing a deduction of ₹5 crore as bad debt or business loss on account of an irrecoverable loan advanced to Shri Ramalinga Raju.

The appeal pertained to Assessment Year 2017-18 and arose from the disallowance of the claim by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].

DSP Adiko Holdings, a registered non-banking finance company (NBFC), had advanced a loan of ₹10 crore to Ramalinga Raju during FY 2008-09 as part of its lending business. When the loan remained unpaid, the company approached the Bombay High Court for recovery. In April 2016, the High Court passed a consent decree permitting recovery of only ₹5 crore, thereby rendering the balance unrecoverable.

Based on this decree, the company claimed the unrecovered ₹5 crore as a deduction in AY 2017-18, either as a bad debt under Section 36(1)(vii) or as a business loss under Section 28(i) of the Income Tax Act.

Your Ultimate Guide to India’s Latest Income Tax Laws, Click Here

The AO, however, disallowed the claim on the ground that the principal component of a loan is a capital transaction. Relying on the Supreme Court’s judgment in CIT v. Mahindra & Mahindra Ltd. (2018), the AO concluded that just as waiver of a loan is not taxable as business income, its non-recovery cannot be treated as a deductible business loss. The CIT(A) upheld this view, holding that the assessee had failed to demonstrate how the loan transaction was integrally connected with its revenue operations.

Before the Tribunal, the assessee argued that the loan was advanced in the ordinary course of its NBFC business, and therefore the unrecoverable amount clearly fell within the scope of deductible bad debts or business losses. It distinguished its case from Mahindra & Mahindra, stressing that the Supreme Court ruling applied to waiver of loans received by a borrower, whereas in its case, the issue concerned non-recovery of a loan granted in the course of lending activities.

The Income Tax Appellate Tribunal Bench, comprising Judicial Member Shri Amit Shukla and Accountant Member Ms. Padmavathy S, accepted the assessee’s contention. It held that once a loan has been advanced during the course of business and is subsequently found to be partly irrecoverable under a court decree, the balance must be treated as a bad debt or business loss.

The bench further observed that the reliance placed by the AO on Mahindra & Mahindra was misplaced, since that decision dealt with the taxability of loan waiver in the hands of the recipient, not with the deductibility of irrecoverable loans in the hands of a lender.

In conclusion, the Tribunal directed the deletion of the disallowance of ₹5 crore and allowed the assessee’s appeal in full. This ruling reinforces the principle that loans advanced by NBFCs as part of their lending operations, if partly irrecoverable, qualify for deduction under the Income Tax Act.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates