Pledge Shares to Support Sister Concern’s Loan is Business Activity: Madras HC Backs Writing off of ₹8.46 Crore Bad Debt [Read Order]

Chief Justice K R Shriram and Justice C. Saravanan observed that “As held in Mahindra and Mahindra (supra), whether to treat the debt as bad debt or as business loss/deduction is a commercial or business expediency of the assessee based on the relevant material and possession of the assessee. Once the assessee records the amount as business loss/deductions in his books of account, that would prima facie establish that it was not recoverable loss, unless the Assessing Officer for good reasons, holds otherwise. The burden would be on the Assessing Officer to make out cogent reasons, which is not so in the case here.”

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The case revolved around the assessee, M/s. Star Investments Pvt. Ltd’s decision to pledge 28.69 lakh equity shares of Balaji Distilleries Ltd. (BDL), held as stock-in-trade, to ICICI Ltd. in support of a ₹10 crore loan taken by its sister concern, Balaji Industrial Corporation Ltd. (BICL).

Following BICL’s default, ICICI invoked the guarantee and sold 25.15 lakh pledged shares at prevailing market value to recover dues. This led the assessee to treat ₹8.46 crore, the unrecovered portion after receiving ₹1 crore in settlement from BICL as a bad debt and write it off in Assessment Year 2009-10.

While the Assessing Officer and Commissioner (Appeals) rejected the write-off, contending that the transaction was not in the nature of a loan and therefore not deductible under Section 36(1)(vii), the Income Tax Appellate Tribunal (ITAT) reversed their findings. The Revenue’s subsequent appeal to the High Court was dismissed with the Court fully endorsing the ITAT’s reasoning.

Relying on precedents including Mahindra & Mahindra Ltd. v. CIT and Delhi Safe Deposit Co., the Court observed that the test for deductibility under business loss is not rigidly confined to direct trade transactions. Instead, it encompasses losses incurred voluntarily on grounds of commercial expediency, such as protecting group reputation or aiding a sister concern to preserve its value and continuity.

The Bench clarified that merely because the pledged shares were sold to repay someone else’s loan did not sever the business link. As the assessee was a promoter of BICL, the pledge was a prudent and strategic business move. Once the amount lost was recorded in the books as irrecoverable and no mala fides were alleged, the write-off deserved recognition.

The Court rejected the Revenue's argument that the pledge and resultant loss were not related to the assessee’s business. It held that pledging shares to help a group company obtain finance is an accepted form of business assistance. If the group entity fails, and the pledging company suffers a loss, it cannot be disentitled from claiming it as a business loss.

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The bench observed that “As regards the submission of the Revenue that the pledging of shares of BDL by assessee to ICICI is not in the course of business activity, the fact is, assessee was a promoter of BICL. The shares were pledged, so as to enable the sister concern/group company to avail the loan from ICICI. Therefore, certainly, it has to be in the course of business.”

Accordingly, the High Court dismissed the appeal, confirming the ITAT’s order in favour of the assessee.

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