Bad debts written under corporate restructuring scheme allowed

Facts and Issue of the case

Both the cross appeals filed by the Revenue and the assessee are directed against the order of the ld. Commissioner of Income Tax (Appeals)13, Chennai dated 27.12.2016 relevant to the assessment year 2012-13.

In the appeal filed by the Revenue, the Ground No. 1 is general in nature and no adjudication is required. Ground No. 2.1 to 2.3 relates to disallowance made under section 14A of the Income Tax Act, 1961 [“Act” in short]. When the appeal was taken up for hearing, both the sides have submitted that in the earlier assessment years 2013-14 and 2014-15, the very same issue has been remitted back to the file of the Assessing Officer and the same may be followed for the assessment year under appeal.

Observation of the court

Court has heard both the sides, perused the materials available on record and gone through the orders of authorities below. Similar issue on an identical fact was subject matter in appeal in assessee’s own case for the assessment years 2013-14 and 2014-15 and vide order dated 20.11.2018 in I.T.A. Nos. 3084 & 3085/Chny/2017. Respectfully following the above decision of the Tribunal in assessee’s own case for the assessment years 2013-14 and 2014-15, court remit the matter back to the file of the Assessing Officer to re- examine and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee. Thus, the ground raised by the Revenue was allowed.

The next ground raised in the appeal of the Revenue in ground Nos. 3.1 to 3.5 relates to deleting the disallowance of interest payable claimed to the tune of ₹.7,53,16,872/-. With regard to the interest payable on loans taken from Government of Tamil Nadu and M/s. Infrastructure Leasing and Financial Services Company [IFLS], during the course of assessment proceedings, the AR of the assessee has confirmed before the Assessing Officer that the assessee had not paid nor was any interest payable during this financial year 2011-12 until 31.10.2011 in view of the moratorium. So, the sum of ₹.1,36,66,067/- being interest payable was held to be not crystallised vis-a-vis the year of payment and the same has not been paid during the year, in view of the non-payment due to the moratorium. Since the issue in appeal before the Hon’ble Supreme Court has not attained finality and in view of the precedence, the interest payable amounting to ₹.7,53,16,872/- was disallowed and added back to the taxable income. On appeal, by following the decisions of the Tribunal in earlier assessment years 2003-04 to 2008-09, the ld. CIT(A) directed the Assessing Officer to delete the addition on account of interest payable to ₹.7,53,16,872/-.

Aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR has submitted that the Department has preferred further appeal before the Hon’ble High Court of Madras against the orders of the ITAT for the assessment years 2004-05 to 2008-09, 2009-10 & 2010-11 and therefore pleaded for reversing the order passed by the ld. CIT(A) and that of the Assessing Officer restored.

Court has heard the rival contentions and perused the order of the Hon’ble High Court of Judicature at Madras vide order dated 15.02.2022 in T.C.A. Nos. 1406 of 2008, 1382 & 1383 of 2009, 87 &483 of 2011, 619 of 2014 and 928, 929 & 941 of 2015 Respectfully following the decision of the Hon’ble Jurisdictional High Court in assessee’s own case, court sets aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of Assessing Officer to decide the issue in line with the directions of the Hon’ble High Court for the assessment year under consideration also. Thus, the ground raised by the Revenue is allowed for statistical purposes.

The first effective ground raised in the appeal of the assessee relates to confirmation of addition of bad debt written off in the books of accounts. On perusal of the financial statements of the assessee company, the Assessing Officer has noticed that the assessee has debited an amount of ₹.12,07,84,026/- as bad debt being written off in the Profit & Loss A/c. The Assessing Officer sought for explanation from the assessee and it was replied by the assessee that the said debit entry pertains to accrued interest on loan of ₹. 18.33 Cr. forwarded to the subsidiary of the assessee company in the earlier years. Pursuant to the corporate debt restructuring of the subsidiary company, NTADCL, done by the banker, M/s IDBI, as part of such exercise, all the lenders had to write off the loans given to NTADCL. The accrued income of the assessee in terms of interest on the loans advanced by it had to be written off. The assessee has also contended before the Assessing Officer that the interest was recognised as income in earlier years and on account of CDR of the subsidiary company, the same was written off in the books of account and accordingly the AR further contended before the Assessing Officer that the assessee company has to write off the debt for reasons beyond its control. While rejecting the above clarifications of the assessee, the Assessing Officer has concluded that such a conscious decision of the assessee cannot be termed and claimed as debt which has gone wrong. The subsidiary is a going concern and is not untraceable. Moreover, the assessee has a deep interest in the business of the assessee. Therefore, the Assessing Officer disallowed the debit entry of ₹.12,07,84,026/- made by the assessee as bad debt written off and added back to the income of the assessee. On being aggrieved the assessee is in appeal before the Tribunal. By reiterating the submissions as made before the ld.CIT(A) as well as filing copy of the judgement of the Hon’ble Supreme Court in the case of T.R.F. Ltd. v. CIT 323 ITR 397, the ld. Counsel for the assessee has prayed for following the above judgement.

Court has heard the rival contentions. Against the disallowance of bad debt written off, the assessee has submitted before the ld. CIT(A) that the Assessing Officer has not considered the sundry debtors receivable shown as receivable in the audited financial accounts. It was further submitted before the ld. CIT(A) that the debtor M/s. M/s New Tiruppur Area Development Corpn. Ltd. is a company promoted by the assessee and it is a subsidiary of the assessee is factually erroneous and untenable and also, the Assessing Officer erred in stating that the debtor is traceable and ongoing concern. The assessee contended that the debt has become bad only due to corporate restructuring scheme, which shows that the receivable has become bad. The AR also contended that the Assessing Officer erred in observing that the appellant had taken a conscious decision to end the liability of its subsidiary. Before the ld. CIT(A), the assessee has relied on the ratio decided in the Hon’ble jurisdictional Madras High Court in the case of CIT vs. Ramakrishna and sons Ltd. 326 ITR 315, wherein it has been held that loss on account of write off debt advanced to subsidiary is a bad debt reported. Moreover, the assessee contended that consequent to the CDR scheme, the assessee had written off the receivables from M/s NTADCL same as bad debt. The assessee further submitted that in the books of account of M/s NTADCL had accounted the remission of liability as income in the assessment years 2010-11 and 2011-12. Therefore, the interest income which was offered has become bad only due to corporate restructuring scheme, which shows that the receivable has become bad. The AR further clarified that M/s NTADCL is an associated enterprise and a related party but not a subsidiary as stated in the assessment proceedings. Accordingly on facts the bad debt written off by the assessee has been shown as income on remission of liability by the debtor, i.e. M/s NTADCL and therefore the bad debt is revenue neutral, hence bad debt to be deleted. By reiterating the above submissions as well as relying upon the judgement of the Hon’ble Supreme Court in the case of T.R.F. Ltd. v. CIT (supra), the ld. Counsel prayed for deleting the addition made towards bad debt written off. Court has perused the above decision, wherein, the Hon’ble Supreme Court, for the sake of clarity reproduced the provisions of section 36(1)(vii) of the Act, both prior to 01.04.1089 and post 01.04.1989.

In the present case, it is an undisputed fact that consequent to the CDR scheme, the assessee had written off the receivables from M/s. NTADCL as bad debt and the debt has become bad only due to corporate restructuring scheme. Moreover, in the books of account of M/s. NTADCL had accounted the remission of liability as income in the assessment years 2010-11 and 2011-12. Therefore, the interest income which was offered has become bad only due to corporate restructuring scheme, which shows that the receivable has become bad and also it was clarified that M/s. NTADCL is an associated enterprise and a related party but not a subsidiary as stated in the assessment proceedings. Under the above facts and circumstances and respectfully following the decisions of the Hon’ble Supreme Court in the case of T.R.F. Ltd. v. CIT (supra) as well as in the case of CIT v. V. Ramakrishna and Sons Ltd. (supra), we set aside the order of the ld. CIT(A) on this issue and direct the Assessing Officer to delete the addition made towards bad debts written off. Thus, the ground raised by the assessee is allowed.

In the appeal filed by the assessee, by making endorsement in the grounds of appeal, the ld. Counsel for the assessee has pray for withdrawal of ground No. 3 and 4 and accordingly, ground Nos. 3 & 4 are dismissed as withdrawn.