2015 (11) TMI 1670 - AT - Income Tax

Addition of loss of foreclosure of loan assets - whether the loss on foreclosure of loan assets is akin to the loss was on account of loss on sale of repossessed assets? - Held that - Admittedly the assessee is a non banking fianc 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 . Thus the assessee satisfies all the conditions of allowabaility of this sum as deduction u/s 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 Honourable Delhi High court in case of CIT V CITI CORP Maruti Finance Limited 2010 (11) TMI 802 - Delhi High Court has held that even loss on repossessed vehicle sold is also allowable to the assessee u/s 36(1) rws 36 (2) of the act. Honourable 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 2001 (9) TMI 46 - CALCUTTA High Court . - Decided in favour of assessee.

Summary

Issues:
Disallowance of loss on foreclosure of loan assets for Assessment Year 2009-10.

Issue 1: Disallowance of Loss on Foreclosure of Loan Assets
The appeal was filed by the revenue against the order of the ld CIT(A)-IX, New Delhi, for the Assessment Year 2009-10, challenging the deletion of disallowance of Rs. 77,36,166 made by the AO on account of loss of foreclosure of loan assets. The assessee, an NBFC engaged in auto finance, lease, and hire purchase, declared an income of Rs. 18,18,75,550 for the said year. The disallowed amount arose from auto or consumer loans advanced by the assessee, where in case of default, the outstanding amount was negotiated with customers resulting in a shortfall, termed as "loss on foreclosure of loan assets." The AO disallowed the claim, considering it a future possible amount saved by the assessee. However, the CIT(A) partly allowed the appeal, treating it as a bad debt based on judicial pronouncements related to loss on repossessed vehicles for NBFCs. The revenue contended that the loss was due to renegotiated debts, not repossessed vehicles, and thus wrongly allowed by the CIT(A).

Issue 2: Interpretation of Bad Debt Provision
The key contention revolved around whether the loss on foreclosure of loan assets qualified as a bad debt under Section 36(1)(vii) of the Income Tax Act. The assessee argued that the negotiated amount written off was akin to a bad debt, meeting the criteria for deduction. The provision allowed for the amount of any bad debt written off as irrecoverable to be deducted. The assessee, being a non-banking financial company engaged in money lending, satisfied the conditions for deduction under this provision. The loss on foreclosure of loan assets was considered an ascertained and accrued loss in the business of financing, meeting the criteria for allowability as a bad debt.

Judgment and Conclusion
After considering the contentions and relevant legal provisions, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of the loss on foreclosure of loan assets. The Tribunal found that the assessee's claim met the requirements for deduction under Section 36(1)(vii) of the Act. The Tribunal highlighted judicial precedents supporting the allowability of such deductions, even in cases of loss on repossessed vehicles. Therefore, the appeal of the revenue was dismissed, confirming the allowance of the claimed deduction.