ITAT rules in favor of NBFC on bad debts, settlement, and set off.

The ITAT ruled in favor of the assessee, an NBFC company, in a case involving disallowance of bad debts, out-of-court settlement amount, and set off of unabsorbed depreciation and business loss. The ITAT allowed the bad debts as a commercial decision, considered the out-of-court settlement amount as revenue expenditure, and directed the AO to quantify the unabsorbed depreciation and business loss for set off against future income.

---

---

Issues:
1. Disallowance of bad debts written off by the assessee.
2. Disallowance of amount paid for reaching an out-of-court settlement.
3. Set off and carryforward of unabsorbed depreciation and business loss.

Issue 1: Disallowance of Bad Debts:
The assessee, an NBFC company, filed an appeal challenging the disallowance of bad debts of Rs. 4.71 crores written off during the year. The AO disallowed the claim as the amounts were not justified under section 36(1)(vii) of the Income-tax Act, stating they did not qualify as revenue expenditure. The FAA upheld the AO's decision, stating the amounts were not bad debts but un-realized hire charges. However, the ITAT held that the bad debts were a commercial decision by the assessee, allowable as business loss under section 28 of the Act, and allowed the appeal in favor of the assessee.

Issue 2: Disallowance of Out-of-Court Settlement Amount:
The AO disallowed Rs. 10 lakhs paid for an out-of-court settlement, considering it a capital expenditure. The FAA also upheld this decision, stating the payment was not for direct business activities. The ITAT reversed this decision, noting that no capital asset was acquired by the payment, and allowed the claim as revenue expenditure, citing the case of Madras Auto Services Private Ltd.

Issue 3: Set Off and Carryforward of Unabsorbed Depreciation:
The AO did not quantify the amount of business loss and unabsorbed depreciation to be carried forward for set off against subsequent years' income. The ITAT referred to the case of Hindustan Unilever Ltd and other cases where similar issues were decided in favor of the assessee. Following the precedent, the ITAT directed the AO to quantify the amount of business loss and unabsorbed depreciation for set off against future income, allowing the appeal.

In conclusion, the ITAT ruled in favor of the assessee on all three issues, allowing the disallowed deductions for bad debts and out-of-court settlement, and directing the AO to quantify the unabsorbed depreciation and business loss for set off in subsequent years.

---