Non-recovery of business loan by NBFC treated as bad debt under s.36(2) or business loss, Rs.5 Crore allowed

When a registered NBFC advances a loan in the course of business and part of the principal becomes irrecoverable, that portion is allowable as a bad debt under s.36(2) or as a business loss while computing profits and gains under s.29; consequence: the unpaid half (Rs.5 Crore) was admitted as allowable. Reliance on a decision about loan waiver affecting the recipient was held inapposite because the present fact pattern involves a lender's unrecovered loan, not a waiver received. Lack of transactional detail was deemed immaterial once a decree established that only half the loan was recoverable, so the remaining loss was allowed.

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Issues: Whether the assessee, an NBFC, is entitled to claim Rs. 5,00,00,000 as bad debt or business loss on account of non-recovery of part of a loan (principal) decreed as irrecoverable by the Bombay High Court.

Analysis: Facts establish that the loan of Rs.10 Crore was advanced in the course of the assessee's lending business and was written off in the earlier year though not claimed due to pending litigation. A consent decree from the Bombay High Court fixed recovery at Rs.5 Crore, leaving Rs.5 Crore irrecoverable. The legal authorities cited regarding waiver of loans concern taxation of amounts waived in the hands of recipients and are distinct from claims by a lender for loss on non-recovery. Where a loan is given in the course of business and a portion becomes irrecoverable, that portion operates as a bad debt or business loss under the provisions governing computation of business income. The absence of certain transactional details does not negate the fact that the loan was advanced as part of the assessee's business of lending and that the decree established the irrecoverability of the balance amount.

Conclusion: The claim of Rs.5,00,00,000 is allowable as a bad debt or business loss in favour of the assessee.

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