2024 (9) TMI 1890 - AT - Income Tax

Bad debt deduction denied for notional intra group loss; overseas interest and TDS claims remanded for verification.

The tribunal held that the Rs. 251.30 crore loss from assignment of intra-group receivables and payables was a notional, capital/investment type loss ... Allowability of loss on assignment of financial assets and liabilities - Loss on transfer of ICDs and interest thereon - deductibility of interest expenditure on intercorporate deposits - remand for factual verification of interest on funds borrowed for overseas investment - verification of claim for short credit of tax deducted at source Allowability of loss on assignment of financial assets and liabilities - assessee has sold ICD receivables - loss on account of assignment of certain receivables and payables pursuant to valuation and reassessment of the company’s ability to collect the amount - AO held that it is a sham transaction and loss is fictious, it is not allowable as bad debt and not allowable as business loss - Whether the loss on assignment of identified intercorporate deposits and related liabilities is allowable as a bad debt or as a business loss? - HELD THAT: - Tribunal upheld the findings of the lower authorities that the amount arose from an intra group assignment of assets and liabilities to a related party at a steep haircut and was recorded as an exceptional item; there was no write off of irrecoverable debt in the sense required for section 36(1)(vii), and the transaction was not shown to be incidental to or of the nature of the assessee's revenue/business operations. The assessee failed to produce the SPA or other material relied upon in its own accounts; auditor's qualification and the character of the entries (shown as investing activity/exceptional item) supported the conclusion that the loss was not allowable as a trading/business loss or as a bad debt. [Paras 57, 58, 59, 60, 61] Loss is not allowable as a bad debt under section 36(1)(vii) nor as a business/trading loss and the disallowance is confirmed. Deductibility of interest expenditure on intercorporate deposits - Whether interest expense in excess of interest income on intercorporate deposits is deductible? - HELD THAT: - Tribunal found that the assessee had not discharged the onus of proving that borrowed funds were used for business purposes or that commercial expediency justified the excess interest claimed; substantial advances to related parties were interest free or not supported by evidence of business use, and earlier findings and records justified treating the interest income suitably and disallowing excess interest under section 36(1)(iii). Coordinate bench decisions for other years were not treated as dispositive for the facts of this assessment year. [Paras 62, 63, 69] Disallowance of excess interest expenditure is sustained. Disallowance of interest expenses incurred for the loan used for overseas investment - As per AO assessee has provided that finance, fund movement shows that once the funds landed in its books, there is nothing brought on record to prove that this investment was in relation to the business - HELD THAT: - Additional evidence (board note, subsidiary accounts, sanction letters) was admitted by the Tribunal but, because these facts require verification, the Tribunal directed that the ground be restored to the assessing officer for fresh examination of the factual material (including bank sanction letters, subsidiary accounts, fund movements and note no.7 of the subsidiary accounts) and afforded the assessee opportunity to substantiate business expediency; the assessing officer is to decide afresh after enquiry and grant hearing if requested. [Paras 75, 76] Ground remitted to the assessing officer for fresh factual examination and decision on the allowability of the interest expenditure. Claim for short credit of tax deducted at source - HELD THAT: - Parties agreed the TDS credit claim requires verification; the Tribunal directed the assessing officer to verify the claim on its merits and decide after verification. [Paras 77] Claim for TDS credit remitted to the assessing officer for verification and decision. Final Conclusion: Appeal is partly allowed: Disallowance of the assignment loss and the excess interest expense on intercorporate deposits are upheld; the claim for interest on funds used for the overseas investment and the TDS credit are directed to be verified and decided afresh by the assessing officer; the plea of denial of personal hearing is dismissed. Issues: (i) Whether loss of Rs. 251.30 crores arising on assignment of intercorporate receivables and payables to a related party is allowable as a bad debt under section 36(1)(vii) or as a business/trading loss under section 28(i); (ii) Whether interest expense disallowance of Rs. 158.12 crores (excess of interest paid over interest received on intercorporate deposits) is deductible under section 36(1)(iii); (iii) Whether interest expense of Rs. 171.57 crores incurred on loans raised for investment in Ennegaon Limited, Mauritius is deductible; (iv) Whether TDS credit of Rs. 2.29 crores should be granted; (v) Whether appellate order was vitiated by denial of personal hearing.Issue (i): Whether the Rs. 251.30 crores loss on transfer of identified receivables and payables to a related party is deductible as a bad debt or business loss.Analysis: The transaction involved intra-group assignment of assets (receivables/ICDs and accrued interest) and related liabilities on 31 March 2017; similar assets and liabilities were transferred to another group entity without loss. Company accounts showed the amount as an exceptional item; auditors gave a qualified opinion and directors' report referenced third party sale agreements and escrow arrangements which the assessee could not produce. Valuation material submitted (Grant Thornton reports) post dated the assignment and did not cover all receivables. The assessee failed to demonstrate attempts to recover debts prior to assignment, or that the transaction was not a round tripping/intragroup arrangement effected to book a notional loss. The tribunal found no write off of an irrecoverable debt in the ordinary course, and that the loss arose from a capital/investment type transaction shown in investing activities rather than operating activities; memorandum provisions for ancillary lending did not convert the activity into the assessee's business of terminals and handling.Conclusion: Issue (i) decided against the assessee; the Rs. 251.30 crores loss is not allowable as a bad debt under section 36(1)(vii) nor as a business/trading loss under section 28(i).Issue (ii): Whether disallowance of interest expenses of Rs. 158.12 crores (excess of interest expense over interest income on intercorporate deposits) was correct.Analysis: The assessee borrowed funds and advanced them as ICDs to related entities, in some cases without charging interest; evidence of commercial expediency or that borrowed funds were used for business purposes was not furnished. Financial particulars showed limited equity and large ICD exposures; the lower authorities found absence of factual material proving use of borrowed funds for business and absence of commercial rationale for interest differential.Conclusion: Issue (ii) decided against the assessee; the disallowance under section 36(1)(iii) is confirmed.Issue (iii): Whether interest of Rs. 171.57 crores on borrowings used for investment in Ennegaon Limited, Mauritius is deductible.Analysis: Additional documents including board note, bank sanction letters and subsidiary accounts were admitted as new evidence; these materials potentially bear on business purpose and commercial expediency. In absence of prior examination at assessment level, the tribunal directed remand to the assessing officer for fresh enquiry and verification of the admitted evidence, permitting the AO to examine facts, bank sanction letters, subsidiary accounts and grant hearing.Conclusion: Issue (iii) allowed for adjudication on merits before the assessing officer; the ground is restored to the file for fresh decision (in favour of assessee for procedural remand but not a final tax allowance).Issue (iv): Whether TDS credit of Rs. 2.29 crores should be granted.Analysis: Both parties agreed the matter can be verified on records; the tribunal directed the assessing officer to verify and decide the claim on merits.Conclusion: Issue (iv) allowed for verification and decision by the assessing officer (direction in favour of assessee for reconsideration).Issue (v): Whether the appellate order was bad for lack of personal hearing.Analysis: The ground was not argued and no evidence was produced before the tribunal.Conclusion: Issue (v) dismissed against the assessee.Final Conclusion: The appeal is partly allowed - appellate confirmation of disallowances relating to (i) loss on assignment of receivables (Rs. 251.30 crores) and (ii) excess interest disallowance (Rs. 158.12 crores) is upheld; issues concerning interest on overseas investment (Rs. 171.57 crores) and TDS credit (Rs. 2.29 crores) are remanded to the assessing officer for fresh verification and decision after admission of additional evidence.Ratio Decidendi: A notional loss arising from an intra group assignment of financial assets and liabilities shown as an exceptional/investing transaction, unsupported by contemporaneous recovery efforts, valuation evidence predating the assignment, or access to underlying third party sale/escrow agreements, is not deductible as a bad debt under section 36(1)(vii) nor as a business loss under section 28(i); factual issues relying on newly admitted evidence must be remitted to the assessing officer for verification before allowing interest deductions raised for business purposes.