Facts:

1. An individual had started a manufacturing company along with some technocrats.

2. The Company availed loans for factory, machinery etc. for which the individual had given
personal guarantee. The company could not run successfully and the loan availed became
NPA.
3. The bank issued notices on the individual threatening to invoke the personal guarantee
clause.
4. The individual through the company negotiated an OTS with the bank and the individual paid
the entire liability of the Company.
5. There is no way that this amount which has been paid by the individual on behalf of the
Company be recovered from the Company.

Queries:

1. Can the individual claim the amount paid under the OTS as a loss while computing his
income. The individual is having income from all heads.

2. If this loss can be claimed, under which head of income can the loss be claimed.

3. Is there anything else that the individual should do to claim this as expenses / loss.

Case laws for reference:

The following case laws (also attached to this mail) can be referred to:

Claiming the loss under business head:

A. PCIT v. Hybrid Financial Services Ltd. ITA No.s 1265 of 2017 with 1469 of 2017
(Bombay HC) (Pronounced on 11th February, 2020)

1. The issue before the Bombay High Court was whether write-off of inter-corporate deposits
and advances can be allowed as bad debts under section 36(1)(vii) of the Income-tax Act,
1961 (‘the Act’) read with section 36(2) of the Act in-spite of the fact that giving of loans and
advances is not the business of the assessee-company.
2. While addressing the above dispute, the HC held that where an assessee has written off any
debt in his books of accounts due to commercial decisions, the same should be allowed.
3. Further, the Bombay HC held that it is not necessary, rather there is no requirement under
the Act that the bad debt has to accrue out of income under the same head i.e 'income from
business or profession' to be eligible for deduction. This is not a requirement of law. All that
is required is that the debt in question must be written off by the assessee in its books of
accounts as irrecoverable. (Refer Para 19)

B. Anant Raj Ltd. v. ACIT [2020] 116 taxmann.com 741 (Delhi - Trib.) (Pronounced on
11th May, 2020)

1. In the said case, the ITAT Delhi addressed the contention raised by the department that
amount written off during the year cannot be allowed as a bad debt, because the income
which has accrued to the assessee in the earlier year was not assessable under the same
head, i.e., income from the business or profession.
 2. While deciding on the above contention, the ITAT placed reliance on the decision of the
Bombay HC in case of PCIT v. Hybrid Financial Services Ltd. and held that firstly, assessee
need not required to establish/approve that debt has in fact become irrecoverable and it is
sufficient that if the bad debt is written off irrecoverable in the account of the assessee; and
secondly, the Court observed that there is no requirement under the Act that the bad debt
has to accrue out of income under the same head 'income from business or profession' to be
deducted as income. (Refer Para 19)

3. The ITAT Delhi also laid down a fundamental principle while deciding such kind of matters
stating that tax due should be collected as enshrined in the taxing statute and which is also
the mandate of the Constitution of India. The Tribunal stated that in the case at hand the
assessee was fastened with tax liability on a hypothetical income which did not materialize
/received and in this situation a justice oriented approach is warranted when assessee has,
on one hand incurred huge loss and on other, tax on Rs. 77.98 Crores is charged merely on
technicality that, since assessee had offered the tax under one particular head which it is
claiming in this year to be set-off in the other head, is precluded from doing so. (Refer Para
21)

C. LML Ltd. v. JCIT [2014] 46 taxmann.com 377 (Mumbai - Trib.) (Pronounced on 12 th

May 2014)

1. The question before the ITAT was whether where assessee furnished guarantees to different
banks against extension of credit facilities to its JV company, in view of fact that JV did not
perform well and said guarantee came to devolve on assessee which was settled at a
discount by way of one-time settlement (OTS) entered into with creditors, amount so paid
under OTS could not be allowed as business expenditure or business loss.

2. While deciding on the above issue, the ITAT stated that if the assessee had directly given the
loan to the company instead of guarantee, such direct giving of loan would also not be
allowed as a business loss, as the assessee is a promoter of the company and hence its
interest is long term and in the capital field. Applying the said reasoning, the ITAT held that
discharging an obligation under the guarantee would also not be allowable as a business loss.
(Refer Para 3.3)

3. An important factor taken into consideration by the ITAT is that the assessee did not write off
the debt paid off on behalf of the company, but showed it as receivable from the company.
Hence, the ITAT said that when the debt is shown as receivable by the assessee, the same
cannot be allowed as a loss. Also, the fair market value of the company’s assets had not
become nil. (Refer Para 3.7)

D. Jackie Shroff v. ACIT [2019] 101 taxmann.com 455 (Mumbai - Trib.) (Pronounced on
31st December, 2018)

1. In the said case, the question before the ITAT was regarding deduction of loans/advances
given by the assessee to a production house run by his wife, as bad debts u/s. 36(1)(vii) or
as a business loss u/s. 37.
2. The ITAT while answering the above question adopted a broader view to the concept of
commercial expediency behind giving of guarantees and loans to his wife by the assessee.
 3. It was stated in the assessee's case the moneys were advanced to the proprietary concern of
his wife and also in her individual capacity to build up the career of the assessee
as well as to promote the business of his wife and also to recover the moneys
already advanced to her which is all goes to show that the moneys were advanced as a
measure of commercial expediency. When the moneys are advanced as measure of
commercial expediency such advances are in the nature of business advances and the write
off of such advances by the assessee should be allowed as deduction under section 37(1) or
section 28(i) as business loss. (Refer Para 27 and 28)

Claiming the loss under capital gains as relinquishment of right to receive the loan:

A. CIT v. Grace Collis [2001] 115 Taxman 326 (SC) (Pronounced on Februray 23, 2001)

1. One of the issues for consideration before the SC was whether the expression
'extinguishment of any rights therein' in section 2(47) (ii) is limited to such extinguishment on
account of transfer or whether the same would cover extinguishment of rights independent of
or otherwise than on account of transfer.
2. The SC overruled the judgement in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR
647 and held that the definition of transfer u/s. 2(47) of the Act clearly contemplates the
extinguishment of rights in a capital asset distinct and independent of such extinguishment
consequent upon the transfer thereof.
3. The SC held that to read the expression as extinguishment of rights only on a transfer is to
render it ineffective and its use meaningless.
4. Hence, the SC held that the expression does include the extinguishment of rights in a capital
asset independent of and otherwise than on account of transfer. (Refer Para 15)