Facts of the Case

The present appeal was filed by the Revenue before the Delhi High Court concerning Assessment Year 2010–11. The dispute arose from an order passed by the Income Tax Appellate Tribunal (ITAT) dated 30.04.2020.

The Respondent, VE Commercial Vehicles Ltd., had acquired the commercial vehicle division of Eicher Motors Ltd. through a scheme of demerger. Subsequently, the Respondent claimed deduction of bad debts amounting to ₹5,96,20,438/- which were originally due to the predecessor entity (Eicher Motors Ltd.).

The Revenue challenged the allowability of such deduction under Sections 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, contending that the successor entity was not entitled to claim such bad debts.

Issues Involved

  1. Whether a successor entity, post demerger, is entitled to claim deduction of bad debts originally pertaining to the predecessor entity.
  2. Whether such deduction satisfies the conditions prescribed under Sections 36(1)(vii) and 36(2) of the Income Tax Act, 1961.
  3. Whether the Tribunal erred in allowing deduction of bad debts to the Respondent.

Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that the deduction of bad debts was not permissible since the debts did not originally belong to the Respondent.
  • It was argued that the conditions under Section 36(2) were not fulfilled by the successor entity.
  • The Revenue sought to distinguish the position of the predecessor and successor entities for the purpose of claiming deductions.

Respondent’s (Assessee’s) Arguments

  • The Respondent submitted that the bad debts had already been offered to tax by the predecessor entity, Eicher Motors Ltd.
  • It was emphasized that upon demerger, all assets and liabilities, including debts, were transferred to the Respondent.
  • Therefore, the Respondent, being the successor-in-interest, was entitled to write off such debts when they became irrecoverable.

Court’s Findings / Order

  • The Court noted that it was undisputed that:
    • The debts had become bad.
    • The predecessor entity had already offered such debts to tax earlier.
  • The Court held that the issue was no longer res integra in view of binding precedents:
    • Commissioner of Income Tax v. T. Veerabhadra Rao
    • CIT v. Times Business Solution Ltd.
  • Applying the above precedents, the Court concluded that:
    • A successor entity is entitled to claim deduction of bad debts if the conditions of the statute are satisfied.
    • The disallowance of ₹5,96,20,438/- was rightly deleted.
  • The Court further held that no substantial question of law arises, and accordingly, the appeal was dismissed.

Important Clarification

  • The judgment clarifies that post-demerger, the successor entity steps into the shoes of the predecessor for tax purposes concerning transferred assets and liabilities.
  • If the predecessor has already accounted for the income, the successor can validly claim deduction of bad debts upon write-off.
  • The ruling reinforces the principle that substance over form applies in tax treatment of corporate restructuring.

Sections Involved

  • Section 36(1)(vii) – Deduction of bad debts
  • Section 36(2) – Conditions for allowability of bad debts

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS15092023ITA3292023_210601.pdf

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