Facts of the Case

The assessee, GE Money Financial Services Pvt. Ltd., engaged in the business of non-banking financial services, claimed deduction in respect of loss arising on sale of its loan portfolio. The Revenue challenged the treatment of such loss, contending that the same did not fall within the capital stream and ought to be treated as income.

The assessee relied upon the statutory framework under Section 36(2)(i) of the Income Tax Act and also placed reliance upon the identical treatment granted in the earlier Assessment Year 2004-05, where the Tribunal had accepted a similar claim. The Revenue carried the matter before the Delhi High Court challenging the Tribunal’s findings.

 Issues Involved

  1. Whether loss arising on sale of loan portfolio qualifies for deduction under Section 36(2)(i) of the Income Tax Act, 1961?
  2. Whether such loss is to be treated in the revenue field or capital field?
  3. Whether the Tribunal’s acceptance of similar treatment in earlier years justified consistency in the assessee’s claim?

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that the loss on sale of loan portfolio could not be treated as allowable deduction.
  • It argued that such loss was not in the nature contemplated under Section 36(2)(i).
  • The Revenue maintained that the transaction should be viewed as part of the capital stream and not as a deductible business loss.

 Respondent’s Arguments (Assessee)

  • The assessee argued that being an NBFC, lending constituted its ordinary business activity.
  • The sale of loan portfolio represented business assets arising in the course of money-lending operations.
  • It relied on Section 36(2)(i), emphasizing that the debt had been taken into account in computing income.
  • The assessee also relied upon the Tribunal’s earlier order for AY 2004-05 where identical treatment was accepted.

 Court Findings / Order

The Delhi High Court observed that the assessee had relied upon an identical treatment of similar amounts in the previous Assessment Year 2004-05 and the Tribunal had accepted the same.

The Court held that the statutory requirement under Section 36(2)(i) was duly considered and no legal infirmity arose in the Tribunal’s order.

Accordingly, the Court concluded that no substantial question of law arose for consideration and dismissed the appeals filed by the Revenue.

 Important Clarification

This judgment clarifies that where an NBFC is engaged in money-lending as its regular business activity, loss arising from sale of loan portfolios can be treated within the framework of business deduction, subject to satisfaction of Section 36(2)(i).

The ruling also reinforces the principle of consistency in tax treatment, especially where similar claims were accepted in earlier years.

 Sections Involved

  • Section 36(2)(i) – Conditions for allowance of bad debts
  • Section 36(1)(vii) – Bad debts written off
  • Income Tax Act, 1961

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8953-DB/SRB01112017ITA2252017_125407.pdf

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