HC Denied Bad Debt Claim as Standing as Guarantor Wasn’t the Main Object of Assessee Co.

Case Details: Principal Commissioner of Income-tax vs. WGF Financial Services (P.) Ltd. - [2025] 172 taxmann.com 125 (Delhi)

Judiciary and Counsel Details

• Vibhu Bakhru & Ms Swarana Kanta Sharma, JJ.
• Puneet Rai, Ashvini Kumar & Rishabh Nangia, Advs. for the Appellant.
• Ms Shreya Jain & Gaurav Tanwar, Advs. for the Respondent.

Facts of the Case

Assessee, a financial services company, stood as a guarantor for a loan availed by its group company CIPL. CIPL defaulted in repayment obligations. In view of a settlement agreement between CIPL and the assessee, the assessee wrote off the balance of certain amount in its profit and loss account and claimed the same as deduction under section 36(1)(vii).

Assessee’s case was that CIPL had become financially sick on account of heavy losses, and therefore, it was not feasible to recover any further amount from said company. Assessing Officer (AO) disallowed deduction on grounds that giving a guarantee was not one of the main objects of the assessee; secondly, the assessee had not initiated any legal proceedings for recovery of amounts due.

The matter reached before the Delhi High Court.

High Court Held

The Delhi High Court held that furnishing of guarantees was a part of the objects of the assessee, which were incidental or ancillary to the main objects. Therefore, it was difficult to accept that the assessee had furnished guarantees as a part of its ordinary course of business.

Assessee had not entered into any similar transaction whereby it had stood as a surety/guarantor for any other entity for a consideration. Assessee had furnished a guarantee for loan availed by borrowers (its group companies) as an isolated transaction. Plainly, it was not a transaction that was entered into in the ordinary course of business.

Further, during the same financial year, CIPL donated Rs. 10 crores, and at the same time, the assessee had written off a large amount due from CIPL as unrecoverable. It was also noted that the assessee had not taken any effective steps to recover amounts from CIPL. Thus, bad debt claimed by assessee was not allowable as an expense under section 36(1)(vii) read with section 36(2)(i).

List of Cases Reviewed

• Madan Gopal Bagla v. Commissioner of Income Tax (1956) 30 ITR 174 [Para 26]
• Commissioner of Income Tax v. Birla House (P) Ltd. (1970) 2 SCC 88 [Para 27] followed
• Order passed by Tribunal in ITA No.8218/Del/2019 dated 10.03.2021 reversed.

List of Cases Referred to

• Madan Gopal Bagla v. CIT [1956] 30 ITR 174 (SC) (para 26).