ITAT: Loan Write Off To Subsidiary Disallowed For Lack Of Commercial Prudence

The appellant, Matrix Clothing Pvt. Ltd., is a company engaged in the manufacturing and trading of garments and the generation of power through windmills. For the Assessment Year 2021-22, the company claimed a massive deduction of Rs. 53.24 crore as a “write-off” of loans and interest originally advanced to its wholly-owned subsidiary, Matrix Clothing Pvt. Ltd. Jordan LLC (Matrix Jordan).

The assessee argued that since the subsidiary was in deep financial distress and was eventually sold at a loss, the outstanding amount should be allowed as a business loss or bad debt. However, the Assessing Officer (AO) disallowed the claim, viewing it as a “colorable device” to shift profits and evade taxes, especially since the company continued to pour funds into the failing subsidiary right until the write-off.

Issue Raised: Whether the write-off of Rs. 53.24 crore representing loans and interest advanced to a foreign subsidiary is allowable as a business loss under Section 37(1) or as a bad debt under Section 36(1)(vii) of the Income Tax Act.

Tribunal Decided: The ITAT Delhi upheld the disallowance and ruled against the assessee. The Tribunal observed that the principle of “commercial expediency” was not satisfied. It was noted that even while the subsidiary was purportedly failing, the assessee advanced over ₹33 crore in fresh loans during the same financial year. The Bench held that no prudent businessman would continue to advance such large sums to an entity already identified for sale due to insolvency.

The Tribunal further clarified that the write-off did not qualify as a “bad debt” because the primary loan amount was never factored into the assessee’s income in previous years. While the ITAT granted relief on other smaller issues like R&D expenses and Section 80-IA deductions based on consistency, the primary addition of ₹53.24 crore was confirmed.

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