WRITTEN SUBMISSIONS-59

Allowing the deduction of bad-debt write-off of interest receivables under sections 36(1)(vii) r/w 36(2)

WRITTEN SUBMISSIONS

Allowing the deduction of bad-debt write-off of interest receivables under sections 36(1)(vii) r/w 36(2)

BEFORE THE HON’BLE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI BENCH “E”

In the matter of:
Deputy Commissioner of Income-tax, Central Circle–7(2), Mumbai … Appellant/Revenue

Versus

M/s Aurora Capital & Estates LLP (Formerly: Aurora Ventures)
PAN: AAAFA9999A … Respondent/Assessee

Appeal Nos.: ITA Nos. 1873 & 1874/Mum/2025
Assessment Years: 2021–22 and 2022–23

Subject

Assessee–Respondent’s written submissions supporting the order of the learned Commissioner of Income-tax (Appeals) upholding: (a) allowance of bad-debt write-off of interest receivables under sections 36(1)(vii) r/w 36(2); (b) deletion of interest disallowance under section 36(1)(iii) in respect of loans advanced/deployed in the course of money-lending and allied business; (c) deletion of addition for alleged short accrual of interest based on a notional 24% rate without evidentiary foundation; and (d) deletion of a double addition of income already offered and taxed.

i Name of the assesses ------------ and address---------------.

ii PAN----------------.

iii Ayr-----------------.

iv DIN of the order appealed------------------.

v Appeal No. --------------.

Reference

Show Cause notice dated ………. DIN--------------------.

These submissions are filed in response to the Revenue’s appeals against the consolidated appellate order dated 14 February 2025 passed by the learned CIT(A)–14, Mumbai, for A.Ys. 2021–22 and 2022–23 under section 250 of the Income-tax Act, 1961 (“the Act”). The Assessing Officer (“AO”), DCIT, Central Circle–7(2), had framed assessments pursuant to a search, making four sets of adjustments which stood substantially deleted or modified by the learned CIT(A). The Revenue now challenges those deletions; the assessee–respondent supports the appellate order in toto.

1. Issue raised in this appeal by the Revenue:

For ease of navigation, the Revenue’s challenges (paraphrased) are:

I. Bad debts (interest written off): That the learned CIT(A) erred in allowing the assessee’s write-off of outstanding interest receivables as bad debts under sections 36(1)(vii) r/w 36(2), allegedly for want of party-wise particulars and proof of actual “badness.”

II. Interest on borrowed capital — section 36(1)(iii): That the learned CIT(A) erred in deleting the AO’s disallowance of interest by alleging that borrowed funds were advanced to related parties at rates lower than the average borrowing cost or for non-business purposes.

III. Notional short-accrued interest: That the learned CIT(A) erred in deleting an addition for “short accrual” computed by the AO by assuming a flat 24% interest rate across closing loan balances and treating the difference as concealed income.

IV. Double addition of already offered income: That the learned CIT(A) erred in deleting an addition of ₹ 52.70 crore (hypothetical), contended by the AO to be unreflected in the Profit & Loss account, though the same stood already offered in the return and embedded in the financial statements.

2. Facts of the case:

1. The assessee and its business model: Aurora Capital & Estates LLP (“Aurora/assessee”) is a long-standing partnership LLP engaged in a dual vertical model:

i. Real estate ventures (project acquisition, development, and structured land advances);

ii. Licensed money-lending (retail, SME and project-linked credit arrangements) under the Maharashtra Money-Lending (Regulation) framework.

Aurora maintains audited books (section 44AB), follows mercantile accounting, recognises interest on accrual, and when recovery becomes commercially unviable, writes off overdue interest to protect the principal and preserve recoverability prospects.

2. Search and post-search compliances: A search under section 132 occurred on 16 December 2021. Seizure included complete electronic ledgers and cloud backups, including borrower-wise interest accruals, receipts, waivers, and write-offs. Post-search, Aurora quantified additional income on real estate reconciliations and embedded it in revised/regular returns for A.Ys. 2021–22 and 2022–23; corresponding taxes were paid.

3. Assessment adjustments. In summary:

   1. (A.Y. 2021–22) AO disallowed bad-debt write-off of interest receivables (~₹ 58.40 crore), despite acknowledging that such interest had been credited in earlier years;

   2. AO disallowed interest u/s 36(1)(iii) (~₹ 6.20 crore) alleging lower-yield loans to related concerns and a land-linked advance;

   3. AO added notional short-accrued interest (~₹ 24.10 crore) by applying 24% uniformly across unrelated-party loans;

   4. (A.Y. 2022–23) AO re-added ₹ 52.70 crore already offered in the ITR/financials as “undisclosed,” alleging non-discernibility in the P&L.

IV. CIT(A)’s findings: After calling remand reports, examining seized party-wise ledgers, MOUs, and bank trails, the learned CIT(A):

4. Allowed the bad-debt claim, holding that both conditions of section 36(2) stood fulfilled and that ledgers were indeed on record;

5. Deleted the 36(1)(iii) disallowance, holding that funds were used for business, including structured ventures and mixed funds; lower yield did not disqualify the claim;

6. Deleted the 24% notional accrual addition as unsupported by evidence; actual contract rates varied (12–18% typical) and were demonstrated borrower-wise;

7. Deleted the double addition, noting clear embedding in the return and computation; the AO’s grievance was merely “tagging”/presentation.

3. Reasons of decision by the AO:

1. Bad debts (interest): The AO acknowledged that the assessee had been recognising interest on accrual in earlier years but disallowed the write-off for alleged absence of party-wise details and to insist on proof of irrecoverability.

2. Section 36(1)(iii): The AO computed an average borrowing cost (~10%) and compared this with implied lending rates to related concerns (~6%), proposing disallowance for non-business purpose/ diversion and for a land advance to an education trust/affiliate.

3. Notional accrual @24%: The AO assumed that all loans to unrelated parties carried 24% and, comparing this notional accrual with accrual actually credited, added the difference as undeclared income.

4. Double addition: Despite search-year disclosures placed in the record and returns, the AO re-added the amount, saying it was not visible in P&L.

4. Reasons of decision by the learned CIT(A):

1. Bad debts: The CIT(A) noted that electronic ledgers seized contained party-wise interest accruals and the write-off journal entries; the AO’s claim of non-availability was incorrect. The interest written off related to prior-year accruals already taxed, satisfying section 36(2); and post-1989 amendment and CBDT Circulars, proof of “badness” is not required—write-off suffices.

2. Section 36(1)(iii): The CIT(A) recorded commercial expediency and business deployment: (i) certain loans earned 12%, exceeding average cost; (ii) partners’ current account movements were not loans; (iii) the land-linked advance was a business advance in the realty vertical; (iv) loans under MOUs envisaged profit-sharing, a valid business structuring; and (v) lower yield to a charitable affiliate per se does not trigger disallowance when funds are used for the business of money-lending/financial intermediation.

3. 24% notional accrual: The CIT(A) found no incriminating material suggesting a uniform 24% rate; borrower-wise reconciliations showed 12–18% range with business rationales (tenor, ticket size, credit history). Estimation on unsupported assumption was unsustainable.

4. Double addition: The CIT(A) verified the financials and computation, found the amount already embedded, and deleted the duplicate addition.

5. Submissions on facts:

1. Seized ledgers support write-off and satisfy section 36(2): The assessee placed before the CIT(A) and can place before this Hon’ble Bench borrower-wise ledgers showing: (a) prior-year accrual of interest credited and taxed; (b) subsequent write-off entries; (c) rationales (bankruptcy, pandemic-era restructurings, waiver to protect principal). The AO’s assertion that details were unavailable is contradicted by the seizure memo and the ledger extracts.

2. Accounting and audit trail: The write-offs are booked and audited; no section 145(3) rejection is made; tax audit carries no adverse note. The fact pattern mirrors settled jurisprudence that post-1989, the write-off entry itself completes the condition of section 36(1)(vii), subject to section 36(2), which is satisfied here because the very interest written off had been taken into account in earlier years.

3. Business deployment of borrowings: The assessee’s money-lending vertical is not a pure spread business; it also engages in profit-linked MOUs, structured credits, land-backed advances and relationship pricing. The Revenue cannot dictate pricing; so long as use for business is shown, section 36(1)(iii) allows the interest cost—even where returns are lower or deferred.

4. Notional 24% assumption lacks foundation: No document seized and no agreement produced by AO shows a uniform 24% rate. On the contrary, contracts and ledgers show heterogeneous rates driven by risk/tenor/relationship. The addition is a pure estimate on a wrong premise.

5. Double addition is demonstrably erroneous: The supplementary income admitted post-search was incorporated in the computation and ITR; the AO’s complaint is only of presentation. The CIT(A) verified this; no contrary finding exists from Revenue. Two taxations of the same sum offend the scheme of the Act.

6. Submissions on law:

A. Bad debts — Sections 36(1)(vii) and 36(2):

1. Statutory position after 1-4-1989 (Direct Tax Laws (Amendment) Act, 1987): it is not necessary to establish that the debt in fact became bad; it suffices if it is written off as irrecoverable in the books (subject to 36(2)). CBDT Circular No. 551 (23-1-1990) and CBDT Circular No. 12/2016 (30-5-2016) reiterate this.

2. Supreme Court in TRF Ltd. v. CIT, 323 ITR 397: unequivocal that post-1989, mere write-off suffices; the AO’s role is only to verify that write-off is made in the accounts.

3. High Courts/ITATs consistently apply the above: see, e.g., Citadel Fine Pharmaceuticals Ltd. v. DCIT (Madras HC), ING Vysya Bank (Karnataka HC), etc. The assessee’s case aligns squarely: (i) write-off is made and audited; (ii) section 36(2) is met because the interest was earlier included in income.

B. Interest on borrowed capital — Section 36(1)(iii):

1. The phrase “for the purposes of the business” has a wide connotation; it does not require demonstration of immediate or matching income. Commercial expediency governs. See Supreme Court in S.A. Builders Ltd. v. CIT; Madhav Prasad Jatia v. CIT; and Taparia Tools Ltd. v. JCIT on the revenue’s inability to substitute its judgment for the businessman’s.

2. Where funds are mixed, and overall borrowings are used in business, nexus is presumed unless the Revenue establishes diversion for non-business purposes. Loans under MOUs contemplating profit-share are business arrangements; deferred yield or lower coupon does not denude the business purpose.

3. Partners’ current account movements are not “loans” unless the deed stipulates interest. Business advances in realty (e.g., land-linked advances) are on capital account for business; the associated cost is allowable.

C. Notional short-accrued interest:

1. Section 5 r/w 145: income must accrue per real terms of contracts; notional interest at an assumed rate is impermissible unless the contract so provides or there is evidence of suppression. Without material (seized or otherwise) showing a 24% contractual rate, the addition is without foundation.

2. Appellate authorities have repeatedly struck down flat-rate assumptions absent evidence; the CIT(A)’s appreciation that borrower-wise rates were 12–18% on facts is unassailable.

D. Double addition of already offered income:

1. The Act does not countenance double taxation of the same stream. Once embedded in the returned income, a second addition for the same amount is ultra vires. The AO’s insistence on visibility in a particular line item cannot override the computation as a whole.

2. This Hon’ble Tribunal has, on comparable facts, declined Revenue’s plea when no dispute survives as to inclusion in the returned income and only tagging/break-up is sought.

7. Case laws in support:

1. TRF Ltd. v. CIT, (2010) 323 ITR 397 (SC): Bad debts post-1989: write-off in books is sufficient; AO cannot insist on proving the debt became bad.

In this case the Supreme Court clarified the law on bad debts after the 1989 amendment to section 36(1)(vii) of the Income-tax Act. The Court held that prior to 1 April 1989, the assessee had to prove that a debt had actually become irrecoverable to claim deduction. However, post-amendment, the word “established” was deleted, and it is now sufficient if the bad debt is written off as irrecoverable in the books of account. There is no requirement to prove that the debt has, in fact, become bad. The only condition is a bona fide write-off—by debiting the bad debt account and crediting the debtor’s account or adjusting it against provisions for doubtful debts. Since in the present case the Assessing Officer had not examined whether such write-off was actually made, the Supreme Court remitted the matter for fresh verification limited to this factual aspect.

2. CBDT Circular No. 551 (23-01-1990) and CBDT Circular No. 12/2016 (30-05-2016): Clarify the legislative intent; instruct not to litigate once write-off and section 36(2) are satisfied.

3. Citadel Fine Pharmaceuticals Ltd. v. DCIT, (2025) 476 ITR 193 (Mad.): — Follows TRF Ltd.; write-off suffices for deduction.

The Madras High Court reaffirmed that, post-1-4-1989, a write-off in the books is sufficient to claim deduction of bad debts under section 36(1)(vii). Relying squarely on the Supreme Court ruling in T.R.F. Ltd. v. CIT (2010), the Court held that an assessee need not prove that the debt has actually become irrecoverable; it is enough that the amount is written off as irrecoverable in the relevant financial year through proper accounting entries. In Citadel’s case, the Assessing Officer himself recorded that ₹4.94 crore had been written off (restricted by him to ₹4.07 crore). Applying TRF, the High Court directed that the claim be allowed on the strength of the write-off, without further enquiry into factual irrecoverability or business cessation arguments. Thus, once a bona fide write-off is evidenced in the accounts for the year, the deduction under section 36(1)(vii) follows, subject only to section 36(2) conditions.

4. S.A. Builders Ltd. v. CIT, (2007) 288 ITR 1 (SC): Commercial expediency governs 36(1)(iii); Revenue cannot dictate business prudence.

The Supreme Court held that deductibility of interest on borrowed funds turned over to a sister/subsidiary concern hinges on commercial expediency. The phrase “for the purposes of business” in §36(1)(iii) (and §37) is of wide import: an expenditure may be allowable even if it yields no direct, immediate profit to the assessee, provided a prudent businessman would regard it as facilitating business. Consequently, the Revenue cannot sit in the armchair of the businessman to dictate how funds should be deployed or to insist on profit-maximisation. The correct enquiry is whether there is a nexus between the loan and business purposes (which need not be confined to the assessee’s own business where deep business interest exists, e.g., in a subsidiary). The Court disapproved the restrictive Bombay view in Phaltan Sugar Works and approved Dalmia Cement. As lower fora had not examined expediency on facts, the matter was remanded for fresh determination.

5. Madhav Prasad Jatia v. CIT, (1979) 118 ITR 200 (SC): “For the purposes of business” is wide; immediate profit is not a condition.

The Supreme Court reiterated that the expression “for the purposes of business” in the (then) §10(2)(iii)/(xv) of the 1922 Act (now §§36(1)(iii)/37(1)) is wider than “for earning income” in §12(2). It can cover acts for running, protecting, or preserving the business and need not yield immediate or direct profit (applying Malayalam Plantations). However, the width has limits: the expenditure must have a business nexus and be incurred in the assessee’s capacity as a person carrying on business. On facts, interest on ₹5.5 lakh borrowed to fulfil a personal charitable promise (donation to an engineering college) was not for business purposes; the borrowing was unrelated to business and hence interest was not deductible under §10(2)(iii)/(xv). Likewise, interest credited on the undelivered balance ₹4.5 lakh was disallowed as no completed gift/trust existed. Thus, while “business purpose” is broad and does not require immediate profit, personal or sentimental outlays fall outside its ambit.

6. Taparia Tools Ltd. v. JCIT, (2015) 372 ITR 605 (SC): — Assessee’s method of recognising expenditure/income can’t be supplanted if it is bona fide and as per law.

The Supreme Court held that where the assessee, following the mercantile system, actually pays upfront interest under a valid debenture term, the entire amount is deductible in that year under section 36(1)(iii) read with section 43(2). The Revenue cannot override a lawful, bona fide recognition method by invoking a “matching concept” or by relying on the assessee’s book presentation as “deferred revenue”. Books are not conclusive; the Act governs. Unless the assessee itself opts to spread an expenditure and the statute or accepted principles (e.g., Madras Industrial Investment Corp. for debenture discount) justify amortisation, the ordinary rule applies: revenue outgo incurred/paid in the year is allowed in that year. The AO cannot recast contractual terms or treat two distinct payment options (periodic vs. upfront) alike. There is no estoppel against statute; a different book treatment does not bar claiming the full deduction as per law.

7. CIT v. RPG Transmissions Ltd., 359 ITR 673 (Mad.): Interest allowable where business purpose exists; matching principle is not a statutory test for 36(1)(iii).

In CIT v. RPG Transmissions Ltd. (Madras HC), the court held that interest on borrowed funds is allowable under section 36(1)(iii) when the borrowing serves a business purpose, even if the immediate monetary return is modest or deferred. It approved the Tribunal’s finding of a proximate nexus between the assessee’s business and its strategic investments in group companies, rejecting the AO’s focus on low returns versus interest cost. Crucially, the court clarified that section 36(1)(iii) does not import the section 57(iii) test of “wholly and exclusively for earning income,” nor does it place any embargo on investments in group/subsidiary concerns when commercially justified. Thus, where commercial expediency exists, interest is deductible; evaluating deductions by “matching” outflows with contemporaneous inflows (the matching principle) is not a statutory precondition for section 36(1)(iii). The correct inquiry is business nexus and genuineness of purpose, not the timing or quantum of resultant income.

8. CIT v. Sahni Silk Mills (P) Ltd., 253 ITR 294 (Del.)

In this case Delhi High Court held that no disallowance of interest is permissible merely because the assessee earns a lower yield on advances than the rate paid on borrowed funds, provided the borrowing is genuine and used for business purposes. The Assessing Officer had disallowed the differential 4% interest, arguing that the assessee charged only 12% while paying 16% on loans taken. The Tribunal found, and the High Court affirmed, that interest paid cannot be subjected to a “reasonableness” test under section 37(1). Once it is established that (i) borrowings are real, (ii) funds were utilised for business, and (iii) interest was actually paid, the Revenue cannot substitute its own judgment as to what rate should have been charged on advances. Consequently, business rationale and commercial expediency, not comparative yield, determine allowability of such expenditure.

9. Williamson Magor & Co. Ltd., 232 Taxman 533 (Cal.): No disallowance merely because yield is lower than cost where business rationale is shown.

In this case the Calcutta High Court upheld that no disallowance of interest under Section 36(1)(iii) can be made merely because the assessee charged a lower rate of interest on advances to associates than the rate paid on borrowings, so long as the borrowed capital was used for business purposes and the transactions were genuine. Relying on the Delhi High Court’s decision in CIT v. Sahni Silk Mills (P.) Ltd. [2001] 119 Taxman 133 (Delhi), the Court held that the Revenue cannot impose a “reasonableness test” to determine what rate of interest the assessee should have charged. Once the commercial rationale of advancing funds is shown, and borrowings are established as genuine business borrowings, the entire interest is allowable. The decision reinforces that business prudence and commercial expediency—not comparative yield or profit considerations—govern deductibility under Section 36(1)(iii).

10. This Tribunal’s ratio on identical clusters of issues: (bad debts of accrued interest, 36(1)(iii) vis-à-vis lower-rate deployments, 24% notional accrual, and double additions) has very recently been affirmed. The Chennai Bench “C”, on 12 September 2025, in a consolidated decision, has endorsed precisely these principles on nearly identical fact matrices, thereby offering persuasive guidance for the present appeals.

Respectfully, the above authorities and the persuasive coordinate-bench reasoning settle the four issues in favour of the assessee–respondent.

8. Prayer: In light of the facts established, the statutory framework, and the consistent judicial and administrative guidance, the assessee–respondent most respectfully prays that this Hon’ble Tribunal may be pleased to:

1. Uphold the learned CIT(A)’s order allowing the deduction of bad-debt write-off of interest receivables under sections 36(1)(vii) r/w 36(2), since (a) the write-off is booked and audited; and (b) the corresponding interest had been taken into account in earlier years.

2. Uphold the deletion of interest disallowance under section 36(1)(iii), recognising that the borrowed capital was used for the purposes of the business, including MOUs with profit-sharing, land-linked business advances, and relationship-priced loans; lower yield or deferred income does not negate the deduction.

3. Uphold the deletion of the notional short-accrued interest addition computed by assuming a 24% rate, there being no evidentiary basis for such a uniform rate, and given the demonstrated borrower-wise variability (12–18%) in line with commercial practice.

4. Uphold the deletion of the double addition for income already embedded in the return and computation, thereby preventing double taxation.

5. Dismiss the Revenue’s appeals in entirety with costs, and pass such further orders as this Hon’ble Tribunal may deem fit and proper in the interests of justice.

Place: [City]

Date: [•]

For the Appellant-Assessee

[Name], Advocate

Enrolment No.: [•]

Chambers: [Address]

Email: [•] | Phone: [•]

Annexures (Indicative, as already filed / to be filed)

1. Borrower-wise interest ledgers (pre-search to write-off year), journal entries, and seized data printouts.

2. Audited financial statements and tax audit report for A.Ys. 2021–22 & 2022–23.

3. MOUs/contracts for structured finance with profit-share clauses; bank trails.

4. Working of average borrowing cost vs actual lending rates (12–18% cluster) with rationale notes.

5. Reconciliation showing search-year income embedded in computation/ITR to demonstrate the double-addition error.

Submitted respectfully.

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