ITAT allows bad-debt claim on irrecoverable loan

The ITAT, Mumbai allowed a ₹5 crore deduction as a bad-debt or business loss for an irrecoverable loan advanced to Mr. Ramalinga Raju, accepting the assessee’s evidence of bona fide lending, attempts at recovery, and circumstances establishing irrecoverability. The Tribunal examined documentary proof (loan agreements, communications, steps for recovery, audit records) and applied tests distinguishing bound-over contingent claims from genuine bad-debt write-offs. The decision reinforces that substantive commercial realities and credible contemporaneous records — not mere bookkeeping entries — are decisive for tax recognition of bad debts. For taxpayers, the ruling underlines the importance of formalizing lending transactions, preserving proof of default and recovery efforts, and complying with accounting norms for provisioning/write-offs. Tax authorities should similarly ensure that recharacterisation is not made without probing the factual matrix. The case has wider implications for creditors and investors evaluating tax treatment of distressed exposures and non-recoverable receivables.