Pledge Shares to Support Sister Concern’s Loan is Business Activity: Madras HC Backs Writing off of ₹8.46 Crore Bad Debt

The Madras High Court has delivered a significant judgment, ruling that pledging shares to support a sister concern's loan constitutes a legitimate business activity. Consequently, the court allowed the writing off of a bad debt of Rs. 8.46 crore that arose when the pledged shares were sold by the lender to recover the defaulted loan amount. The Income Tax department had disallowed the write-off, arguing that the transaction was not directly related to the assessee's own business. However, the High Court observed that supporting a sister concern is a common commercial practice driven by business expediency and strategic considerations. It held that the loss incurred from the invocation of the pledge was a business loss and therefore, the resulting bad debt was an allowable deduction. This ruling provides crucial clarity on the tax treatment of inter-corporate financial support and recognizes the commercial realities of modern business group structures.