Revenue vs. DBS Bank Ltd [I.T.A. No. 2429/Mum/2025 & 2430/Mum/2025]
Background of the Case
The appeals were filed by the Revenue against the order of CIT(A), for Assessment Years 2016–17 and 2017–18. DBS Bank Ltd., a scheduled banking company, had advanced loans to 3i Infotech Ltd. The borrower underwent a Corporate Debt Restructuring (CDR) process under which a portion of the outstanding loan of Rs.33.50 crores was compulsorily converted into 1,69,70,618 equity shares. Although the shares were allotted on 8 October 2015 at Rs.19.74 per share, they were actually credited into the bank’s Demat account on 27 November 2015 when the market value had sharply fallen to Rs.3.95 per share. After adjusting overdue interest, this resulted in a net loss of Rs.10.04 crores, which the bank wrote off as a bad debt/business loss in its books.
The Assessing Officer, however, disallowed the claim by treating it as a capital loss. The Revenue approached the Tribunal challenging CIT(A)’s decision which had allowed the deduction following the Tribunal’s own order in the assessee’s case for AY 2015–16.
Arguments by the Appellant (Revenue)
The Revenue argued that the CIT(A) erred in allowing the deduction for the write-off of enhanced debt and wrongly imported RBI restructuring guidelines into income-tax provisions. According to the department, once the loan was converted into equity, the bank acquired a capital asset, and the subsequent fall in share value represented a capital loss, not a business loss or bad debt. The AO relied on judgments of the Bombay High Court in TN Power Financial & Infrastructure Development Corporation Ltd. and the Supreme Court decision in Southern Technologies, asserting that RBI guidelines cannot override the Income-tax Act.
It was also submitted that the bank was not engaged in trading of shares and therefore the equity obtained on conversion could not be treated as stock-in-trade. The AO also rejected the bank’s alternative claims under sections 28 and 37, stating that a disallowed deduction under section 36 cannot be claimed under section 37 as a residuary provision.
Respondent’s Response (Assessee)
The Respondent, submitted that the loss was not a capital loss but a diminution in the value of an existing loan asset, which forms part of the circulating capital of a banking business. The conversion into equity was not a voluntary investment decision but a compulsory component of the CDR package meant to maximize recovery of stressed assets. The receivable continued to retain the same commercial character as stock-in-trade, and the loss represented an erosion in recoverability, fully written off in the books. The assessee emphasized that, in AY 2015–16, the ITAT had already allowed an identical claim involving another CDR case, treating the loss as a deductible bad debt or business loss.
It further argued that banking norms, RBI guidelines, and accounting standards require recognition of such diminution through the profit and loss account. Even if not strictly a bad debt, the loss was incidental to banking operations and allowable under section 28 or alternatively under section 37(1).
Court Findings and Decision
The ITAT Mumbai held that the AO’s approach was incorrect and that the substance of the transaction must be recognized. It observed that the original loan was part of the circulating capital of the bank, and the conversion into equity was a compelled restructuring measure, not an investment. The substituted asset (shares) had significantly lower realizable value on the date of credit in the demat account, resulting in a genuine, irreversible loss. The Tribunal held that the write-off fulfilled the conditions under section 36(1)(vii) read with section 36(2), as the unrecoverable portion of the debt was written off in the books as irrecoverable. Even viewed differently, it was a business loss arising directly from the banking business and was allowable under section 28, or alternatively under section 37(1).
The ITAT also relied on its earlier order in the assessee’s favour for AY 2015–16. Consequently, the Tribunal dismissed the Revenue’s appeal and upheld the CIT(A)’s decision allowing the deduction.
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