2011 (4) TMI 504 - AT - Income Tax

Tribunal upholds CIT (A) decisions in favor of assessee on various additions

DCIT Versus Maruti Countrywide Auto Financial Services (P) Ltd.

The Tribunal dismissed all three appeals filed by the revenue, upholding the CIT (A)'s orders in favor of the assessee on the deletion of additions ... Loss on sale of repossessed assets - The assessee is a non-banking financial company (NBFC) engaged inter alia in the business of auto finance, lease and hire purchase. - Held that:- Although the appellant company has used the nomenclature as 'loss on Sale of Repossessed Assets' as provide under NBFC norms but the fact of the matter is that it is a 'write off of bad debts.' - When the customer makes default in payment of loan the vehicle is reprocessed and sold. - It is not a case of trading loss u/s 28 - Deduction claimed by the assessee was admissible u/s 36 of the Income-tax Act - Decided in favor of the assesseeRegarding non-offer of interest income on sticky loans and advances - Accrual or receipt basis - It was submitted that the recovery of the loan and advance itself was in dispute or was doubtful and the assessee is an NBFC and has to follow the norms prescribed by the RBI - High Court in the case of CIT vs. Vasisth Chay Vyapar Ltd. (2010 -TMI - 202354 - Delhi High Court) has held that if in any enactment the provisions contained a non-obstante clause, that would override the provisions of the Income-tax Act and it was held that Section 45Q of RBI Act having a non-obstante clause will prevail over the Income-tax Act - An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable - Supreme Court itself has held that when there is a provision in other enactment which contains a non obstante clause, that would override the provisions of Income-tax Act - Decided in favor of the assessee Regarding advertisement and business promotion expenses - it was observed by the Assessing Officer that a major part of the expenses have been spent on advertisement in print and electronic media which directly contribute towards brand promotion which relates to Maruti Udyog Ltd - If any expenditure is incurred on the ground of commercial expediency, it shall be treated as normal business expenditure even if somebody other than the assessee is also benefited by the said expenditure - The genuineness and the actual incurrence of these expenditures have not been doubted by the Assessing Officer - According to the case law relied upon by the assessee before the CIT (A), it has been clearly laid down that if the expenditures are incurred for the purpose of business of the assessee and if incidentally those expenditure benefit the other party, then also no part of those expenditures could be disallowed on the ground that the assessee did not incur such expenditure wholly and exclusively for the purpose of its business - Decided in favor of the assessee Issues Involved:1. Deletion of addition on account of loss on sale of repossessed assets.2. Deletion of addition on account of accrued interest on sticky loans.3. Deletion of addition on account of disallowing 50% of expenses incurred on advertisement and business promotion expenses.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Loss on Sale of Repossessed Assets:The revenue contested the deletion of additions made by the Assessing Officer (AO) on account of loss on sale of repossessed assets for the assessment years 2002-03, 2005-06, and 2006-07. The assessee, a non-banking financial company (NBFC), argued that such losses were business losses and not capital losses. The Tribunal had previously upheld the CIT (A)'s decision in favor of the assessee in similar cases, noting that the loss on sale of repossessed assets is akin to a 'write off of bad debts' as per Section 36(1)(vii) read with Section 36(2) of the Income-tax Act. The Tribunal reiterated that the assessee did not claim depreciation on these assets, and the repossessed assets were treated as current assets. Therefore, the loss incurred was considered a business loss. The Tribunal dismissed the revenue's appeals, affirming the CIT (A)'s deletion of the additions.2. Deletion of Addition on Account of Accrued Interest on Sticky Loans:For the assessment year 2002-03, the AO added Rs. 36,65,022/- to the income of the assessee on account of accrued interest on sticky loans, arguing that the assessee followed the mercantile system of accounting. However, the CIT (A) deleted the addition, noting that the assessee, being an NBFC, followed RBI guidelines which mandated non-recognition of interest on non-performing assets (NPAs) until actually realized. The Tribunal upheld the CIT (A)'s decision, referencing the Delhi High Court's ruling in CIT vs. Vasisth Chay Vyapar Ltd., which held that Section 45Q of the RBI Act, containing a non-obstante clause, overrides the Income-tax Act. The Tribunal agreed that the interest income on sticky loans did not accrue under the Income-tax Act due to the uncertainty of collection, thus dismissing the revenue's appeal.3. Deletion of Addition on Account of Disallowing 50% of Expenses Incurred on Advertisement and Business Promotion Expenses:For the assessment years 2005-06 and 2006-07, the AO disallowed 50% of the expenses incurred on advertisement and business promotion, arguing that these expenses primarily benefited the Maruti brand, which belonged to Maruti Udyog Ltd., and not the assessee. The CIT (A) deleted the disallowance, stating that the expenses were incurred to promote the assessee's business and establish its market presence. The Tribunal upheld the CIT (A)'s decision, noting that the genuineness of the expenses was not in question and that incidental benefits to a third party do not disqualify the expenses from being considered as incurred wholly and exclusively for the assessee's business. The Tribunal referenced several judicial precedents supporting the view that commercial expediency justifies such expenses. Consequently, the Tribunal dismissed the revenue's appeals on this ground as well.Conclusion:The Tribunal dismissed all three appeals filed by the revenue, upholding the CIT (A)'s orders in favor of the assessee on all contested issues. The order was pronounced in the open court on 29.04.2011.