Revisionary powers under Section 263 not justified as AO's order deemed correct. Assessee's appeal partially allowed.

The ITAT held that the Pr. CIT's revisionary powers under Section 263 were not justified as the AO's order was deemed correct and not detrimental to revenue interests. The assessee's appeal was partially allowed, overturning the revision order issued by the Pr. CIT.

---

---

Issues Involved:
1. Capital work in progress written off as revenue expenses.
2. Claim of depreciation on assets under finance lease.
3. Non-recognition of gross income on securitization and assignment of loans.

Detailed Analysis:

1. Capital Work in Progress Written Off as Revenue Expenses:
The assessee had written off Rs. 690.18 lakhs under the head 'other expenses' in the profit and loss account. The Principal Commissioner of Income Tax (Pr. CIT) initially questioned this treatment, suggesting it should be disallowed as it was of a capital nature. However, upon reviewing the assessee's submission dated 26/03/2022, the Pr. CIT found the submission tenable and did not interfere with the Assessing Officer's (AO) decision to allow these expenses as revenue expenses. Consequently, the assessment order was not set aside on this ground, and the assessee withdrew Ground No. 3 related to this issue.

2. Claim of Depreciation on Assets Under Finance Lease:
The assessee, a Non-Banking Finance Company (NBFC), claimed depreciation of Rs. 4754.29 lakhs on assets under finance lease. The Pr. CIT contended that depreciation should not be allowed to the lessor (assessee) as the lessee is entitled to claim it. The assessee argued that for finance lease transactions, the cost of leased vehicles is shown as loans advanced in the balance sheet, and lease rentals are bifurcated into principal and interest components. The principal component is adjusted with loans advanced, and the interest component is credited to the profit and loss account. The assessee consistently followed this accounting method, which is in line with generally accepted accounting standards in India.

The Pr. CIT observed that under Accounting Standard (AS-19), finance leases transfer all risks and rewards incidental to ownership to the lessee, making the lessor's ownership nominal. However, the Supreme Court in the case of Taparia Tools Ltd. vs. JCIT held that accounting entries do not determine taxability or deductibility. The assessee demonstrated that it met the twin requirements of Section 32 of the Income-tax Act, 1961 (ownership and usage for business) and cited the Supreme Court judgment in R.S.V.S. Ltd. vs. CIT, which allowed depreciation claims for leased vehicles. The ITAT found that the AO's order was neither erroneous nor prejudicial to the revenue's interest regarding the depreciation claim.

3. Non-Recognition of Gross Income on Securitization and Assignment of Loans:
The Pr. CIT noted that the assessee did not recognize gross income of Rs. 1290.58 lakhs from securitization and assignment of loans. The assessee disclosed in its financial statements that it recognized excess interest spread (EIS) on securitization transactions only when redeemed in cash, in line with RBI guidelines. The assessee argued that as an NBFC, it is bound by RBI instructions, which override the Income-tax Act provisions. The ITAT Delhi in Tedco Investments and Financial Services Pvt. Ltd. vs. DCIT supported this stance.

The assessee explained that securitization involves selling a pool of performing assets to a special purpose vehicle (SPV), which becomes the legal owner of the loan portfolio. The EIS is paid to the assessee only after all other payments are made as per the waterfall mechanism in the securitization agreement. The EIS of Rs. 1290.58 lakhs was not recognized as income in AY 2017-18 as it was not received, but it was accounted for in subsequent years when received. The Pr. CIT's reference to ICDS-IV was found inapplicable as the EIS is not interest but a contractual receipt. The ITAT found no prejudice to the revenue's interest, as the income was recognized in subsequent years.

Conclusion:
The ITAT concluded that the Pr. CIT's invocation of revisionary powers under Section 263 was not justified as the AO's order was neither erroneous nor prejudicial to the revenue's interest. The appeal of the assessee was partly allowed, quashing the revision order passed by the Pr. CIT.

---