2022 (3) TMI 1634 - AT - Income Tax

Finance company wins on depreciation and indexation but faces remand on income recognition methods

M/s. Sundaram Finance Ltd. Versus ACIT, Large Taxpayer Unit, Chennai.

ITAT Chennai ruled on multiple issues for a hire purchase finance company. The tribunal directed the AO to consistently apply either EMI or ESM method for ... Method of recognizing income on hire purchase contracts - HELD THAT:- For income tax purpose, the assessee continued to follow ESM method as done in earlier years. Such change resulted in hire purchase finance charges on ESM basis being higher than the income recognized on IRR method in the books to the tune. Accordingly, the same was added back by the assessee while computing the taxable income. As submitted that the finance charges on hire purchase transactions were taxed on IRR method in earlier assessment years and assessee’s appeal against the same was pending before Hon’ble High Court. However, for the sake of consistency in the assessments, the excess hire purchase income offered on ESM basis was to be deducted from the taxable income. However, rejecting the same, AO noted that the issue had not reached finality and further similar treatment was give in assessment order for AY 2005-06. Therefore, the plea to reduce the taxable income by Rs. 483.52 Lacs was not accepted. CIT(A), following the decision of Tribunal for AY 2001-02 confirmed the stand of Ld. AO against which the assessee is in further appeal before us. We find that this issue is covered by the latest order of Tribunal [2019 (9) TMI 974 - ITAT CHENNAI] The bench, considering the decision of Hon’ble High Court of Madras in assessee’s own case [2019 (3) TMI 1068 - MADRAS HIGH COURT] directed Ld. AO to tax the interest income on EMI method or ESM method which has been consistently being followed by the assessee and allow consequential relief in accordance with law. Since facts as well as issue is pari-materia the same in this year, we issue similar directions to Ld. AO in this year. Reduction claimed by the assessee would not be allowed and continue to be added to the income in the computation of income. The grounds thus raised stand allowed for statistical purpose. Provision for reversal of NPA - assessee made provision for non-performing assets (NPA) as per directions of RBI - HELD THAT:- We find that what the assessee is claiming is that the reversal should not be included in total income on the ground that provisions were not allowed in earlier years. We also find that this issue has been set-aside by Tribunal [2019 (9) TMI 974 - ITAT CHENNAI] The bench observed that the assessee’s claim would require verification and therefore, the matter has been remitted back to the file of AO for fresh consideration after affording opportunity of hearing to the assessee. Recovery of Bad debts written-off in the books of amalgamating companies - assessee reduced taxable income being amount recovered out of bad-debts written-off in the books of amalgamating companies on the ground that it was exempt / nontaxable - HELD THAT:- As after amalgamation, the assessee has all the rights as well as liabilities of amalgamating company which were transferred to it. Such recoveries of bad-debts were nothing but business receipts for assessee and therefore, assessable in its hands. Respectfully, following the same, we dismiss the grounds urged by assessee, in this regard. Business Origin Cost - We find that this issue has been dealt with by Tribunal in [2019 (9) TMI 974 - ITAT CHENNAI] chose to follow the decision of Taparia Tools Pvt. Ltd. [2015 (3) TMI 853 - SUPREME COURT] wherein it was held that normally revenue expenditure incurred in a particular year has to be allowed in that year and if the assessee claims the full expenditure, department could not deny the same. Finally, the claim was allowed. Therefore, this issue is covered in assessee’s favor. Amortization of expenditure - AO denied the deduction. CIT(A) held that since the claim was rejected in earlier years, the reversal of the same during this year was to be given credit. Accordingly, AO was directed to entertain the claim. Aggrieved, the revenue is in further appeal before us. Since we have allowed the assessee’s claim in full in the year of incurrence as per assessee’s computation of income, the credit of reversal would not be available to the assessee in this year. Therefore, this ground raised by the revenue stand allowed. Disallowance u/s 40(a)(i) - assessee did not deduct tax at source on the ground that the expenses were incurred by overseas branch and the payments were not taxable in India - As there was no obligation of withholding tax liability - HELD THAT:- As submissions of DR were that the services in that year was utilized outside India which is not the case in this year. Considering the rival submissions, we remit this issue back to the file of Ld. AO to bring on record correct factual matrix and re-adjudicate the same after affording opportunity of hearing to the assessee. Broken period interest on sale of securities - assessee was in regular sale and purchase of Government securities - transactions were classified as investment - HELD THAT:- We find that this issue is subject matter of Tribunal order [2019 (9) TMI 974 - ITAT CHENNAI]. The coordinate bench, at para 9.5 of the order, observed that CIT(A) did not appreciate the facts of the issue properly. The courts have held that if the securities are regularly purchased and sold, they could be stock-in-trade. Therefore, the matter was remitted back to the file of AO for fresh examination with a direction to the assessee to place all the material before Ld. AO. Since facts are similar in this year and with a view to enable revenue to take consistent stand in the matter, we remit this issue back to the file of AO on similar lines. As per chart placed before us, this issue also arises in revenue’s appeal. Depreciation on UPS - assessee claimed depreciation on UPS system @60% considering the same to be part of computer block - HELD THAT:- CIT(A), following the decision of this Tribunal [2014 (2) TMI 224 - ITAT CHENNAI] in the case of Sundaram Asset Management Co. Ltd., directed Ld. AO to allow depreciation @60%. Grant of indexation benefit by CIT(A) to the assessee on government securities holding that Bonds and Debentures are distinguishable from government securities - AO denied the same on the ground that all capital assets which are in the nature of debt instruments, excluding capital indexed bonds issued by Government, was not eligible with the insertion of third proviso to Sec. 48 - HELD THAT:- The bench observed that government securities are not excluded from the definition of capital assets. As per Sec. 2(42A), the expression ‘securities’ shall have the meaning as assigned in Clause-11 of Securities Contract Regulation Act, 1956 which includes government securities. It was thus concluded by the bench that bonds and securities are distinguishable. The bonds are not freely tradeable whereas the securities are freely tradeable. The Bonds could not be equated with securities. Further, from plain reading of 3rd proviso to Sec. 48. government securities were not excluded for indexation benefit and only bond or debentures were excluded. Accordingly, the revenue’s grounds were dismissed. We find that similar is the issue in both the appeals of the revenue. Disallowance u/s 14A - HELD THAT:- As submissions of Ld. AR are two-fold i.e., own funds are more than the investment and therefore, no interest disallowance should be made. Secondly, the 0.5% as per Rule 8D(2)(iii) should be computed only on those investments which have yielded exempt income during the year. We concur with both the submissions. AO is directed to verify whether assessee’s own funds are sufficient enough to cover the investment. If so, interest disallowance would not be justified. The indirect disallowance of 0.5% should be computed only on those investments which have yielded exempt income during the year. The grounds, in all the three years, stand allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include: The appropriate method for recognizing income on hire purchase contracts, specifically the transition from Even Spread Method (ESM) to Internal Rate of Return (IRR) method. The treatment of provisions for non-performing assets (NPAs) and their reversal. The taxability of recoveries from bad debts written off in the books of amalgamating companies. The deductibility of business origination costs and the timing of such deductions. The application of Section 40(a)(i) concerning disallowance for non-deduction of tax at source on certain payments. The classification of broken period interest on securities and its tax treatment. The allowance of bad debts as a deduction. The appropriate rate of depreciation on UPS systems. The applicability of indexation benefits on government securities. The disallowance under Section 14A concerning expenses related to exempt income.ISSUE-WISE DETAILED ANALYSIS1. Method of Recognizing Income on Hire Purchase ContractsThe tribunal considered whether the transition from ESM to IRR method for recognizing income on hire purchase contracts was appropriate. The tribunal noted that the change was in compliance with the Accounting Standard (AS-19) issued by ICAI, but for tax purposes, the ESM method was continued. The court directed the Assessing Officer (AO) to follow the consistent method of taxing interest income on either EMI or ESM method, as previously decided in earlier years.2. Provision for Reversal of NPAsThe tribunal examined the assessee's claim that the reversal of NPA provisions should not be taxed since these provisions were not allowed as deductions in earlier years. The tribunal remitted the issue back to the AO for verification, following the precedent set in earlier tribunal decisions.3. Recovery of Bad Debts Written-offThe tribunal addressed the issue of whether the recovery of bad debts written off by amalgamating companies should be taxed in the hands of the amalgamated company. The tribunal upheld the AO's decision that such recoveries are taxable as business receipts, following the precedent that the amalgamated company inherits the rights and liabilities of the amalgamating companies.4. Business Origination CostsThe tribunal considered whether business origination costs should be allowed as a deduction in the year incurred or amortized over the contract's term. The tribunal followed the Supreme Court's decision in Taparia Tools Pvt. Ltd. and allowed the deduction of the full expenditure in the year it was incurred.5. Disallowance under Section 40(a)(i)The tribunal examined the disallowance of expenses for non-deduction of tax at source on payments to overseas branches. The tribunal remitted the issue back to the AO for further verification, noting inconsistencies in the utilization of services in India versus outside India.6. Broken Period Interest on SecuritiesThe tribunal addressed the classification of broken period interest on securities as either capital gains or business income. The tribunal remitted the issue back to the AO for fresh examination, following earlier tribunal decisions.7. Bad DebtsThe tribunal upheld the allowance of bad debts as a deduction, following consistent tribunal decisions in previous years.8. Depreciation on UPSThe tribunal confirmed the allowance of depreciation on UPS systems at 60%, consistent with earlier tribunal decisions.9. Indexation Benefits on Government SecuritiesThe tribunal upheld the allowance of indexation benefits on government securities, distinguishing them from bonds and debentures, following earlier tribunal decisions.10. Disallowance under Section 14AThe tribunal considered the disallowance of expenses related to exempt income under Section 14A. The tribunal directed the AO to verify the sufficiency of own funds to cover investments and compute disallowance only on investments yielding exempt income.SIGNIFICANT HOLDINGSThe tribunal established several core principles, including: The consistent application of income recognition methods for tax purposes, following earlier tribunal decisions. The necessity of verification for claims related to the reversal of provisions for NPAs and deductions for business origination costs. The taxability of recoveries from bad debts in the hands of the amalgamated company, following the inheritance of rights and liabilities. The allowance of full deduction for business origination costs in the year incurred, consistent with Supreme Court precedent. The requirement for verification of the utilization of services for disallowance under Section 40(a)(i). The distinction between government securities and bonds for indexation benefits, following earlier tribunal decisions. The computation of disallowance under Section 14A based on investments yielding exempt income and verification of own funds.The tribunal's final determinations on each issue were guided by precedents and the need for consistency in tax treatment across assessment years.