Prepaid finance charges allowed as deduction in payment year despite deferred revenue treatment in books

ITAT Chennai allowed assessee's appeal on prepaid finance charges, following its own precedent from AY 2011-12 that such charges should be deducted in the year of payment despite being treated as deferred revenue expenditure in books. The Tribunal also deleted addition of excess interest spread income from assignment of receivables, following its decision in assessee's case for AY 2016-17. However, it upheld disallowance of excess provision for bad debts under section 36(1)(viia)(d), clarifying that 5% limit is maximum ceiling, not mandatory deduction amount. Alternative claim regarding reversal of provision for standard assets was remanded to AO for fresh examination.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of prepaid finance charges.
3. Addition for excess interest spread (EIS) income earned on assignment of receivables.
4. Disallowance of excess deduction in relation to provision for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the assessee for the assessment year 2012-13 was barred by a delay of 185 days. The delay was attributed to the pandemic period of Covid-19. The assessee cited the Hon'ble Supreme Court's order in Miscellaneous Application No.665 of 2021 dated 23.03.2020, which directed that delays during the period from 15.03.2020 to 14.03.2021 be condoned. Respectfully following the Supreme Court's directions, the delay was condoned, and the appeal was admitted.

2. Disallowance of Prepaid Finance Charges:
The first issue in ITA No.847/CHNY/2020 for the assessment year 2012-13 was regarding the disallowance of prepaid finance charges amounting to INR 19,96,29,043. The AO disallowed the charges, stating that the liability should be spread over the period of the loan. The CIT(A) upheld this disallowance, relying on the Supreme Court's decision in Madras Industrial Investment Corpn Ltd vs CIT, which held that liabilities should be spread over the period of benefit. However, the Tribunal noted that in the assessee's own case for the assessment year 2011-12, it was held that once actual payment is made, the entire payment should be allowed as a deduction in the year of payment itself. Respectfully following this precedent, the Tribunal directed the AO to delete the disallowance of prepaid finance charges.

3. Addition for Excess Interest Spread (EIS) Income Earned on Assignment of Receivables:
The next issue was the addition of INR 26,99,20,000 for excess interest spread income earned on the assignment of receivables. The AO added this amount, stating that the income had accrued and should be taxed in the year of securitization. The CIT(A) upheld this addition, stating that the income had accrued and could not be deferred by accounting entries. However, the Tribunal, following its decision in the assessee's own case for the assessment year 2016-17, held that the income from EIS is contingent upon various conditions and should be recognized over the life of the underlying receivables. The Tribunal deleted the addition for the assessment year 2012-13 and confirmed the CIT(A)'s order for the assessment years 2017-18 and 2018-19, dismissing the Revenue's appeals.

4. Disallowance of Excess Deduction in Relation to Provision for Bad and Doubtful Debts:
In ITA No.384/CHNY/2023 for the assessment year 2017-18, the issue was the disallowance of excess deduction in relation to the provision for bad and doubtful debts. The AO disallowed INR 13,87,96,281, stating that the provision created was only INR 49.45 crores, whereas the assessee claimed INR 63.33 crores. The CIT(A) upheld the AO's disallowance, interpreting the provision of section 36(1)(viia)(d) as allowing a deduction not exceeding 5% of the total income. The Tribunal agreed with the CIT(A) but remanded the alternative claim regarding the reversal of provision for standard assets and diminution in value of investments back to the AO for fresh adjudication.

Conclusion:
The appeals filed by the assessee in ITA No.847/CHNY/2020 were allowed, and ITA No.384/CHNY/2023 was allowed for statistical purposes. The appeals filed by the Revenue in ITA Nos. 514 & 515/CHNY/2023 were dismissed.

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