https://www.taxtmi.com/css/info/rss_sitemap/rss_feed.css?v=1746094055 https://www.taxtmi.com Business/Tax/Law/GST/India/Taxation/Policies/Legal/Corporate Tax/Personal Tax/Vat Law/Legal Information/Tax Information/Legal Services/Tax Services Tax Management India. Com / MS Knowledge Processing Pvt. Ltd. All rights reserved. One stop solution for Direct Taxes and Indirect Taxes https://www.taxtmi.com/caselaws?id=768997 https://www.taxtmi.com/caselaws?id=768997 Disallowance of claim of write off of security receipts - assessee had written off Security receipts during the year under consideration and claimed the same as deduction - When questioned about the same by the AO, the assessee submitted that, as per RBI guidelines, the unrealised security receipts have to be written off within a maximum period of 8 years. Hence the assessee claimed deduction of amount so written off as business loss - HELD THAT:- It appears that the assessing officer has not correctly appreciated the business model and the manner of functioning of the assessee company. The assessee herein is a "Asset reconstruction Company" registered under SARFAESI Act. We notice that section 7 of SARFAESI Act permits the assessee to issue "security receipts" for raising funds. The concerned trusts have made provision for bad debts in order to determine the quantum of its income. Hence, the provision for bad debts, if any, created by the Trusts is for the purpose of determining the income of the trusts as per the accounting principles and hence, it is nothing to do with the accounting methodology followed by the assessee. So far as the assessee is concerned, it has treated the investment made in Security Receipts as a separate investment and the income generated there from is offered to tax. Unrealised Security receipts were written off after the expiry of eight years. If any amount is realised after it was so written off, such realisation is offered to tax. As noticed earlier, the AO has misdirected himself in understanding the concept of forming trusts, the accounting system followed by the trusts and assessee. There is no dispute with regard to the fact that the assessee has to follow the guidelines issued by the RBI for accounting the Security Receipts and it has to treat the Security receipts as "Loss assets" if it is not realised within five years. Accordingly, the assessee has chosen to write it off the unrealised portion of the security receipts after expiry of eight years. There should not be any dispute that, if any security receipts was not realised within a period of eight years, then its recovery is doubtful. Accordingly, we do not find any infirmity in the claim made for deduction of Security receipts written off by the assessee. Accordingly, we confirm the order passed by Ld CIT(A) on this issue. Addition of upside income not offered to tax by the assessee - A.R submitted that the upside income would consist of "Income by way of management fees/incentive" and "income from investments" - HELD THAT:- The assessee cannot be considered as the owner of the entire investments made in the Trusts or the financial assets acquired through trusts. In view of the above said position, and also as per the requirements of the SARFAESI Act, the Trusts are required to be considered as separate entities notionally for accounting purposes. Hence, the realisation of NPAs made by the trusts cannot be considered to be the income of the assessee. We notice that the tax authorities have misdirected themselves in understanding the manner of functioning of the assessee and the trusts. We are of the view that the assessee was right in comparing the investments made by it in Security receipts with the investments made by general public in Mutual fund investments. The investors of mutual funds are not concerned with the financial activities carried on by the mutual fund and the incidence of tax shall arise in the hands of investors, only when they receive any money from the Mutual fund. In our view, the position of the assessee in respect of Security receipts is akin to the investment made in the mutual funds for the purpose of accounting and taxation, in view of the requirements provided under SARFAESI Act. AO was not right in assessing any realisation made by the concerned trusts as income of the assessee and the Ld.CIT(A) was not justified in partially confirming a part of the said additions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to upside income recovery. Protective addition in respect of upside income relating to other Security receipt holders, viz., the other beneficiaries of the Trust - The reasoning given by us for deleting the addition of upside income of Rs. 153.77 crores would equally apply to this addition also. The realisation made by the trusts cannot be considered as income of either the assessee or other investors. In any case, any income pertaining to other investors cannot be considered as income of the assessee. Hence, we are of the view that the AO was not justified in making protective addition of upside income relatable to the other investors in the hands of the assessee, since the realisations made by the Trusts cannot be considered as income of either the assessee or other investors, unless they are distributed between the security receipts holders. Accordingly, we affirm the decision rendered by the Ld.CIT(A) on this issue on the above said reasoning also. Appeal filed by the Revenue is dismissed Case-Laws Income Tax Tue, 25 Mar 2025 00:00:00 +0530