TaxTMI 
TaxTMI 
TaxTMI 
2011 (4) TMI 504
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....acts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs.36,65,022/- made by the Assessing Officer on account of accrued interest on sticky loans. 3.1 The Ld. CIT (Appeals) has ignored that the assessee is following mercantile system of accounting and accrued interest is to be taxed in the year of accrual. 4. the appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of the hearing. 1. The order of the learned CIT (Appeals) is erroneous and contrary to facts and law. 2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs.4,80,03,895/- made by the Assessing Officer on account of loss on sale of repossessed assets. 2.1. The Ld. CIT (A) has ignored the fact that the vehicles in questions were sold earlier on hire purchase basis to other buyers. 3. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs.3,15,24,257/- made by the Assessing Officer on account of disallowing 50% of expe....
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....s noticed by the Assessing Officer that the assessee had claimed certain expenses on account of loss on sale of repossessed assets. According to the Assessing Officer, such expenditure was capital in nature. It was explained that the assessee was providing financial assistance to customers in acquiring wide range of consumer and auto products. During the course of regular business, it has to provide from time to time certain auto/consumer loans and assets on hire purchase/lease. In the case of hire purchase transaction, the assessee does not claim any depreciation and reflects the hire purchase receivables from the hirers in the balance sheet as hire purchase receivables. In the case of secured auto or consumer loan, the loan is hypothecated against the auto/two wheeler or the consumer durable as a security which, in the event of default of the customer is repossessed. Similarly, in the case of hire purchase, in the event of default on the part of the hirer in the payment of installments the assessee repossesses the asset. As and when a hypothecated asset is repossessed under loan/hire purchase transaction, the same is included in the repossessed stock of the company under the curr....
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....le 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. The amount realized on sale is credited to the customer a/c and balance left in the account of customer is written off as "loss on sale of Repossessed Assets' which is nothing a write off of bad debts. Nomenclature does not change the real character of the transaction. The court have invariably held that nomenclature given to the transaction and the treatment given to expenditure in particulars manner or the accounting entries does not change the real character of transaction and are not determinative and decisive for tax purposes. The claim of the assessee should be decided as per provision of law) see case of Burger Paints India Ltd., 254 ITR 503 (Cal) and Kedar Nath Jute Manufacturing Co. 82 ITR Supreme Court. I have also gone through the provision of section 36(1)(vii) and section 36(2) of the Act which provide that write off made by the company which are in money lending business are admissible deduction under section 36 of the Act. The relevant extract of secti....
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....see's claim comes u/s 36 (1)(vii) r/w section 36(2) of the Act and accordingly benefit was given to the assessee holding that it is a bad debt and that debt become bad in the previous year." Now, I come to cases relied upon by learned AR and found that cases referred support the view of the appellant. In case A.W. Figgles and C. Pvt. Ltd. (2002) 254 ITR 63 (Cal) relied upon it was held that "the amount advanced by the assessee during the course of business but could not be recovered was held allowable as bad debt u/s 36(2) of the Act." Similarly judgment Delhi ITAT in case of Poysha Oxygen Ltd. (2008) 19 SOT 711 as well other judgment of jurisdictional court cited in submission holding the similar view." 5.1 The Tribunal in the aforesaid case of M/s Citi Corp. Maruti Finance Ltd. (supra) deleted the impugned additions by observing in para 6 of its order as under:- "6. On considering the submissions of both the parties, perusing the orders of the tax authorities below, we are of the opinion that the A.O. while disallowing the claim of the assessee has wrongly placed reliance on the decision of Hon'ble Allahabad High Court in the case of M/s Motor General Sale....
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....stem of accounting, therefore, the assessee was under an obligation to offer interest accrued on loans and advances which may become sticky loans and advances. According to the assessee, even under the mercantile system of accounting income accrues only when there is a reasonable certainty of its collection. 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 vide Notification No. DFC119/DG (SPT) -98 dated 31st January, 1998. It was submitted that on the default of non-receiving the payment of interest and installment, the asset will become nonperforming and the same required to be recognized only when it was actually realized. According to the Assessing Officer, RBI guidelines could not override the provisions of Income Tax Act which requires the assessee to offer income on the basis of accrual. The Assessing Officer observed that RBI as well as Income-tax Act are both independent regulatory system and, therefore, for the purpose of Income-tax Act, the provisions of Income-tax Act were to be followed. He, therefore, added the said amount to the income of the a....
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....extract the relevant provisions of the RBI Act and NBFCs Prudential Norms (Reserve Bank) Directions, 1998. Section 45Q of the RBI Act, which starts with non obstante clause, reads as under:- "45Q. Chapter IIIB to override other laws.- The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." 16. It is not in dispute that on the application of the aforesaid provisions of the RBI and the directions, the ICD advanced to M/s Shaw Wallace by the assessee herein had become NPA. It is also not in dispute that the assessee company being NBFC is bound by the aforesaid provisions. Therefore, under the aforesaid provisions, it was mandatory on the part of the assessee not to recognize the interest on the ICD as income having regard to the recognized accounting principles. The accounting principles which the assessee is indubitably bound to follow are AS-9. Relevant portion of the said accounting stand reads as under:- "9. Effect of Uncertainties on Revenue Recognition.- 9.1 Recognition of revenue requires that....
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..... The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment year 2006-07. Reason was adverse financial circumstances and the financial crunch faced by Shaw Wallace. So much so, it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty insofar as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued". We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above. (2) In the instant case, the assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exe....
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....rms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 of the Income-tax Act. It can be said, therefore, that the Apex Court approved the 'real income' theory which is engrained in the Prudential Norms for recognition of revenue by NBFC. The following passage from the judgment of the Apex Court would bring out the distinction noticed by the Apex Court between permissible deductions/exclusions, on the one hand, and income recognition on the other:- "31. Before concluding on this point, we need to emphasise that the 1998 Directions has nothing to do with the accounting treatment or taxability of "income" under the Income-tax Act. The two, viz., Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as "income" is recognized under accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its Presentation under the said Directions, there would be an add back but not under the....
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....eal income" which is income computed according to ordinary commercial principles but subject to the provisions of the Income-tax Act. Under section 36(1)(vii) read with the Explanation, a "write off" is a condition for allowance. If "real profit" is to be computed one needs to take into account the concept of "write off" in contradistinction to the "provision for doubtful debt". 40. Applicability of section 145. - At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the Income-tax Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the "permissible deductions" or "their e....
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....from that payment, a further sum of 7,20,02,851/- was incurred by the assessee on advertisement and sales promotion the details of which are as under:- Particulars Amount (in Rs.) Print Media Advertisement 5,470,931 Advertising - Electronic/TV Media 33,382 Advertising - Media Production - Creative Expenses (TV) 8,468,142 Advertising Outdoor - Productions (Hoarding, Pole, Kiosks) 1,476,677 Other sales promotions 17,026,140 Canvasser's Charges 10,129,084 Exhibitions 2,889,661 Sales Incentives 17,554,496 Load Sales Shop - Management and other charges 8,954,340 Total 72,002,853 10. From the details, 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. A substantial amount has also been spent on various components, banners, photo sheet, display books, banners and catalogues which also is relating to brand promotion and these expenses have enhanced the Maruti brand in the eyes of general public and, as such, these expenditures do not belong to the assessee. Through such expenditure "Maruti Brand" h....
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.... legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditure incurred voluntarily on the ground of commercial expediency and in order to facilitate the carrying on of the business would be deductible under Section 37 of the Act. On these submissions learned CIT (A) has returned a finding that these expenditures have been incurred by the assessee in order to establish and increase its market presence and promotion of its business. The Assessing Officer has not doubted the genuineness or correctness of these expenditures being revenue in nature. The disallowance has been made by the Assessing Officer only on the ground that the assessee by making such expenditure has promoted the Maruti brand which did not belong to the assessee, but belong to Maruti Udyog Ltd. According to the decision relied upon by the assessee, those expenditures could not be disallowed and the disallowance has been deleted. Against such deletion, the revenue is aggrieved, hence, in appeal. 12. Relying upon the order of Assessing Officer, it was vehemently pleaded by Ld. DR that the assessee by incurring these expenditures has p....